Okay, I get it. The internet is full of information on all the different types of trading strategies out there. You can be overwhelmed with all the information on trading and investing. Heck, even this website can get overwhelming at times!
So how can you find the best trading strategy that suits you ?
Great question !
Now, let's be clear from the beginning. This isn't a holy grail magic strategy type article. There is no such thing. Instead, it's a useful guide on how to go about finding the right strategy for you.
If you give an impatient trader a profitable long term trading strategy, it will drive them nuts and they will more than likely lose money with it. So yes, picking the right trading strategy unique to you as the individual is so important for your trading success.
Ever wonder why you can give 10 different people the exact same strategy and you will get 10 different end results ? Well, that's because people are different and our personalities shape how good we will be at utilizing a particular trading strategy.
The best trading strategy for you might not be the best strategy for someone else.
So with that in mind, let's get started on how we can steer ourselves in the right direction in finding the best trading strategy for us.
Finding the right strategy requires us to look at the following areas:
As we dig into these individually, it will become more clear what I mean and how it can help make the vital decision of picking what's right for you.
Right, let's clarify this here and now. I don't believe you should ever strategy hop, that is to go from one strategy to another every couple of weeks or months. You'll get no where.
The best traders in the world have their own unique strategy with their own twist on it.
But how do we know what strategy is right for us if we shouldn't strategy hop ?
Well this is a balancing act. For beginners, you need experience and learning the basics. You can learn what to do and more importantly what not to do through trying out the different trading styles.
How else will you know what you like and don't like if you don't sample what's on offer? But this can also be very dangerous. Please keep in mind the importance of allowing yourself a good rigid process and time-frame to work on a particular trading strategy.
The best way to do this without losing money is through paper trading.
Some argue it's not as good without real money on the line and this might be the case for you too but it certainly helped me iron out and tweak strategies until I found what was right for me to stick with.
A great little saying that is so important in trading is
" Jack of all trades, master of none"
I'd much rather be a specialist in one strategy and know it inside out then have average knowledge on a vast amount of different trading strategies.
You will need to educate yourself about the varies strategies in order to pick the right one for you. Free resources such as chart school will give you a basic understand of how things work.
Through this you may find indicators, price patterns or other form of analysis you may want to try out yourself.
Alternatively, you can find a trading mentor and learn the ins and out of their strategy. The benefit here is you have someone who is already profitable. But like I mentioned above, you'll need to be aware that one style of trading might not be the best for you.
Have a look at my trading strategy for another example of a trading style you might want to learn and dig into further. It's by no means some secret formula but certainly has worked for me.
Going through all the different strategies and trying to assess which one you may like is always best done right at the beginning. Don't rush it though, as if you do this right, it's like being married. You'll want to respect it through the good times and bad and don't cheat on it with another strategy.
Okay, you get the idea ! :)
Here's an interview with Nate over at Investorsunderground. You'll hear his story of how he developed his strategy to where it is today.
If this isn't enough, here is a list of trading strategies you might prefer to dig into further. Again and I point it out to you guys, my readers because I don't want you to get scammed.
Be aware of people promising unlimited profits. This warning only applies if you search for people to teach you their strategy on your own without any knowledge of what to do. If you follow my recommended mentors above, this shouldn't be an issue as they are legit and have proven track records.
Don't get me wrong, there are lots of genuine trustworthy people out there willing to teach, just be very careful is all I'm saying
Why is this important ? Well, as I mentioned above, you don't want to be an impatient type person trading a long term strategy or you'll go crazy. Find a style that suits your own personality.
If you don't know what type of personality you have for trading, this trader personality test will help steer you in the right direction.
Just a heads up, there are 74 questions and you'll need to sign up (give them your email) to get your results. If you answer as accurately as possible, you'll get a fair idea of your trading personality.
Once you have this nailed down, you can find trading styles that work with your trading personality. e.g. day trading for shorter term traders and swing trading for longer term traders.
It really doesn't matter what you prefer. It's unique to you.
