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What is a trading strategy?


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VR Watch list and Linker – Screener for MetaTrader
VR Watch list and Linker – Screener for MetaTrader

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Financial instruments screener for manual search and selection of the most interesting and liquid financial instruments. Designed for MetaTrader 4 and MetaTrader 5 terminals. The best solution for trading stocks.

VR Stealth Pro - an adviser invisible to the broker
VR Stealth Pro - an adviser invisible to the broker

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The expert Advisor's interface is intuitive and easy. The EA hides the take Profit, Stop Loss, Breakeven, and Trailing Stop trading levels.

Forex – Crypto Advisor VR Black Box
Forex – Crypto Advisor VR Black Box

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The trading strategy is similar to the swing strategy, if we made a wrong purchase, then we make a sale. Algorithms for protection against high-risk situations is an interesting feature of this program. VR Black Box uses real Stop Loss and Take Profit levels, and can also use virtual levels, while using real levels, the expert adviser hides virtual levels. I started developing this trading strategy in 2009. A large number of improvements and modifications have been implemented in the VR Black Box expert adviser over this more than ten-year period.

A trading strategy, or system, is a set of clearly defined rules and a sequence of actions that a trader applies in various market conditions in order to make a profit in the Forex market and other financial platforms.

Simply put, a trading strategy is a kind of plan or instruction that determines the trader’s actions depending on the current situation on a specific financial instrument.

It is worth noting that the same trading strategy may not work equally effectively in different markets. A strategy designed for Forex trading may not be as successful when used in the stock or cryptocurrency markets.

Having once developed a trading strategy, a trader can subsequently consistently and for a long time make profit from trading financial assets.

What is a trading strategy?

Why do you need a trading strategy?

For systematic profit generation in financial markets. A trading strategy reduces psychological stress, eliminates panic, gives confidence in trading, has a clear plan of action in all situations, including when a trader receives excess profit, and ensures profit at the end of the trading period. p>

Most financial markets are an area of price chaos, where the value of an instrument can increase, decrease, or remain the same. In order not to get lost in this chaos and achieve the desired profit, you must strictly adhere to the developed rules of the trading strategy.

According to statistics, traders who make consistent money in the financial markets use a trading system. At the same time, those who do not use the trading system stably and systematically lose all their money.

How to create your own strategy?

Creating your owntrading strategy is a large and painstaking process, which includes a large number of tests of various indicators, trading systems, technical analysis figures, fundamentals strong> data.

Here are a few steps to help you create your trading strategy:

  1. Decide on the financial market (Forex, Stocks, Cryptocurrency, Futures, Options) in which you are going to work.
  2. Decide on the amount of funds to trade on the selected financial market.
  3. Develop and write down rules for opening positions, rules for holding positions in the market, and rules for closing positions.
  4. Decide on the amount of risk per transaction.
  5. Decide on the market phase in which you will work, trend or flat.
  6. Test your trading strategy on training or demo accounts. The trading strategy must work well in the selected market phase for at least 100 transactions and at least 60 days.
  7. An important point will be to keep statistics of all trading signals without omissions.

It is important to rememberthat creating a successful trading strategy takes time and effort. Please be patient and expect that results may vary.

What should a trading strategy take into account?

The main factors of a high-quality and profitable trading strategy include the following aspects:

  1. Volatility of a financial instrument: this is the degree of price fluctuation over a certain period of time. The greater the amplitude of fluctuations, the more volatile the financial instrument is.
  2. Price noise: These are small price fluctuations that occur as the price moves in a trend. They are part of the overall mobility of a financial instrument.
  3. Entry rules: this is a set of price indicators, indicator signals, time values, support and resistance levels that determine when to open a position.
  4. Position holding rules: these are trader actions, such as trailing stops, setting and modifying Take Profit and Stop Loss, adding positions, partially closing an open position.
  5. Exit rules: these are price indicators, indicator signals, time values, support and resistance levels, Take Profit and Stop Loss levels, which determine the moment of closing a position.
  6. Risks: this is the possibility of losing part or all of the deposit. Experienced traders recommend using no more than 3% of the current deposit balance to complete a trading operation. If you have a deposit of $1000, then you should not risk more than $30. Based on the ratio of Take Profit and Stop Loss, in a successful outcome of a trading operation the profit should be at least 6-9%. One successful transaction allows you to make mistakes twice in the future and not suffer losses from the initial deposit.

Recommendations for developing your own trading strategy

Recommendations for developing your own trading strategy

The more complex and understandable the trading strategy, the greater the chances of success. Let us remember that everything simple is ingenious, and everything ingenious is simple.

