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Monday, 27 March 2017

Trading Plan: From Formulation to Implementation

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Lets say you have been working on a trading plan and you finally have a workable one put together. The next step is to put your market strategy to a test on historical data to see how it would perform under certain conditions. The aim is to ensure that your strategy can perform profitably so you can go ahead and use it on a live market. This article will take you through the steps from formulating your plan you implementing it live.

Formulating the plan

First up is actually getting the plan put together and ensure that it is workable and doesn't take over your entire life. So, you will want to look into a few things such as;

  • Your trading goal
This will set out a SMART goal that you wish to accomplish from trading. SMART is an acronym for the guideline of setting goals. Your goal must be Specific, Measurable, Attainable, Realistic and Timebound. Your goal will be the steering for your strategy.
  • Timeframes you want to trade
It will be extremely time consuming and somewhat chaotic if you attempt to trade on all timeframes. As such it is advisable to use at most 3 time frames when trading. One high time frame such as daily or weekly to indicate you the overall trend, One lower one such as 30 mins to give you and entry signal and the other one will be your main timeframe such as the one hour time frame. depending on your strategy you can use just one timeframe.
  • Trading Strategy
Your strategy will involve your trading instruments whether currencies only or currencies and commodities or whatever you choose to trade. It will also outline your entry and exit rules, your pre and post-market routines, what you will do during volatile economic events and also what your trading week will be. It will also involve your money management rules and risk management.
  • Behavioural Rules

Your behavioural rules will include certain controls that limit your emotional trading, revenge trading and anything that will take you away from following your strategy.

How to test the strategy

Testing a strategy might take some work and time if you attempt to do it manually. There are softwares available that can help in testing your strategy on historical data. The testing technique is called Backtesting. It is accomplished by reconstructing, with historical data, trades that would have occurred in the past using rules defined by a given strategy. The result offers statistics that can be used to gauge the effectiveness of the strategy. Using this data, traders can optimize and improve their strategies, find any technical or theoretical flaws, and gain confidence in their strategy before applying it to the real markets. The underlying theory is that any strategy that worked well in the past is likely to work well in the future, and conversely, any strategy that performed poorly in the past is likely to perform poorly in the future.

Read more on Backtesting

Is the Strategy successful

A strategy is considered successful when is at or above a 75% success rate. This can be determined when you backtest your strategy. After testing the strategy and seeing its success rate if it doesn't meet the benchmark then you should look at the test results and see what tweaks can be made to get it to higher success levels. Once a high success rate is achieved then you can go ahead can implement it on the live market.

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