Want to know about a trading strategy? A trading strategy is a method of purchase or sale of financial instruments or securities in markets that are based on a set of predefined rules to make trading decisions.
In other words, a trading strategy is a fixed plan, designed to gain some profits when going for short or longs in the market.
A trading strategy helps traders to trade due to its quantifiability, verifiability, objectivity, and consistency features.
What is a Trading Strategy?
A strategy is basically a set of rules defining when a trader should take action. Strategies include trade filters and triggers. All these actions and filters and triggers are based on indicators only.
➤ Trade filters – As the name suggests, it filters out or helps in identifying the opportunities whereas,
➤ Trade Triggers – Trade triggers helps in identifying when a particular action has to be taken place.
To understand this more clear, let’s take an example – A trade filter might be a price that has closed above its 250 days average. This is the condition set by the trade filter which sets the stage for trade trigger. This means a trade would be triggered if the price reaches one tick above the bar of 250- days moving average.
Just FYI, a strategy is not only when the price is above the moving average, or with any other technical indicator, etc. That would be too elusive and doesn’t provide a clear picture assisting in decision making.
Does Your Trading Strategy Is Truly Reliable?
This is a very common question that strikes almost all technical traders. To really answer this question there are different questions that need to be answered first.
Given below are a set of questions that need to be answered for a good working, reliable strategy:
1. What moving average to be used in calculation with length and price point?
2. How far the price needs to move above the set moving average?
3. What should be the entry point? As soon as the price moves above moving average or at the close or open of the next bar?
4. What order type to be selected while placing the order i.e., Limit or Market?
5. How many shares do you want to trade?
6. What are money management rules?
7. When to exist or exit rules?
We believe all these questions need to be answered and successfully answering all of these can lead you to create a trading strategy.