Building your own strategy can potentially be very rewarding if you are prepared and knowledgeable. There are fundamental steps that should be followed to validate your strategy
Whether you choose to proceed with a technical approach or with fundamental analysis, there are certain rules that apply to any strategy.
1-Parameters
First of all, you will need to set your entry and exit signals. There has to be something that will trigger an entry, which is called your “edge”. This is what makes your strategy profitable. No trader can prosper without an edge. You could compare it to a casino tweaking the rules so they have an advantage over the player, only in this case you are the casino.
Entry signals can be many different variables. You can use indicators, resistance and support levels, or economic news. Whatever fits your trading style and respects your beliefs is what you should focus on.
Exit signals are where you take your profits or cut your losses short. They can be determined by a risk to reward ratio, or they can be set in accordance with the same variables that caused you to enter the trade.
For example, imagine that you go long in a trade because of “X”. You hold the trade for a few hours, and then realise that the price action has turned to the opposite of “X”. What you could do is exit the trade and open a position on the opposite side.
The entry and exit parameters will have to be set in stone and be respected if you want to achieve consistency.
2-Statistics
The moment you truly understand how much trading revolves around statistics is the moment when trading becomes a numbers game.
Everything in trading should be statistically sound. If it does not make sense on paper, you should not be doing it.
The amount of money for every position you open can be calculated before you press that buy button. You could even predict the amount of money you will make during the year (if you are truly consistent with your parameters, that is).
Beforing adding a variable to your strategy, it is important that you verify whether this addition will benefit you or be a disadvantage. For example, after having a lot of success with a risk to reward ratio of 1 : 2, you decide that you want to take more profits from the markets and go with a ratio of 1 : 3. You take the decision based on a hunch that you are cutting your trades too short.
Before taking such a drastic decision, you should verify that, statistically, the amount of money you will make from taking more profits will be greater than the number of trades that will turn into losers before reaching the take profit order.
3-Testing
Practicing your strategy over a long period of time is imperative for you to apply your parameters consistently. You should be able to differentiate a good trade from a bad trade without any hesitation.
There are multiple ways you can practice. The most time effective way of practicing your strategy would be with a simulator. You can go through previous data, enter a trade and fast forward until the position closes. You can compile data rapidly and calculate if your decisions are statistically sound.
You can also paper trade in real time. Paper trading means that you are opening fake trades on the live market. This method will give you a good idea of how the market moves in real time, but is overall an inferior and less efficient way of practicing compared to a simulator.
Finally, you could potentially fund a very small trading account and start getting a feel of what it feels like to lose and earn money from your decisions. You could then scale the size of your account depending on how confident you are.
