CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64.71% of retail investor accounts lose money when trading CFDs with this provider.

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64.71% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

How to Build a Trading Plan and Strategy: 10-Steps Guide to Success

Trading plan and Strategy (Light bulb with business charts) CC

The trading world is exciting, and CFD (Contract for Difference) and Forex are the popular choices. The path to success in trading is not easy, but it is achievable. While the commitment and hard work needed along the trading path may seem difficult, there are steps that can help you on your way to being a top trader! Considerable effort goes into becoming a successful trader, and although you may read many “get rich quick” stories, don’t let this fool you into thinking it can only be done in a quick and likely risky way; there are plenty of safer paths and strategies too.

For those who want more information on how they might start their journey as traders, there are a few things that need careful thought before action. And one of them is to think about a trading strategy or plan.

In this article, we are going to look at how to build a trading plan or strategy, with a focus on:

 

Education

To be successful in anything, education is critical! To succeed in the world of trading, it is essential to have an education in the fundamentals of markets and, ideally also in technical analysis. You can find numerous articles that can help you gain this knowledge at the Hantec Learning Hub. Whether you’re just starting out in the markets or looking for a new perspective, our articles will help give insight into what it takes to be successful as a trader. It is important to have a good understanding of the macroeconomic fundamentals and geopolitical influences behind global financial markets when starting out as an aspiring trader.

 

Types of analysis

There are three main types of analysis that you should look to educate yourself about when building a trading strategy:

  • Technical analysis
  • Fundamental analysis
  • Sentiment analysis

 

Forex Market Analysis

Technical analysis

Technical analysis is a tool that traders use to evaluate financial markets and make trading decisions. It is based on the idea that market prices move in waves and cycles and that by analysing past price movements, it is possible to predict future price behaviour.

Technical analysts use charts to identify patterns in price data, which can then be used to generate buy or sell signals. Charting is a graphical representation of price movement over time. There are many different technical indicators that can be used for technical analysis, and traders often use multiple technical indicators to make trading decisions.

While technical analysis cannot guarantee success in the financial markets, it can be an important part of a trader’s toolkit. By understanding technical analysis, traders can gain a better understanding of the market and make more informed trading decisions.

 

Fundamental analysis

The fundamental analysis approach to analysing the financial markets is the study of macroeconomic and geopolitical factors that may impact price. This can include factors such as inflation, interest rates, employment levels, and political stability. By understanding how these factors may affect the supply and demand for security, traders can make more informed decisions about their trading strategies.

 

Sentiment analysis

An often-overlooked form of analysing global financial markets is sentiment analysis. Sentiment analysis is a method of measuring the mood or tone of a group of people, typically by analysing their written words. In the financial markets, however, sentiment analysis is used to make trading decisions based on the collective mood of market participants.

There are several different methods that can be used for sentiment analysis, but one of the most popular is to use sentiment indicators. These sentiment indicators consider a range of factors such as social media sentiment, analyst recommendations, and insider buying and selling activity. By taking all these factors into account, sentiment indicators can provide a valuable insight into market sentiment. By analysing sentiment, traders can get an idea of which way the market is moving and make more informed trading decisions.

Timeframes

The time frame over which you hold your trade is a key factor to your trading approach and strategy. This trading time frame may be restricted by the time available to you to trade. For example, a day trader needs to be able to watch markets very closely and swill spend all day analysing market price action and trading multiple times through the day with their trading plan.  Whilst a swing or position trader, who would typically keep on trades for several days or even several weeks, is able to spend less time actively trading.

 

Types of strategy

There are many different types of trading strategies, including, but not limited to:

  • Swing and Position Trading
  • Day Trading
  • Price Action Trading
  • Algorithmic Trading
  • Event-Driven Trading

 

And rather than go into depth on these strategies, you can read more about these different types of trading strategies in our article 5 Best Trading Strategies for Every Trader.

When determining which trading strategy might suit you best, there are numerous factors you may wish to consider, including:

  • The time you are able to devote to trading
  • Your trading goals and aims
  • Your personal make up and psychology
  • What trading strategy “feels right”

 

How much time you can devote to trading is a key first question in deciding what type of strategy you may wish to build. Are you just trading part-time around your main job? Or can you devote all day to trading and are looking to make trading your main source of income. Most traders start of trading alongside their current employment and if they are successful look to become full-time traders. But if you are going to be confined to only certain times of the day to trade, or to do your strategic analysis and implementation, then you need to manage your strategy.

