Creating Trading Strategies

How to Get Started Creating Trading Strategies: A Simple Guide

Want to know how to get started creating trading strategies? This guide will walk you through the essential steps—from basics of trading to defining your own strategy and managing risks. By the end, you’ll be equipped with the knowledge to start trading effectively.

Table of contents:

Key Takeaways

  • Understanding trading fundamentals and the unique characteristics of different financial markets, such as Forex, equities, and commodities, is important for developing effective trading strategies.
  • Risk management, including position sizing, risk-reward ratios, and stop-loss orders, might be useful to protect capital.
  • Backtesting strategies on historical data and practicing with a demo account provide knowledge and confidence before transitioning to live trading.

Understand the Basics of Trading

Illustration of financial markets

What is driving the price fluctuation in the financial markets? Entering the world of trading, you’ll experience the excitement, joy, and frustratetions of speculating on market prices, free from the responsibility of owning assets. The energy that fuels these movements? Information flow, such as:

  • news releases that send ripples across market waters
  • economic indicators that impact market sentiment
  • corporate earnings reports that reveal the financial health of companies
  • geopolitical events that can disrupt global markets

These information flows lead to hige price fluctuations and hopefully enable you to make money on them.

Related reading: Trading Edge: What Is It And How To Find Them

Financial Markets Overview

The financial markets resemble a vast ocean, where Forex, Equities, and Commodities act as the main currents. Each has its allure: Forex’s vast and deep liquidity, Equities’ promise of ownership in the world’s innovators, and Commodities’ tangible assets like gold, oil, and crops.

Common Trading Styles

Illustration of common trading styles

Your unique trading style should mirror your personality, appetite for risk, and life pace. From the rapid-fire trades of scalping to the patient art of position trading, each style requires a unique set of qualities and resources. And both require knowledge via trial and error.

Importance of Risk Management

Risk management acts as the compass guiding you away from catastrophic losses and financial ruin. After all, if you lose your capital, you are out of business. A 50% loss means you need to recoup 100% to get back to even!

The key components of risk management include:

  • Position sizing: Ensuring that only a sensible portion of the capital is risked on each trade.
  • Risk-reward ratios: Evaluating the potential reward against the potential risk before entering a trade.
  • Stop-loss orders: Serving as the lifelines.
  • Correlation risk: You want to trade many strategies that are not correlated.

You can protect their capital by implementing these risk management strategies (or a few of them).

Define Your Market Ideology

Illustration of defining market ideology

Before you start, you need some kind of ideology. Your market ideology serves as the unifying thread. It is the lens through which you view the markets, and it should reflect your personality and temper. Are you able to withstand inevitable losses? Are you a risk seeker? You need to construct strategies that mirror your market perceptions.

A well-defined ideology is your shield against emotional and irrational decisions.

Research and Education

Knowledge constitutes the principal component of a trader’s arsenal. Unfortunately, you only get knowledge after studying over time. Trading is no different than any other skill. A doctor studies for many years, and trading is no different.

With education comes the power to apply insights to daily trading, often via trial and error.

Avoiding Common Pitfalls

Trading is laden with obstacles, including the tempting allure of emotional trading and the peril of perpetually altering one’s own trading strategies. This is one of the reasons we recommend automated and systematic trading! It creates a layer between you and the market and you are less susceptible to emotional pulls.

Recognizing these dangers is the first step.

When misused, leverage can magnify both gains and risks, making it a double-edged sword that must be used with caution. Leverage is not recommended because it increases the emotional bias!

Select Your Preferred Market

It is important to choose a market that aligns with your trading philosophy. Will you navigate the vast Forex market, engage with the tangible wealth of commodities, or seek the growth potential of equities? Your choice will shape your trading narrative, and each market offers distinct tales of risk and reward.

Forex vs. Equities vs. Commodities

Each market is different:

  • Forex, with its high leverage and low initial investment
  • Equities, offering a slice of a company’s future
  • Commodities, the trade of physical and tangible goods like gold and oil
  • Bonds, the “safe haven” of interest payments

Which market is best? We at Quantified Strategies believe that the best market is stocks. Why? You have a tailwind in the form of long-term rising prices due to inflation and productivity gains. Forex is the least desirable market because forex is a zero-sum game.

Market Characteristics

The characteristics of a market whisper hints about the strategies it favors. Some key characteristics to consider are:

  • Volatility: A highly volatile market may be more suitable for short-term trading strategies, while a less volatile market may be better for long-term investing.
  • Trading hours: Some markets, like the forex market, are open 24 hours a day, allowing for flexibility in trading times. Other markets, like equity markets, have set trading sessions.
  • Liquidity: A market with high liquidity allows for easy buying and selling of assets, which can be beneficial for executing trades quickly.

Understanding these characteristics can help you determine which market is best suited for your trading strategy. The optimal is to find uncorrelated strategies.

Commodity markets, with their blend of exchange-based and OTC trading, offer a hybrid stage for those who seek variety.

Establish Your Trading Time Frame

Whether you thrive on the adrenaline of intraday trades or the calculated pace of end-of-day analysis, your chosen time frame lays the groundwork for your trading activities.