It would be good to take as a basis the trading strategies of other traders or study classical trading strategies that have been tested by time and by other traders. However, when taking someone else's strategy as a basis, it is important to understand that each trader is unique and has his own approach to trading. Therefore, it is recommended to adjust your trading strategy to suit yourself and your trading style.

To develop a trading strategy, the optimal solution would be to use demo trading accounts or accounts where there is no risk of losing your own funds.

Even now, in modern times, technical analysis is considered one of the most effective methods. Studying techniques for working with support and resistance levels, technical analysis figures and Japanese candlestick combinations will help you more accurately determine when to enter the market, hold positions longer and more efficiently, and exit the market with maximum profit.

It is recommended to use technical analysis together with fundamental analysis. You shouldn't rely entirely on the news, but you shouldn't ignore it either. Practice shows that experienced traders advise avoiding trading during the release of important news. The news background has a significant impact on currency movements a few days before the news is released and a few more days after.

Pay attention to indicators that greatly facilitateprice analysis and can become excellent assistants. Don't overload your work schedule with many indicators. For comfortable work, it is enough to use no more than three (indicators displaying time, balance, trading account statistics, trading sessions are not taken into account).

The trading strategy must be clearly defined for the different phases of the financial instrument. You should not try to create a strategy that works equally well both in a trend and in a flat. It is better to focus on developing a stategy for the trend, since in a flat without increasing trading volumes it is difficult to earn good money, and an increase in volumes entails an increase in the risk of losing money that exceeds acceptable limits.

The trading strategy must demonstrate a positive mathematical expectation of a coefficient of more than 2 over a trading period of at least 60 days and 100 trading operations, including all three phases of the market: a rising trend, a flat or sideways trend, a downward trend.

What are the different trading strategies?

Trading strategies can be classified into several types, each of which has its own characteristics:

By trading time:

  1. Short-term (intraday) trading strategies involve opening and closing positions within one trading day. Often such strategies are based on scalping, where the trader seeks to fix a profit of no more than 20-30 points.
  2. Medium-term trading strategies involve holding trading positions in the market for one to five business days.
  3. Long-term trading strategies involve holding trading positions in the market for more than five to seven days.
  4. Investment strategies are focused on long-term holding of positions until the desired profit is achieved.

By type of analysis:

  1. Trading strategies based on technical analysis allow you to predict price changes based on previous data on prices and trading volumes. They use various tools such as charts, indicators and support/resistance levels.
  2. Fundamental analysis, on the other hand, is based on an analysis of economic and political factors that can affect asset prices. It includes the study of company financial statements, macroeconomic indicators and geopolitical events.
  3. Indicator analysis uses mathematical models to determine future price movements. It can be useful for determining entry and exit points for trades.
  4. The combined approach combines all of the above methods to create the most complete picture of the market. This allows traders to make informed decisions based on comprehensive analysis.

By the amount of profit and loss:

  1. Trading strategies based on scalping assume a profit or loss of 20-30 points per trade.
  2. Classic trading strategies are aimed at closing positions using Take Profit, Stop Loss or Trailing Stop levels. The profit from each transaction in such strategies is significantly higher than in strategies based on scalping, but the number of transactions is reduced significantly.

By profitability and risks:

  1. Conservative strategies are characterized by a minimal level of risk and insignificant profit.
  2. Standard strategies have a moderate risk-return ratio.
  3. Aggressive strategies are characterized by high rates of return, but are associated with increased risks.

Traders' mistakes when creating a trading strategy

Common mistakes traders make in trading strategies?

One of the common mistakes among traders is deviation from the rules of the developed trading strategy. After several failures or receiving excess profits, traders often deviate from pre-established rules, which can lead to loss of money.

Changing your trading strategy on a regular basis is also a mistake. After several losing trades, traders begin to think that their strategy is no longer working, and they try to change the indicators and rules of the strategy several times a day or even an hour. However, only testing a strategy with certain parameters can show whether it is profitable or not.

Getting profits and excess profits is normal, but you should not change the rules of your trading strategy after that in order to get even greater profits. Also, do not neglect the rules of the strategy when opening new positions, even if previous transactions were successful.

Loss is also a normal element of trading. A well-thought-out strategy can include 3 profitable trades out of 10 and 7 losing ones, but still bring a stable income. Therefore, it is important to remember thatthe more losses in a row were received following the rules of the strategy, themore likelythat the next trades will be profitable and will not only compensate for the losses, but will also bring < strong>additional profit.

