Stop, think, trade – building a successful trading strategy

Stop, think, trade – building a successful trading strategy

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Every trader wants to be successful. No one likes to lose. But is there a secret to building a successful trading strategy? Like with clothes, when talking about trading strategies one size does not fit all, and like fine cuisine more is not always better. With this in mind, let’s dive into the basics of developing healthy trading habits, and discover how they can help you build a more successful trading strategy.

Healthy trading habits

Humans are irrational creatures, no matter how much we like to believe our thoughts follow logical patterns.We often fall victim to cognitive biases; tricks our minds play on us. In trading these can be things such asoverconfidence bias, hot hand fallacy, or the bandwagon effect.

It’s time to trade mindfully. Since its adoption in clinical psychology and psychiatry in the 1970, the concept of mindfulness has grown in popularity. Derived from Buddhist teachings, the concept of mindfulness,known as ‘sati’ means self-knowledge, and wisdom, and is usually achieved through meditation.

Jon Kabat-Zinn, professor emeritus of medicine, was one of the first to highlight the benefits of the technique:“the awareness that arises from paying attention, on purpose, in the present moment and non-judgmentally.”

But, what’s this got to do with trading? Mindfulness, as we know it today has come some way since Buddhist meditation, and has taken on a more general western understanding, even used by the British NHS. For traders, mindfulness can mean staying focused on the markets, being aware of the charts, and avoiding falling victim to biases.

Speaking of biases, they’re risky, and it’s best to avoid them if you can. One way to avoid biases coming into play, is to learn about them by reading all the material available, asstudies show (De Paola, Maria and Gioia, Francesca and Piluso, Fabio, Does Reminding of Behavioural Biases Increase Returns from Financial Trading? A Field Experiment. IZA Discussion Paper No. 10983.) that awareness of biases decreases their likelihood.

Although there’s a lot to be said for planning, beware of the flip-side – analysis paralysis. Amateur and experienced traders alike can experience analysis paralysis.Considering the massive amounts of information in trading, it’s no wonder that some traders become lost in the world of charts, graphs, and reviews. If you feel this is starting to happen it may be time to take a step back, walk away from the screen, and take some time before returning to trade.

Developing healthy trading habits takes a lot of practice, so hone your skills, be mindful, educate yourself, and know when it’s time to take a step back from the table.

Building a successful trading strategy

Now it’s time to put those habits into action and develop a successful trading strategy. Let’s keep it simple:

  1. Stop
  2. Think
  3. Trade
  4. Evaluate

First things first, stop! Don’t trade, wait before you even make your first move.

Get in the trading zone, take a moment to breathe. Don’t rush into your trades, you may get lucky at the start, but the best way to trade is with a plan.So, once you’ve taken a moment you can proceed to the next step – think.

Examine the markets, analyse the charts, and get to know your prospective trades. This is the stage at which you should design your trading strategy. Explore your options and choose markets that suit you.If you’re trading CFDs,pay close attention to the leverage level, and never risk more than you can afford to lose.

Next, it’s time to plan. Be aware of the risks, know your limits, manage your funds, and plan your trades accordingly. One very healthy trading habit is to make sure you always set the appropriate stop loss and take profit orders to ensure you have control over your trades even when you’re not online.

Now, you’ve got your strategy, it’s time to trade. Open you have planned your positions, set all alerts and orders, and wait. Keep track of your trades and how your strategy is working. But, don’t be tempted by the desire to keep adjusting in search of higher profits. One pit fall of even the best though out strategies is overtrading – using too many different trading strategies at once. If this is happening to you, it’s time to take a step back, review your healthy trading habits and try again.

Even with the best planning, the markets are unpredictable. If they happen to move against you don’t panic. Knowing how and when to accept your losses is key to becoming a successful trader.

Finally, before you run off to enjoy your profits (or commiserate your losses), you need to evaluate and discover the actual success level of your strategy, how profitable it was, and even your own ability to stick to it. Armed with this information you can discover new ways to make your future trades more profitable.