How do you build a Strategy
Hello traders, Thiru Nagappan here founder of Master the Markets, Elite Traders Conference, and Traders Open Day.
Today’s topic is going to be on how you build a strategy. Strategy is such a common word between so many thousands of traders; but one thing first before choosing a strategy and practising on it to see if it makes money or if it doesn’t. I think sometimes traders it would be a nice thing to step back; and think about how you can build a profitable strategy that can be reproduced, scaled, and one that fits your personality. It will be very useful to you, and that is what this video is all about.
Let me show you three points you should consider when building a strategy. First; the concept. The concept is the first thing you should be looking at before you start putting rules together for your strategy. Let’s take a look at some familiar concepts. I have mentioned in previous videos and talks over the world that some of the concepts would be; swing trading, for example, swings in terms of a concept comes from a point that says that price does not move on a linear fashion. Price does not move in a linear fashion. That turns into swings formed in the market and building strategies around that concept or around the swings. For example, if we see prices move in cycles, we are going to be looking forward to catching those swing turning points from that concept. It is a very strong concept, because a strong concept is one that stands through time. When it can stand through time, that is when you know that is going to continue to be reoccurring again and again. Therefore, you can them make money out of it consistently. You can also have an edge around it that would then put confidence in you to be able to reproduce it profitably. That is a good concept. One more example of a strong concept would be, price moves a certain amount every day. If you look at your daily bars, they move at least a certain amount every day. If they did not, you would have a horizontal line on your chart and in that case, you would not want to trade it because it would not be very liquid. On a concept of it moves a certain amount of range every single day, you can then go to shorter time frames, so you can capture that amount every day. That is called range trading. That is a very strong concept as well because it will stand through time, and you will know a particular instrument will have to move “x” amount a day. Therefore, you have to have a concept before you take it further down the line when building a strategy. The concept has to give you a strong edge. These concepts that are strong and stand through time, they give you a strong edge.
Second point that you need to be looking at before you build your strategy is your “objective”. I cannot stress enough to you how important this is. Most traders are trading without understanding objective. This is where all has to come into alignment after this point. You need to get very clear on what it is you want to capture from your strategy. What kind of move you want to capture. If this is not well defined, what then happens is that your emotions start to kick in as greed and fear. If you do not have objective well defined when you exit from the trade move and then it shoots up another 200 pip, you are going to think that you should have stayed there a little longer. It may lead to the tampering of your rules, which will harm your consistency and profits when trading. In order to achieve consistency, we need a clearly defined objective. When talking about the objective, what do we need to get certain about? We need to be certain about what percentage of the move we want to capture. For example; in swing trading, if you want to capture phase 1 which is in line with the trend, we are looking at maybe capturing 70% of that move. If you are talking about range trading, you can relate that to levels of ATR. You can then say that you want to capture 0.6 ATR every day of that daily range move. These are the things that you need to first clearly define before you even start to enter the market and taking a trade.
When you have defined the concept and objective, then you need to choose your tools. Your tools are necessary to build your rules. Usually, we have about six tools. I have mentioned this in past videos, and you can definitely go and watch them and our blog as well. Out of the six tools, what are we looking to achieve when we formulate those rules? We looking to have all of those rules quantified. This point is very important, if not the second component of your trading strategy being valid totally becomes redundant, which is actually consistent execution. Without quantification doubt creeps in, and with doubt the feelings of fear and greed start to come up. For the trader’s toolbox later, trade like a master, we actually explain to you how you can quantify even those rules as well and the best methods for quantification. The last point to mention is your money management rules. The type of things you have to put in there is usually risk management, per trade, total portfolio, maximum draw down, etc. You need to mention all of that. Another crucial factor building your strategy is deciding what your reward to risk ratio is going to be. It could be less than 1:1 trading strategy, or more than 1:1, maybe minimum 2:1, you have to mention that as well. All of these is expected reward to risk ratio, then track and see how well your strategy is performing.
These six tools to pick and choose from is to create what we call the “four degrees of freedom”, and that is a least three to four entry rules to formulate. Do consider these three points over here; concept, objective, and tools that you pick and choose to then formulate a strategy that is in line with the concept and the objective of your strategy. By doing that you would then be able to form a very strong strategy with a solid edge in the market that it can then help you produce consistent profits.
Traders, I believe this has been immense value to you. Contemplate on it, take a step back on your strategy and then look at the overall picture to formulate your rules. Finally, you will build a strategy that will give you the returns. Until the next time as we always say; stay disciplined, follow your trading plan, and keep Trading Like a Master.