What are the usual steps for building a trading strategy? The trader is called from the first to the last step before the “opening” of a new profitable Forex strategy that will follow, to build something on solid foundations and with good “materials” to withstand in time and the very difficult conditions prevailing on foreign exchange market.
The start of everything
The inspiration to create a new strategy usually comes either from a new idea, or from a random observation in a price chart or even live forex quotes (open-high-low-close) of day, week or any other time frame is used by the trader.
At this point we must say that ideas certainly do not come from the sky…
To get to the point where the trader has a new idea (which may be the foundation of a new system – strategy) will need in addition to the basic knowledge of how forex market moves, in addition to the necessary training in almost everything about Forex, also already have quite a lot of experience managing his professional account.
If it has already reached this level, inspiration (the original idea to start something new) will emerge almost as physical continuity…
Experimentation and … notes
There is a widespread opinion (which personally I agree with) that a trader should not essentially be called the “manager” who sets buy and sell orders and .. managing a cash account (which is not a simple matter anyway) but the one who “gets the idea” for experimenting with something new. In other words, the creator and not the one who copies something ready.
A good piece of advice? Just as the writer or lyricist must have a notepad so that he can record the inspirations of the moment and be able to recall them when he is able to process his initial thoughts, so the forex trader must take notes because it is probably a good idea to never process because it has been forgotten forever!
The Rules – The Recipe!
After presenting the trader as an architect or even a builder in the first paragraph but even a writer and lyricist (!) it’s time for the cook…
Because like the good cook, the trader then goes to the next phase which is to establish the exact rule or rules that should govern the market so that his original idea begins to take the form of a “recipe”.
The classic and most common rule example? “50 days simple moving average crosses 200 days simple moving average from below” then we have a buy setup.
Essentially this phase is the jump in rule in the Forex market. The entry rule (or more logically the set of some rules) that when “meets” the necessary condition on the market will send an entry signal to buy or sell a currency exchange rate.
The key to a successful trading strategy and at the same time a prerequisite – as are the entry rules- are the exit rules. This is the “filling” again of certain conditions in the real market that will show us the exit door from an active trade.
Do I need to clarify that the exit from the market does not necessarily mean final profits from our buy or sell positions have been recorded by that time of exit? I think so because it’s not all self-evident.
Just as with any other activity in our lives when a situation “just doesn’t go any further” and we have to be brave to get out of it even with losses (so as not to count even more) so in forex trading selfishness doesn’t fit into a strategy at all. Far from it, it can easily lead to a small (or even great) disaster.
For the majority of the various forex strategies the concept of exit is identical to that of setting stop loss and take profit levels but (although highly recommended) one does not banish consequent of the other.
Backtesting, the final step
Backtesting is what will tell us to a great extent whether or not it is worth it to proceed with the implementation of our new strategy.
Backtesting is called the process of checking old real data of one or more forex pairs in order to see the results of our strategy with all the rules of entry and exit from the market. In other words, we are doing a virtual test in our new strategy to see how it responds to real market conditions.
There is a common question that has to do with how far back in time we have to go (depending on the timeframe we use) to be fairly sure of the profitability of our strategy (absolutely sure we can never be, after all the conditions in the forex market change from time to time and no system can guarantee absolute profitability for ever).
Answer definitive and sure does not exist but there is good advice: Go at least 6 months back (in 1 day time frame) OR have checked at least 100 trades that meet the entry requirements of our strategy to see their results and then decide whether to proceed or not.
If you decide to try to create your own trading strategy, the necessary condition before everything else is to like what you are doing and to have patience and perseverance after the expected failures.
And good luck!