Intraday vs. End-of-Day

End-of-day trading, offers a reflective pause, allowing you to align trades with broader market movements after the day’s trading activities. For many, the latter provides a better balance between trading and personal life, allowing for a more measured approach to the markets compared to intraday trading.

Intraday trading trading might offer more action, but also a lot more noise. You are less likely to succeed in intraday trading compared to end of day (swing trading).

Matching Time Frame to Lifestyle

Day trading may fit with those who can carve out hours to focus on the markets, while swing trading allows for a more relaxed pace, fitting comfortably alongside a full-time job. You need to choose what works for you. and something you are comfortable with.

Create Entry and Exit Rules

Illustration of creating entry and exit rules

The foundation of any trade result rests on the entry and the exit. Likewise, risk management is the guardian of your capital, ensuring that your trades are executed with precision and your risks contained.

Defining Entry Triggers

Entry triggers are the green lights that signal that tell you to buy (or short). For example, technical indicators on a candlestick chart might indicate when to enter and buy.

You should backtest your entry points. How else do you know if they are good or not?

Planning Exit Strategies

When you exit or sell your position is just as important as when you buy. Again, you must backtest to find the best trading rules.

Implement Technical and Fundamental Analysis

While technical and quantitative analysis offers a microscopic view of price movements, fundamental analysis zooms out and considers the larger economic picture. In the long run, all markets are determined by fundamental factors, while in the short term, a zillion factors influence them.

You might want to incorporate fundamental factors to your trading. However, it will be complicated, and it’s difficult to backtest.

Technical Analysis Tools

Illustration of technical analysis tools

Technical analysis tools are the brushes with which traders paint their market forecasts. Price charts and oscillators are frequently used as indicators like moving averages and stochastic oscillators, support, resistance, and momentum.

Fundamental Analysis Insights

The anticipation before an earnings call, the tension in the air as traders speculate—these are the moments when fundamental analysis shines. Unfortunately, most of the price action is random, and you are unlikely to profit from it unless you have inside info.

Instead, we believe you are better off if you focus on quantitative analysis and completely ignore news and earning calls.

Backtest Your Trading Strategy

Backtesting serves as a predictive tool in trading, providing knowledge of a strategy’s potential future.

By simulating trades on historical data, traders can evaluate the might-have-beens. This is no guarantee of the future, of course, but we believe it’s the best starting point you can get.

Steps for Backtesting

The art of backtesting begins with gathering historical data, the data upon which you will project your strategy’s history. This historical rehearsal is not a guarantee of future performance but a valuable rehearsal, perhaps a rehearsal for the future live performance.

Analyzing Results

Backtesting speaks through metrics like profitability, risk-adjusted returns, and win rates. Yet, even the most auspicious results must be weighed against the realities of transaction costs and ever-shifting market cycles.

Should the outcomes fall short of the mark, the cycle begins anew—another backtest, another chance to refine the strategy towards perfection.

Write Down and Refine Your Trading Plan

A trading plan acts as the roadmap to your financial future, detailing what, when, and how much you should trade. It’s a personalized guide that should evolve over time, adapting to new market scenes and info.

Creating a Trading Journal

A trading journal is a must. It might give you info such as:

  • Mistakes
  • Patterns
  • Strategies
  • Emotions

Trading is a constant feedback loop, and the journal feeds you with data on where you go wrong or right.

Continuous Improvement

Trading life is a continual process of refinement and learning, with regular reviews and adjustments to maintain the effectiveness of your own trading strategy (or preferably strategies). The markets are ever-changing puzzles, and you must always adapt and adjust.

Remember, the pursuit of the Holy Grail strategy is a myth; instead, aim for wisdom through continuous improvement.

Practice on a Demo Account

Prior to plunging into live trading, a demo account provides a peaceful place to practice your skills. With virtual funds, you can:

  • Test the waters of your trading strategies
  • Practice without the risk of ruin
  • Measure how the strategies correlate with each other.

Benefits of Demo Trading

A demo account is a proving ground for traders:

  • test new strategies
  • refine old strategies
  • look for correlations

All without the peril of losing hard-earned money.

Transitioning to Live Trading

When the time comes to transition from the training grounds of a demo account to the live markets, here are some steps to follow:

  1. Start with small positions to acclimate to the weight of real capital at risk. Always trade smaller than you’d like.
  2. Maintain the discipline of your trading plan.
  3. If you automate with a trading platform, the better.
  4. As you gain knowledge, slowly increase size.
  5. Aim for trading with no detachment to money.

What factors should you consider when selecting a market to trade in?

Factors to consider when selecting a market to trade in should be your trading style, financial capacity, correlations, geographic location, and favored trading hours. Day traders might find a home in the forex market, while long-term investors might gravitate towards stocks.

Each market demands a unique strategy and set of skills, so choose the one that best suits your trading style and personality.

How do you assess your risk tolerance before starting to trade?

