How To Create A Strong Trading Strategy: The Ultimate Guide
In between videos & podcast episodes, I felt like I wanted to sit down and write on this Saturday morning. Instead of a simple article, I wanted to create an ultimate guide you can use over and over again to create a strong trading strategy – and ultimately a playbook of strategies!
About a month ago, I did an online training on how to create a strong trading strategy. As I recall, it was titled “The Essentials Of Strong Trading Strategies”.
A Strong Trading Strategy vs. Perfection
While discussing with traders, I came to realize that a lot of people still look to find the perfect trading strategy.
One thing that kept me stuck for a long time was this idea of finding something that would be perfect (i.e. that would work in all market conditions).
As algorithmic Forex trader Rob Booker said it: “Every trading system is terrible at something.”
If you come into creating a strong trading strategy with that mindset, you're way ahead of everyone looking for perfection.
Now, let me share with you the specifics of a strong trading strategy!
What Makes A Strong Trading Strategy
As I was trying to create a strong trading strategy for myself a while back, I came up with an easy-to-remember framework around it. A strong trading strategy has to be…well S.T.R.O.N.G.
- S. stands for Specific.
- T. stands for Tested.
- R. stands for Replicable.
- O. stands for Organized.
- N. stands for Not Complicated.
- G. stands for Grounded.
Let's cover each of those individually!
As you create your trading strategy, you should try to make things as specific as possible.
A strategy that's vague is more likely to create confusion when you trade it.
For instance, if you say that you trade Engulfing patterns, you will want to define what an Engulfing Pattern is for you as there are many ways to see this.
Here are a few non-specific things and how you could define them:
- I trade “price action” -> hammers with a body that is at most 1/3 of the whole candlesticks.
- I look for confluence with “various indicators” -> when the market is trending, I'll look for bounces off the 20 EMA.
- I look for “signs of reversals” -> specifically double tops that I can identify at a first glance.
I think you get the point. Make it specific!
No matter who taught you a trading strategy, you are likely to be average at trading it until you test it yourself. That's when it becomes a strong trading strategy.
Testing builds confidence, and you can't get to truly master something until you've seen the ups & downs of it.
Not only will you feel more re-assured when you hit a profit decrease or a drawdown, but you will become 10x better in your execution. No more guessing whether the trade is right or not! You become confident in your actions the moment you start to test.
At the same time, don't rely on testing (your trading strategy) as the perfect remedy!
I have tested strategies in the past and when I came to apply them in the market, I couldn't do it!
Because those strategies were not built with indicators that I could truly understand. There was too much ambiguity when looking at a blank live chart.
So, whatever strategy you create, make sure it is replicable and that you can actually execute on it.
That can only be done through live trading.
If you are the type of person who tends to have your trading strategy on top of your head, you'll want to get better organized.
This step is hard..and it isn't sexy but it's necessary.
All the highly successful traders I've interviewed are super-organized. They track stuff, use checklists, and journal.
I can proudly say that I'm quite organized these days, but it hasn't always been that way. Fortunately, I created a template for myself so that I could get my strong trading strategy organized. It's called the One-Page Trading Plan (you can grab it for free!).
Going back to Replicable, you must ensure that your trading strategy is not too complicated. That is especially true if you intend to travel while you trade.
Making your trading strategy less complicated might involve a few things:
- Using at most 1 technical indicator.
- Reducing the number of support & resistance lines on your chart.
- Using set-and-forget stop-losses & take-profits.
- And more.
Chances are, if you went through the previous criteria (and respected them) to create your strong trading strategy, you'll have no problem with this one.
Grounded means that your trading strategy should be based on some logic in the market. If you are a Forex trader, you'll want to start looking at how the market works.
The way I do this myself is by relying on the Market Phase, a concept developed by trader Stan Weinstein.
By knowing that all my trades are based on how the market moves, I ensure a higher probability type of trading – and fewer valid trade setups, which is a good thing for me.
Other Factors Behind A Strong Trading Strategy
The criteria above will make for a relatively strong trading strategy, but there are additional things you must pay attention to as you start to trade your strategy.
Here they are:
Ensure your strong trading strategy…
Has a positive expectancy
Expectancy is a mix between win rate & reward-to-risk. I've explained in the past how you can win 3/10 trades and still get rich as a Forex trader.
Just ensure you combine both to come up with a winning combination. That's called an edge.
Obviously, you want to eliminate doubts as much as you can in your trading strategy.
This is a continual process. If you feel uncertain about a trade, don't act out of emotion! Instead, note this down in your journal so you can address it later. Uncertainty as to whether to enter a trade or not means you have something to work on.
Risk-of-ruin of 0%
I am amazed sometimes when I see that so few people talk about risk-of-ruin. The first person introducing me to the topic was Brent Penfold.
Common knowledge says: “risk maximum 1-2% of your account per trade.”
The problem is, there are no common rules in trading. All strategies are different.
Based on your testing, you can compute how much you can risk in order to obtain a risk-of-ruin of 0% (i.e. zero chance of blowing up your account).
I get in-depth on this in the video Validate your Forex Trading Strategy. In short, however, I recommend you use Chris Capre's risk-of-ruin calculator. It happens to be the easiest one to use for free.
Uses tools you're comfortable with
Like I mentioned, using tools just because you hear about them online is one of the easiest ways to feel confused and overwhelmed.
Like investor Jim Rogers said it, stick to the things you know. If you don't know about something, it isn't for you to trade.
As you start learning about trading, you'll get to see what you like/understand and what you don't.
Keep that in mind!
How To Improve Your Strong Trading Strategy
In the past, I have tested multiple trading strategies. Rare were the occasions where my strategies worked from the first round of backtesting.
What was frustrating at the time is I couldn't find ways to improve my strategy.
Over the years, I have collected some tweaks that I use to improve the results of my trading strategy.
Best – and simple – ways to improve your current Forex trading strategy:
- Take some partial profits (read: A Simple Trade Management Strategy To Get More Profit)
- Reduce/increase take-profit
- Look for indicator confluence
- Consider the impact of the trend
- Wait for price to go beyond a candle high/low to enter
- Scratch trades that don’t move
- Use a feeler to capture moves early
Additional Resources: How To Create A Strong Trading Strategy
- Successful Price Action Trading In 3 Steps
- How To Stick To One Trading Strategy [The Complete Guide]
- How To Trade A Single Currency Pair And Make Money – The Ultimate Guide
- DTTP 064: The Guide To Forex Trading Strategies – 3-Part Audio Series
Your Turn To Stand Out!
You see, a strong trading strategy will help you stand out from most traders out there. The moment you start to plan and apply what's in this article, you automatically start getting closer to your trading goals.
If you are serious about standing out from the crowd and achieve the goals you've set for yourself, begin applying & keep me updated on your progress! I'd love to connect!