 

HERE is a summary of the various types of trading strategy, time spans and trading time period for each strategy.

Trading Strategy Type Time Span Trading Time Period
Swing and Position Trading Short/ intermediate term days, weeks
Day Trading Short-term minutes, hours
Price Action Trading Short/ intermediate term minutes, hours, days, weeks
Algorithmic Trading Very short-term (usually) seconds, minutes
Event-Driven Trading Very short-term/ short-term seconds, minutes, hours

What are your trading objectives? Like the time factor above, are you looking to initially just make some top-up income or is the goal to be a professional trader? This decision may influence your choice on what type of strategy you choose. As a basic rule of thumb, the shorter the time frame you trade, the greater the possibility for large profits. This is because you are taking more moves out of the market, therefore the more likely to be able to be profitable to the extent to trade as a full-time occupation. But equally, this will need your full attention, so is a full-time job!

Who you are and what you bring to trading will have a significant impact on which type of trading strategy you choose and prefer? Are you mathematical and like looking at charts? Or does analysing the macroeconomics and fundamentals of a market appeal more to you? Connected to your personal psychology and make up is what trading strategy “feels right”. Some strategies may just “click” with you and feel right, whilst others may leave you scratching your head.

 

Which market or markets to trade?

An extremely important decision. Which markets will you trade and base your trading plan on? You may build a strategy that works across multiple assets classes. Or the plan may just suit one asset class, like Forex. Or, within an asset class, you might find that your strategy only works with a specific market, like Gold in the commodity space. It may be that it is through trial and error, through testing and backtesting, you are able to decide which markets is best to apply your trading strategy.

 

Trade direction

Once you have decided on what type of trader you are looking to be, over which time frame and what type of strategy you are looking to use with what type of analysis, the next key decision that needs to be made from your analysis is what direction you are going to place the trade in. That is to say, are you a buyer, going long, or are you a seller, going short? This sounds obvious, but how your trading plan sends signals that triggers you to buy or sell a market is critical.

 

Trade entry

Once your plan has given you a buy or sell signal, the next step is when to enter long or short. DO you buy or sell immediately the strategy gives you the signal? Is there a time delay, where you wait for the signal to be confirmed? Is the signal a price signal, so you enter when the market hits or breaks through a certain price level? These are all questions that need to be answered when building your plan.

 

Trade exit: Take profit/ stop-loss

Once you have entered a trade, or even before, placing a stop loss is critical. The stop loss is a money management tool that you should use to avoid losses. It’s important not just to place the stop loss where you don’t want to lose too much money, but to place at a point where your view of the market has changed, and you no longer want to hold the position. Placing the stop loss at an appropriate level ensures good risk management so it is essential.

Similarly, a take-profit point or target level for a trade is critical to trading success and any healthy trading plan.

 

Risk management

Risk management is an often-overlooked aspect of trading by the newbie trader and probably one of the most important aspects of trading. The consequences of losing money on an open position are serious, so it’s important to always calculate the risk before making trading decisions. A good rule of thumb is that you should never put more than 1% of your funds at risk when placing any trade. You should also calculate the Reward to Risk Ratio and Hit Rate over time to improve your risk management. You can read more about these trading metrics in our article Risk/Reward Ratios and Hit Rate.

Keeping a trading journal

Data is key when trading, and analysing your data, plus your mood and psychology, are an important part of building a successful trading strategy. The best way to learn from your mistakes and successes is by keeping a journal. Not only will it help you identify what went right or wrong with any particular trade, but also allow for an analysis of how well-suited certain strategies are in general so that they can be refined and improved upon over time.

 

Top trading strategy building takeaways

If you can successfully implement these factors into a trading strategy, then you will be on your way to a more successful trading journey. And as you can see from the table below, there are no cutting corners when building your trading strategy. Most of the above factors required to build a trading plan are “musts”.

Strategy factor Must/ optional
Education Must
Types of analysis Must
Timeframes Must
Types of strategy Must
Trade direction Must
Trade entry Must
Trade exit: Take profit/ stop-loss Must
Risk management Must
Trade journal Optional

So, there is no time like the present, why not start to build and test your trading strategy using a Hantec demo account or, better still, to test in a live example, but with lower risk with a Hantec Cent account.

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