Importance of strategies in trading
Trading is a form of negotiation in financial markets that is based on price speculation, that is, trying to predict the movements that a price will take in a certain period of time to open buy and sell positions. All this translates into the use of strategies that allow an analysis of movements. Let’s see below what is the importance of trading strategies and what are some of the ones that you can use.
Trading Strategy: What is it?
A trading strategy is a system by which the trader combines different knowledge and uses various tools and technical indicators to establish a pattern of action in the market that generates profits, that is, a system that helps him determine when he should buy and when to sell, when is it right to open a position and when it can be closed.
The objective of trading is to obtain profitability when an operation generates capital gains, which will be subject to market changes which can be as abrupt as they are surprising, but can also be predictable.
So the idea of using one or more trading strategies is to get the most successful operations trying to anticipate the market. Trying to trade without a strategy tested in advance on a demo account is like trying to bet on roulette, a chance that cannot go well at all, especially considering that in your first trade you can lose all the capital if you are starting.
Importance of strategies in trading
As we have mentioned, it is very important to use trading strategies, since these action plans will allow us to operate with greater knowledge and awareness in the market, and not only by impulse or trying to get lucky.
Trading strategies are as varied as each type of trader; hence there is no single type of indicator or tool. Each operator establishes its own systems of action in the market according to its type of trading, its experience, investment objectives, timing in which it operates, knowledge in the use of indicators, etc.
And although there are many previously configured strategies that you can help obtain good results, the truth is that there is no single formula. The important thing is, as we have already analyzed, not to operate without a trading strategy or method.
In this way, you will be able to exercise greater control over your actions and you’re trading, and not fall into the error of being a discretionary operator, that is, one who opens a position without taking into account trend, moment, volatility, temporality, or anything else. If it goes well, repeats the movement again, if it goes wrong, opens a contrary position. These types of actions generate anxiety and many losses.
However, the trader who takes the time to establish a proven results-based trading strategy on a demo account is better equipped to predict market movements and act accordingly. We are not going to say that using a strategy is infallible and will always give you positive results, but certainly, the rate of successful trades is usually much more encouraging.
Trading strategy models
Each trading strategy is based on analyzing the market in a different way, some only use technical analysis, others only fundamental analysis, and other traders design strategies and trading models combining these two types of analysis. Let’s see some of the strategy models that are usually used in the markets:
This type of method tries to take advantage of the trend, either while it is running or when it makes a reversal. Methods are used that integrate trend indicators with support and resistance indicators.
Many traders lean towards technical analysis and base their decisions solely on the chart, while others use fundamental analysis, in which important news and events play an important role. Others decide to combine these two analyzes and create a strategy that uses both fundamental and technical elements.
Support and Resistance Strategies
Countertrend is a type of strategy that seeks to make the most of support and resistance zones to take advantage of a price rebound in a reversal. To do this, they use indicators and analyze reversal candle patterns to enter the market at these key points.
Many traders establish trading methods at times when the market is very volatile, that is, where price variations are more erratic. Others on the contrary prefer to operate in range markets.
Other strategies try to use the force that has a tendency to know whether to follow or contradict it. There are indicators like the ADX that are especially useful in this type of method.
Process of a trading strategy
Just as it is important to use trading strategies, it is also important to identify the key points of your system. It must be made up of:
- A market filter is the starting point and it is done when we have defined which indicators will be part of our strategy, which will be the protagonists of our decision.
- An entry strategy is the central point of our trading method and indicates when you should open a trade. This decision will be based on the filters through which we have already passed the graph.
- An exit strategy is perhaps one of the most difficult points to establish for a beginner trader, how long the operation must be open to obtain profits and avoid losses. It is a crucial point in our strategy and in it we can learn to use Stop Loss and Take Profit limits correctly.
- A volume of operation, especially if we are operating with leverage, it is important to establish how much of our capital will be involved in the operation.
We have analyzed the importance of using trading strategies and that these methods are necessary to operate properly. As the last point, let’s see some recommendations when designing your own trading system:
- First, you must take into account what type of trader you are, in what time range you are going to invest, if in the short, medium, or long term. A scalping strategy is not the same as one for swing trading, for example.
- The next thing is to know how to use the tools and indicators on a chart, and how to read it at the end. There are many types of indicators, some combine well with others, while others do not match and can give confusing signals. At this point, the recommendation is to use the demo account to practice different trading strategies until you get a successful combination.
- You can take as a reference some pre-designed strategies that will help you have a starting point. But remember that what works for another trader may not work for you, so from this base, you can try to configure it to your liking.
- Determine what type of strategy you want to use, if trend, volatility, temporality, range, etc.
- We repeat: try all the strategies you want to use in the demo account. Remember that using a method without having tested it just because someone says it is efficient is the same as not using any strategy.