You assess your risk tolerance before starting to trade by using a margin of safety. If you think you can accept a 25% loss, you might want to expect that you abandon trading after a 155 loss. Losses are much harder to accept in live trading than in demo trading.

What are the benefits of starting a trading diary and how should you maintain it?

A trading diary records your trading journey, documenting each trade’s details and accompanying emotions. To maintain it, document every trade, reflect on successes and failures, and use it as a map.

How can you define clear and achievable trading goals?

You define clear and achievable trading goals via knowledge and experience. You need to start somewhere, and you learn as you go. But the goals should reflect your trading style and risk tolerance, and they should be moderate.

What criteria should you use to determine which markets to trade?

The criteria to determine which markets to trade should be your goals, trading style, strategy diversification, market correlations, and where you can find the best opportunities for making profitable trades.

Why is it important to outline your motivation for trading, and how can it influence your strategy?

It’s important to outline your motivation for trading because it shapes the goals you set, the risks you take, and the time you dedicate.

What techniques can be used to effectively time your trades?

Techniques that can be used to effectively time your trades include:

  • Automate routine tasks
  • Establish a structured trading schedule
  • Minimize distractions to maintain focus
  • Study long-term cycles
  • Watch the calendar for seasonal patterns
  • Monitor ranges to identify new trends

What are the key steps in preparing for a trade?

The key steps in preparing for a trade include:

  1. Learn about the market’s structure
  2. Choose your mode of trading
  3. Backtest
  4. Learn about correlation risk
  5. Select a reputable broker

To successfully trade in the markets, follow these steps:

  1. Make a detailed trading plan.
  2. Select your markets to trade.
  3. Analyze the market. Formulate trading rules.
  4. Implement robust risk management.
  5. Backtest.
  6. Use a demo account.
  7. Then trade live with a small size.

How should you determine the amount of capital to allocate for trading?

You determine the amount of capital to allocate for trading based on criteria like this:

  • Consider the efficiency and return on invested capital
  • Diversify your portfolio and avoid overinvesting in a single trade
  • Employ fixed fractional allocation or the Kelly criterion
  • Ensure you have a strategy for liquidating investments during market downturns

What are the essential components of a successful trading strategy?

The essential components of a successful trading strategy include:

  • A robust trading plan
  • Clear and specific trading rules
  • Understanding strategy diversification and correlations
  • Time commitment in sync with your lifestyle
  • Risk-reward considerations
  • Domain expertise

It is maintained through diligent record-keeping and the use of technology, with capital protection as its cornerstone.

How do your trading goals influence the development of your trading strategy?

Your trading goals serve as navigational tools. They influence every aspect of your trading strategy, including:

  • The risks you’re willing to take
  • The discipline you maintain
  • The time frame you trade in
  • The markets you focus on
  • The indicators and tools you use

Having clear and well-defined trading goals is essential for success in the market. Clear, realistic goals help you stay focused and make better decisions.

How can you determine which trading style suits you best?

To determine which trading style suits you best you need to consider the following factors:

  • Your temperament
  • Your patience
  • Your philosophy about risk
  • Your time dedication

What practices should you follow for effective records management in trading?

Practices to follow for effective records management in trading include:

  1. Be disciplined
  2. Make sure you allocate the time needed
  3. Be meticulous

What risk management techniques should be incorporated into a trading strategy?

The risk management techniques that should be incorporated into a trading strategy are diversification and correlation. You should trade small, and make sure you trade different markets, time frames, and market directions.

You should also trade small. Stop losses are overemphasized. Backtests reveal that they normally make things worse. We recommend trading smaller instead.

How do you plan your exit strategies to minimize losses and maximize profits?

You plan your exit strategies to minimize losses and maximize profits by doing this:

  • Calculate reward and risk levels
  • Employ proper risk management – preferably strategy diversification
  • You might want to scale out and in of positions
  • Align your holding periods with your overall trading strategy


From understanding the basics of trading to defining your market philosophy, from selecting your market to establishing your trading time frame, each step has been a building block in forming your trading strategy. But above all, you need to backtest and evaluate how the strategies interact with each other.

Remember, the essence of trading lies not in seeking perfection or optimization but in how your strategies perform as a collective whole.

Frequently Asked Questions

What is the most important factor when choosing a trading style?

The most important factor when choosing a trading style is aligning it with your personality, risk tolerance, and lifestyle, as different styles require different time commitments and mental attitudes. This is crucial for your success in trading.

Can a beginner trader start with day trading?

Yes, a beginner trader can start with day trading if they dedicate time to monitoring the markets and build a strong educational foundation before practicing on a demo account.

How often should I review and adjust my trading plan?

You should regularly review and refine your trading plan to ensure long-term success, adjusting it as market conditions and personal circumstances change. This is key to adapting your strategy accordingly.

Is backtesting a reliable way to predict future trading performance?

Backtesting is a valuable tool for understanding past performance, but it may not reliably predict future trading outcomes due to evolving market conditions and other factors.

Why is risk management important in trading?

Risk management is important in trading because it protects your capital, allowing you to continue trading after facing losses by using techniques like stop-loss orders and position size determination.

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