Trading is not just a game on the stock exchange. You can both win and lose. However, most successful traders achieve success when they stop playing and start taking trading seriously and professionally.

Which strategy is best for trading?

The question of the best trading strategy does not have a clear answer. Just like choosing the best food or car, it all comes down to individual preferences and needs. The best strategy is one that you have developed, honed, and fully understand. This is a strategy that you caneasily calculate in your mindand that brings you the greatest profit with minimal investment of time, money and nerves.

How to calculate the profitability of a trading strategy?

How to calculate the profitability of a trading strategy?

To assess the profitability of a trading strategy, you can use several key mathematical formulas:

Mathematical expectation formula:

Profit / Loss = Result; The greater the result, the more profitable the strategy is; for good strategies, the result should have a value greater than or equal to 2. The mathematical expectation is best calculated for trading strategies for which more than 100 trading operations were carried out.

Example of a risky trading strategy:

Profit 155,365 rubles / Loss 122,659 rubles = Result 1.2666 Result less than 2x, even though the final result in money is positive, such a trading strategy will be highly risky.

Example of a profitable trading strategy:

Profit 142,326 rubles / Loss 40,233 rubles = Result 3.5375 The result is more than 2x, with such indicators the trading strategy will be considered very profitable and low risk, since the profit is three times greater than the losses.

Formula for real profit per day:

(Profit - Loss) / Number of days traded = Result; The result represents the net profit per day, and the higher it is, the more profitable the trading strategy. The difference from the mathematical expectation formula is that the real profit formula does not give an idea of the coefficient, so it will be very difficult to assess risks. In this formula, a positive result should be expected and targeted for the trader.

Profit formula in percentage:

(Profit - Loss) / Starting deposit / 100 = Result. This formula shows the percentage of profit on the initial starting deposit. If the interest is less than the interest offered by a regular bank on the same deposit, then it is more profitable to place the money on a bank deposit.

Example of a classic trading strategy

Consider a simple strategy based on the Alligator indicator:

Alligator is an indicator created by Bill Williams. It consists of three lines, which represent moving averages with a certain shift. These lines, called jaws, teeths, and lipss, serve to alert traders to the presence of a trend or consolidation in the market.

Alligator default settings:

  • Green sliding - alligator lips. Period 5. Shifted 3 periods into the future.
  • Red sliding - alligator teeth. Period 8. Shifted 5 periods into the future.
  • Blue sliding - alligator jaws. Period 13. Shifted 8 periods into the future.

The strategy uses three states of the alligator indicator:

  1. The alligator is sleeping—all three lines are close to each other.
  2. The alligator wakes up—the green line begins to move away from the other lines.
  3. Alligator eats—there is a gap between all three lines. Which indicates the beginning of a trend movement.

Entering the market occurs at the moment when the alligator awakens. For a more accurate entry, many traders prefer the moment the new period begins. To close a position, a reverse signal or Take Profit or Stop Loss levels are used.

How to automate a trading strategy?

How to automate a trading strategy?

Automation of the trade strategy can be achieved by using specialized software products such as Metatrader 4 or Metatrader 5. These platforms provide the opportunity to create and test automatic trading systems using the MQL4 or MQL5 programming language, respectively.

You can independently study the MQL programming language using the author’s course mql master and automate your trading strategy.

Advantages of this approach:

  1. You keep your discoveries and secrets secretly from other people and not conscientious programmers.
  2. You are guaranteed to program the strategy that you need without unnecessary inclusions.
  3. You can independently change the automatic trading strategy.
  4. You can automate many other trading strategies and ideas.

Disadvantages of this approach:

  1. Learning the programming language will take some time, in most cases, at the time of studying the programming language, the trader immediately realizes his trading strategy.

Why do you need automation of a trading strategy?

Automation significantly saves the time - the trader is exempted from many hours of control of graphs and financial instruments. The trader does not miss trading signals at night or at the time of the terminal.

Automation removes emotions from trading - the trading robot works strictly by the programmed algorithm and clearly, without a doubt, performs all the actions according to the trade strategy.

Automation significantly increases the effectiveness of the trader in financial markets. The ability to automate trading strategies makes traders much more successful than those who continue to trade manually.

What do we have in the end?

Trade in financial markets without a trading strategy is, to put it mildly, is not the most pleasant activity . In most cases, this approach leads to cash loss . Stable profit from financial markets is possible only when using well -thought -out and balanced trading strategy .

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