Trading Strategy Examples
Trading strategies are used by all successful traders and, indeed, if you enter positions without one it is likely you will lose money - quickly.
Put simply a strategy is a set of rules which is used to determine when to trade. When the markets aren't performing as the strategy requires, no trades are entered.
The advantages of using strategies are:
- They automate your decisions for you and, when followed properly, should remove emotion from your trading.
- They clear up any queries. A good strategy will tell you when to enter, how much capital to risk, when to cut a position and when to take your profits.
- They save a great deal of time. If you can use a system which works and stick to it, even through losing periods, you won't have to sit watching the screen all day. You can place trades and let the stop losses protect you.
A very simple strategy would be:
Buy on market open if it is Monday.
If back-testing has shown that the market has a bias for finishing up on a Monday then by buying a daily bet at the open and letting your trade expire you will be following the strategy.
This is very simplistic but often the best strategies are very simple. The hard part comes when you have to follow the rules even during periods of extensive drawdown (a series of losing trades).
The Turtles used a very simple system which concentrated on market highs and lows. This system would involve trading through long periods where many trades lost money.
However, over the course of many months (with the help of excellent and strict money management) the rules provided the group with massive returns.
A simplified version of the Turtles' strategy would be as follows:
Enter a long trade with 1 unit (see Adding to Trades) when the price of the market exceeds the highest high of the last 4 weeks.
Add another unit when the price moves 2 ATR above the entry price.
Continue adding 1 unit for each 2 ATR move above entry price.
Place the stop loss at a level representing 2% of capital. No more than 2% was ever risked by the Turtles. When adding units, stops were moved to be 2% of capital below the new unit entry price.
Positions are closed if the market makes a new low for the last 10 days.
This is a very simplified version, the actual Turtle rules can be found on OriginalTurtles.org or by clicking here (Opens in a new window)
Another example of a strategy is to use a moving average to signify entry and exit points.
For example: You enter a long trade with 1 unit when the price moves above the 200 day moving average and exit when it moves below it again. (The opposite applies for short trades).
In the case of individual equities (shares) you could use the following as a strategy:
When the share has moved more than 5% in one particular trading session, open a trade in the direction of the move. Put a stop loss 10% below/above the entry price and calculate the risk per point from the position of the stop loss.
For example: In the previous day's trading BP has moved from 550 to 580.25 (an increase of 5.5%). Open a trade and put a stop at 10% below the entry price at 522.25. If you had £250 to risk, your total risk per point is:
£250 / (580.25 - 522.25) = £4.31 or £4.25 per point (rounded down). Your total risk is 58 x £4.25 = £246.50.
If the market continues to rise, use a trailing stop to lock in profit and exit when the price moves down more than 5% in one day.
The above are simply examples of strategies, there are many more available both for free and in books and courses,
When using any strategy you must remember to discipline yourself to accept loss and let your profits run. Make sure you never lose more than you determine you can when placing the trade.
Never average down or move your stop further away from the market to avoid it being hit.
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