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Trading strategy and why it's so important

  • trading
  • cryptocurrency
  • arbitrage
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There is no such thing as chance success. In any business, in anything, you can only reach your destination point if you act gradually and systematically. Such a strategic approach is equally important for any business, whether it is goods production, services or trading on financial markets.

When you develop a strategy, you estimate the current situation and go beyond it – estimate the business environment, the whole situation in the industry and your own prospects. Currency trading requires a strategy too because trading financial assets are one of the riskiest types of business. Without knowing the current state of the market, history data, market volume and leading trends, a trader turns work into gambling with his eyes closed shut.

A trading strategy is a firm plan that encompasses different scenarios. The major parts of a trading strategy are analysis, risk and money management, and self-discipline.

Market analysis is about studying the data, the past, the present and the expected future, which can serve as a base for a price forecast. Traders use a wide range of instruments to analyze the market – technical indicators, candlestick patterns, economic calendars, market depth, market volume indicators, etc. The main purpose of the analysis is to find the most probable price action.

The most popular technical analysis indicators are moving average, volumes, Relative Strength Index (or RSI), stochastic oscillator, MACD, etc. Candle patterns can show you if a trend reversal coming or not – Head and Shoulders, Double Top, Double Bottom, Triple Top, Triple Bottom, Triangles, Pennants, etc. Trading terminals are equipped with dozens of such indicators and different TA tools, so every trader can choose whatever suits him or her best.

Money management is crucial for any trading strategy since it allows you to control your current account statement and use your funds wisely. The correct money management helps you reduce the number of your losses and keep your account in the green zone. There are several basic rules:

  1. Maximum order size should not exceed 5% of your deposit.
  2. No more than 20% of your deposit should be traded at once.
  3. Every order needs to have the proportion of profits to losses at 2:1.

This approach will help you keep your deposit safe and make the profitable deals outweigh the lost deals.

Risk management is also a very important part of a successful trading strategy. We have to accept that financial markets are mostly unpredictable, so you have to provide maximum safety to your account.

The main aspects of risk management:

  1. The right leverage size. Please, keep in mind that high leverage helps you earn more, but it also puts you at greater risk to lose your deposit in an instant.
  2. The right order size. The same principle applies here – you can earn a lot, but your chances to lose it all increase respectively. This is why it is so important to set the order size so that the margin requirement did not freeze the whole account, and your losses won't outrun your profits.
  3. Order protection tools. Please, never forget that even the most advanced analysis cannot guarantee profits, and the market can reverse at any moment. This is why it is necessary to put Stop Losses to minimize your risks.
  4. Invest only the amount you are not afraid to lose, the amount you can risk without significant damage dealt with your account.
  5. Diversify your investment. Choose several trading assets, so that even if one order is lost, you still can save the day with the help of other orders.

The key element to successful trading is, I guess, self-discipline. Even the most accurate indicators, and good risk and money management won’t help if your actions are governed by emotions.

The psychology of trading is the main problem of the majority of traders; trend reversing all the time, prices skyrocketing and diving – all of it inevitably sparks excitement and gambling craze, fear, greed and hope. Any newcomer is familiar with it: you make a detailed analysis, and yet you yield to an impulse and open an unpremeditated order. Most of such cases lead to losses because emotions make traders forget about the rules of technical analysis, indicators signals, and risk or money management.

Strict self-control is a solution. This is the most important and the hardest part of any trading strategy, because, without control, all the other norms and rules are often forgotten.

Effective self-discipline implies adding these aspects to your trading strategy:

  1. A trading plan. It is used by professional experienced traders because writing down your plans and decisions helps you notice and prevent or correct mistakes. Such trading plan gives a better image of the situation and a better understanding of your further actions.
  2. Writing down your analysis. It is highly recommended to beginners, who can take into consideration all the data and make a better forecast, keeping everything in mind.
  3. Trading journal. It is the record of all of your orders with entry and close points, parameters and reasons to do so. This is precious for helping you see your mistakes better. After closing a deal you can scrutinize your notes and see where you made a mistake and, vice versa, which of your decisions led to victory.
  4. Trading statistics. It can be a graph that shows your trading results – good or bad.

These notes can help traders concentrate on the technical part of their job and shut the emotions down.

There are thousands of trading strategies today. You can rely on other traders’ experience or upgrade their strategies yourself, or work out a whole new strategy. Anyway, a trading strategy can be successful if and only if it includes the most important components listed in this article.

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