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You are here: Home / Trading Articles / 10 Steps To Creating Your First Trading Strategy

10 Steps To Creating Your First Trading Strategy

By Galen Woods in Trading Articles on December 20, 2016

10 Steps To Creating Your First Trading StrategyMost new traders start by learning the trading strategies of other traders. I began my trading career this way as well. But, many traders ask, how do I get started with my trading strategy?

The good news: Creating your first trading strategy is easy.

The bad news: Creating a profitable trading strategy is hard.

Start with the right expectations. Forming a trading strategy is easy. Learn a few trading tools and indicators, and you can do it.

However, it’s not realistic to think that your first trading strategy will make you rich.

Finding an objective trading edge is tough. On top of that, you’ll realise that trading profitably goes beyond your trading strategy.

Then why should you still form your trading strategy? Why not just use the trading strategy of a successful trader?

Traders might share their tools and approaches. But no trader can or will guarantee your profits. Every trader is different. Hence, you can only benefit from a unique and personal blend of trading tools.

The best and most sustainable approach is to develop your trading strategy.

Follow these 10 steps to forming your first trading strategy:

Step 1: Form Your Market Ideology

Before you jump into creating your own trading strategy, you must develop an idea of how the market works. Most importantly, you need to answer this question.

Why do you think you can make money from the markets?

Form your market ideology by reading widely. Read about both technical and fundamental analysis.

Avoid get-rich-quick claims.

Think about demand and supply.

Doubt theories that claim that people are perfectly rational.

Your ideology will define every step that follows. Give it the attention it deserves.

Regardless, I urge you to follow one principle in your first trading strategy.

Keep it as simple as possible.

You don’t want to be overwhelmed by a complex strategy right from the start. Moreover, a trading strategy with more moving parts is harder to manage and improve.

Step 2: Choose a Market For Your Trading Strategy

Forex? Equities? Options? Futures?

If you choose to trade forex, understand what you are buying and selling with a currency quote. Make sure you learn about the different models of forex brokers. Know how the margin is calculated.

Or if you choose to trade equities, you must know what a share means. You must know the difference between a blue-chip and a penny stock.

The point is there’s a lot to learn about each market. But you cannot start to learn in-depth until you choose your trading market.

Although I recommend futures trading for intraday traders, the choice is yours. The only rule is that you must understand the market you choose to trade.

Step 3: Choose A Trading Time Frame

Before you gain any trading experience, it’s hard to decide on a trading time frame. You will not know if you are more suited to quick scalping or daily swing trading.

Should you trade the 5-minute time frame or the daily charts?

Hence, you can start by considering your circumstances. If you have time to watch the market for extended periods, try intraday trading.

When you trade fast time frames, you get fast feedback to shorten your learning time. Even if you end up with longer timeframes, what you learn from intraday price action will still be useful.

Of course, if you are not able to watch the market for extended periods, start with end-of-day charts. With sustained effort, you can learn enough to decide if swing trading is for you.

Choose Your Trading Time Frame

Step 4: Choose A Tool To Determine The Trend (Or Lack Of)

You don’t trade when you see a Pin Bar. You trade when the market is rising, and you use a bullish Pin Bar to trigger your trade.

You don’t trade when you see a Gimmee Bar. You trade when you judge that the market is going sideways, and you use a Gimmee Bar to enter the market.

Decide on a tool to help you judge the market context. (i.e. trending or not, up or down)

You can choose price action tools like swing pivots and trend lines. You can also use technical indicators like moving averages and MACD.

Step 5: Define Your Entry Trigger

Even with the right market context, you need an objective entry trigger. It will help you enter the market without hesitation.

Both bar and candlestick patterns are useful triggers. If you prefer indicators, oscillators like the RSI and stochastics are good options too.

Stochastic for Swing Trading

Step 6: Plan Your Exit Trigger

You need to plan how to exit when things go wrong. The market can go against you, causing you losses beyond your imagination. Having a stop-loss is critical.

Learn how to place a stop-loss here.

You also need to plan how to exit when things go your way. The market will not go your way forever. Hence, you need to know when to take profits.

