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Many people live their lives by Benjamin Franklin’s old saying: “by failing to prepare, you are preparing to fail”. Preparation is key in any project, regardless of whether it’s moving property or planning a wedding. However, nowhere is this saying truer than in the world of online trading. Here we’ll discuss the importance of trading strategies for new traders and how these strategies can be advanced as you gain experience.
The Importance of Trading Strategies for New Traders
To navigate the financial markets, mental focus, emotional restraint and analytical precision are all factors the market experts consider trading essentials. This means that, in order to succeed, traders have to educate themselves continually and plan for a number of eventualities.
If you’re new to the markets and operate at random, then you may be discouraged by your abilities and knowledge. However, the creation of a trading strategy can help ensure that you’re doing everything necessary to succeed, preventing your heart from ruling your head and providing logic to your trades.
There’s no set formula for what constitutes a successful trading strategy, and many traders opt for different strategies based on what works for them and their trading style. However, no matter what strategy you choose, it should specify your entry points, exit points, currency pairs and money management criteria. Your strategy should then be used to formulate every trading decision that you make, and you should never make trades outside of the strategy. If possible, you should back-test your plan to assess its effectiveness before you use it for trading purposes.
Advancing a Trading Strategy
Once you’ve discovered a trading strategy that works for you, it’s time to advance it and continually improve it.
Blending Fundamental and Technical Analysis
A good trading plan should blend fundamental and technical analysis. For your fundamental analysis, read widely and regularly from respected resources, but also ensure that you’re fully using an economic calendar to help keep you abreast of impending market announcements that could cause increased trading volatility. Once you’ve done the appropriate fundamental analysis, you can perform technical analysis to assess this view.
Different forms of technical analysis will suit different traders and the level of risk they’re willing to take. The form of technical analysis you choose (which could be moving averages, support and resistance or trend lines) can then be used to analyze the currency pairs that the fundamental analysis led you to believe would move; hopefully affirming your view.
Document and Review
To help you improve your strategy as you gain experience, you need to continually document and review it. Have discipline and patience in following your plan, but ensure you have a review process in place to critique not only the plan itself but also your ability to execute it.
Document all of your trades in a ‘little black book’ and practice self-review on a daily basis. This way, you’ll be able to identify trades you placed that weren’t part of your plan, and trades that you should have made but didn’t. From here, you can work on reducing and eliminating these problems to create consistency.
In addition, you should also conduct a trading plan review monthly (or sooner if you feel it appropriate). By reviewing all of your trades and the plan monthly, you’ll also be able to highlight any problems through the trading patterns and results. So, be sure to review, adapt and repeat to further improve your strategy as you trade.
Remember that trading strategies and plans should be continually improved. So, even when you’ve created a strategy that works for you, continue to educate yourself and find ways to improve your market analysis.
