Trading STRATEGY Creation

Part 1.

In my previous posts here on Medium, I started off by giving some background and then into risk management. This is an integral part of any trading strategy.

At this stage, I hope you have a good idea on risk of the trade — I also hope you have spent a little time reading through babypips.com to get the basics nailed down. You should therefore know the difference between a pip and a LOT, know what a spread is, how to calculate your Risk:Reward ratio and so on.

The issue is, many courses — Even if you have paid a couple of thousand dollars seem to stop not much further than this information, CONGRATULATIONS, you now know how to use a moving average on a chart. But what does that mean for real term trading? Well, quite frankly. NOTHING. You have been sold a whole bunch of optimism, delivered by a sleek sales guy who has possibly not placed a real trade.

As a trader of over 20 years, I can tell you from my own pain. That reading is a hard way to learn as most books cover only one technique or you find the information is similar to a course, you get the basics and not much else. The major problem in today’s world, is that information is almost too readily available and taking bad free education is just as bad as paying for the privilege (well nearly). When building your plan, you need to think from the top down in all aspects, I often explain to my students It’s a bit like planning a holiday. You first need a rough idea of where you are going, then you can search for hotels in the area and then you arrange the travel plans around the idea.

In trading terms, this means you need to start with assessing the higher timeframes, ideally you need no more than 3 or you will start to confuse yourself. Now the other thing to keep in mind, is that it makes no sense to pick a monthly chart, a 4 hour chart and a 5 minute chart as your 3 as the views have very little confluence overall. So when selecting what timeframes you want a bias (assume monthly), you want a secondary for direction confluence let’s use the weekly and then for entry you would look to use the daily. These all marry up to each other and can be used in sync to create your perfect picture.

You could also use the daily, the 4 hourly and say a 1 hour chart. Or even smaller 4 hour, 1 hour and 15 minute would also make some sense. This will also depend on the type of trader you want to be & what the day job allows you to be. If you have read babypips already, then you will know you don’t want to scalp a monthly chart, you also wouldn’t want to plan a long term predication on a minute chart.

I’ll cover more on the types of traders in my next post.

Another thing to keep in mind when starting out, watching youtube videos or taking a trading course, is that 75% of traders lose money. So, you don’t want to get stuck with basic tools majority of losing traders are using. Educators often make money through what is called FTD’s — first time deposits, this is where brokers pay introduction fee’s to educators for paying customers who sign up on the exchange or broker. The reason is simple; there is what’s known as the 90–90–90 rule. 90% of traders lose 90% of their accounts in 90 days. So a new client with limited education, passed over by the educator is easy pickings for a broker to profit from.

Types of traders and introduction to strategies in the next post.