Learn how to place a target here.

Step 7: Define Your Risk

Once you have your entry and exit rules sorted out, you can work on limiting risk.

The primary way to do so is by position sizing. For a given trading setup, your position size determines how much money you are putting on the line.

Double your position size, and you will double your risk. Watch your position size carefully.

Step 8: Write Down Your Trading Rules

At this stage, your trading strategy is simple. You might be able to memorise the trading rules. However, you must still write down your trading rules.

Having a written trading plan is a robust method to ensure discipline and consistency.

It also provides a record of your trading strategy. You will find it useful when you are trying to refine it.

Step 9: Backtest Your Trading Strategy

With your written rules, you can now backtest the strategy.

If you have a discretionary trading strategy, backtesting can be an arduous process. You need to replay the market price action and record your trades manually.

If you have a mechanical trading strategy and a coding background, you can speed up this stage.

Nonetheless, looking through the trades one by one is a great way to develop your market instinct. Doing so can also help you think of ways to improve your trading strategy.

Step 10: Plan How To Improve Your Trading Strategy

Your first trading strategy will not be profitable. But it’s okay. Your trading strategy is a living object. It is not static.

With your growing experience and knowledge, your trading strategy will improve.

But let’s not leave this to chance. Plan how you will obtain feedback and improve your trading strategy.

Forward test your trading strategy. Plan to take good notes of your market observations. Record your trades and keep your chart images in good order.

Avoid drastic changes to your trading strategy.

For this final step (which might take forever), remember that your aim is to achieve positive expectancy with every trade. Not positive profits for each trade.

Let statistics work for you. Don’t force your will on the market.

Conclusion

Follow the 10 steps above, and you will find yourself with a basic trading strategy.

This strategy is not the Holy Grail. But it is formed with your experience and according to your trading style. 

Keep working on it, and you will stand a chance to succeed.

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Comments

  1. Basty says

    November 9, 2018 at 4:15 PM

    Making a decision on trading will take a lot of risk, having this kind of guide or reading these steps can help you find an easy way, but still, there will be a risk to take. Just be wise in choosing your platform.

    Reply
    • Galen Woods says

      November 12, 2018 at 10:17 AM

      Agreed! Trading is always risky. We can only try our best to take calculated risks.

      Reply
    • ABHIJIT SINGH says

      March 24, 2019 at 10:51 PM

      AGREE

      Reply
  2. Tinotenda Mugocha says

    August 1, 2019 at 5:16 PM

    Really helped me a lot

    Reply
    • Galen Woods says

      August 4, 2019 at 11:48 AM

      Glad to hear that! All the best for your trading.

      Reply
  3. Andrew Golyanov says

    August 9, 2020 at 8:59 PM

    Nobody journals their trades, but I will. This is what will set me apart, right?

    Reply
    • Galen Woods says

      August 10, 2020 at 5:52 PM

      Definitely. That’s the first step to treating your trading as a business, instead of a hobby. Of course, that does not guarantee success, but it is an important step towards trading consistently. All the best!

      Reply
  4. Michael says

    February 13, 2021 at 7:42 PM

    That’s a good planning

    Reply
    • Galen Woods says

      February 13, 2021 at 11:27 PM

      Thank you for your comment. Yes indeed, planning is essential for trading well in the long run.

      Reply
  5. Kevin M Wall says

    April 20, 2021 at 4:28 PM

    Great confirmation to where my head is currently working toward becoming a successful day trader. Much of what you shared here is the process that I’m currently employing to develop my skill in becoming a successful trader. The time we are currently in I feel is completely unprecedented, in which cocktail servers can become rich overnight, and once again back to the grind tomorrow. With a successful strategy (hope is NOT a strategy as many I have been observing are currently employing!) ANYONE can LEARN, PRACTICE, and GROW to become a successful trader.
    Thank you for sharing your thoughts and helping me to develop a successful plan!

    Reply
    • Galen Woods says

      April 21, 2021 at 11:19 AM

      Thank you for sharing your experience! Having a solid trading plan puts you ahead of most traders. I wish you all the best in developing your plan.

      Reply

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