I'll repeat this one more time so it gets drilled into your virtual heads. Be as honest as possible when taking that test. The last thing you want is inaccurate results. I found getting a close family member to answer it for me was helpful because they were less biased that me.
I overestimate my achievements and under estimate my failings lol but you get the point.
Now we have some sort of a style we'd like to explore more, it's time to practice. Now some of you think the only way to practice is with your hard earned cash. I prefer to iron out all the strategy pitfalls with demo paper trading.
That way I learn from my mistakes and don't risk a penny.
A great way to paper trade for free is with tradingview. They have a simple simulator you can use to practice trading your strategy in real time without a dollar of real money risked.
You can find it on the bottom of the page on the chart. See the screenshot for guidance.
If you still need help with setting this up, the video below will guide you through it.
Another important consideration is risk tolerance. Now don't go risking tons of money on every trade but you will need to find a strategy that fits within your risk tolerances.
One thing I notice a lot is people overestimate the losses they think they're able to take. In reality, if on a 10% drawdown, it's the end of the world for them and they are numb to making sound trading decisions.
The only way to truly know what kind of drawdowns you can take without making dumb decisions is by being in one and knowing your thresholds. Now again, the demo is great for this.
However, demo isn't real life so there is only so much information you can gain from this. As a rule of thumb, it's best to keep your losses as small as possible. I prefer to sleep at night so I take very small risks, 1% per trade.
Some other traders can take larger risks and that's the best trading strategy for them. There is no right or wrong way. Eric Wood is a great example of this. The man is a great trader and really pushes it.
Check out his interview here.
I know I couldn't trade like him. It's just my own personality makeup that would cause me to have a heart attack in some of the scenarios he's been in.
Win rate is a very misunderstood concept in trading. People think in order to be profitable, you need a high win rate. This couldn't be further from the truth. Risk, reward is the important thing.
If you struggle with having a low win rate, you might need to find a style with a higher win rate. Honestly though, I am even reluctant to write that because it is absolutely not necessary for profitable trading.
In fact, find a high win rate strategy can be very tough and straining but like I said, if it's something that you think would work better for you. great.
If you don't work off sound principles, the strategy you wish to explore will eventually fail. By sound principles, I mean mathematical principles. If we risk 1 to make 1, we need at a minimum a 50% win rate.
Yet so many people don't even do this. You can't fight math, it will win and leave you broke. This is why I find paper trading so great. You get to tweak and test all these things until you are satisfied with the end result. i.e. your trading edge.
Have a look at the chart below for risk reward and win rate requirements, it's very important when finding your trading edge.
Other principles we must include are good discipline and psychology practices. This all goes into finding the best trading strategy. You need to get into this level of detail if you want to be great.
90%+ of traders lose money so we need to go the extra mile to slot into that 10%. Any extra edge we can find can be the difference and it is so important that you follow these principles on your quest for trading mastery.
Another important aspect of find the best trading strategy for you is back-testing. We need to see how it would have performed in the past. This way, we know if we are onto a winning system or not.
There are many ways you can backtest your strategy, either manually going through charts with your own two eyes. Alternatively, you can use back-testing software to help go through years of data.
This can be more complicated to do but you'll cover far more data at a much faster rate if you do it this way. Just don't analysis everything to death as you might suffer from curve fitting.
This is more common through manually eyeballing the charts but still something to keep in mind all the same. You can certainly benefit from backtesting and it's an important part in finding the right strategy for you.
Finding the best trading strategy is like finding the best partner. It takes time but once you find it, life is a hell of lot better. I honestly feel like I am married to my trading strategy and sometimes struggle with cheating when I see some traders with other strategies post great profits with their setups.
But then I remember why I married my strategy in the first place. :)
Okay enough of the marriage comparisons, you know what to do to find the best trading strategy for you. There is no holy grail and your strategy could work for you and fail for others.
It is however absolutely of utmost importance you find a trading edge.
So go forth and best of luck on your journey. I hope you have a happy marriage with your trading strategy :)