Trading strategies comprise of predefined rules which are implemented and used by traders in order to make trading decisions. Strategies are a method which is used by traders when buying and selling in markets.
Trading strategies consists of not only a well-considered investing plan but also a trading plan which include, but are not limited to:
- Investment objectives
- Risk tolerance
- Different time zones
- Implications arising from taxation, and more
Traders need to do extensive research into ideas along with best practise which they need to adopt and then strictly adhere to. Traders then develop different methods used when either buying or selling financial instruments.
Traders need to keep in mind that the strategy used for one financial instrument may not apply to other financial instruments, and this requires further intense planning especially when dealing with complex financial instruments such as options or futures.
Trading strategies are used to enable a trader to become more consistently profitable and this can only be done through a set of sound trading strategies and an excellent money management system.
Technical and Fundamental Analysis
Technical analysis is referred to as a trading discipline which is employed by traders to evaluate certain investments while identifying trading opportunities that present themselves.
This is done by the trader through analysing statistical trends which they gather from activity pertaining to trading. Example of such statistical trends includes price movement along with volume.
Fundamental analysis is aimed at the attempt to evaluate a financial instrument’s value based on business results, sales, earnings, market news, and more.
Both of these are important when making trading decisions, but some traders prefer one to the other while others use a combination of both.
Traders who prefer to use a combination use fundamental factors as the main source of their information while using technical indicators to identify crucial support, resistance levels as well as possible turning points.
Despite an influx of news and economic data which may impede an analysis process, traders who use sound strategies that have been thoroughly tested have the ability to remain focused.
Steps traders can follow to create a more successful Trading Strategy
Trading strategies not only prevent emotional investments made by the trader, but they also prevent irrational actions which may arise when there are extreme swings in the market.
Different traders have different strategies not only for different market, but also for different financial instruments and what works for one trader, may not work for another as there are many factors to consider when developing and implementing a strategy.
One of the most important factors to consider is the trader’s personality, apart from several other factors that include trading objectives, money management, risk exposure and more.
The most important thing to remember is that a trading strategy must have predetermined rules that the trader follows despite of the market conditions and to have a trading plan that is securely in place and that the trader keeps to no matter what.
There are ten steps that traders can use to aid them in formulating an effective trading plan.
Determine a trading goal
Traders need to know what they wish to achieve through trading even before they start. By setting a goal, traders will obtain a significant amount of discipline which they will need to maintain.
Test the trading strategy
As soon as the trader has formulated a trading strategy, they can go to work with backtesting it, which helps a significant amount with testing out the framework for a testing strategy.
There are various ways in which a strategy can be tested and MetaTrader 5 makes provision for a built-in trading strategy tester.
Time management
The time which a trader dedicates to a trading strategy is as important as setting a trading objective. Traders need to keep their schedules in mind to determine whether they will have time to utilize their strategy.
Should a trader only have a certain amount of time available with which to trade in a day, the day trading strategy will be better suited to them.
Determine the markets in which to trade
As soon as the trader has determined how much time they will be able to dedicate to trading, the trader can choose which market they would want to trade in, this will depend on the financial instrument that they wish to trade.
Assess the risk tolerance
The tolerance towards risk will be determined by the amount of money that the trader is willing to risk when entering into a trade. The ideal is that traders should not risk more than 5% of capital.
Risk assessment is crucial, and traders need to look at determining their risk-reward ratio as well.
Ensure that a stop-loss is always in place
The rules is that traders should only risk what they can afford to lose and through implementing a stop-loss, traders are able to stay within their trading limits especially when they trade Forex.
When a stop-order loss is implemented, a stock is sold once it reaches a certain price. This limits traders’ exposure to risk significantly. When using MetaTrader 5, traders are able to set their stop-loss at the beginning of every trade.
Conduct thorough research
Traders need to conduct research on financial instruments and markets before making the decision to trade. This can be done at looking into earnings reports, price-to-earnings ratios and more.
The whole idea behind having a trading strategy is to increase profitability and thus traders should do their homework into the financial instruments in which they wish to trade to determine whether it will be a profitable investment.
Keep a trading journal
By keeping a journal dedicated to trading, traders are able to keep track of their trades and to see over a certain time, whether their trading strategy is proving to be successful.
Trading journals keep track of the date and time of trade, different instruments, entry and exit prices, results of trades and more.
Learn from mistakes
In keeping a trading journal, traders are able to see a trend or a pattern in a trading strategy especially if there are losses that occur. No trading strategy is perfect from inception and there may be trial, and error involved in perfecting the strategy.
The important thing is that traders need to be able to learn from their mistakes and use what they learn to improve their strategy. A lot of mistakes that traders make may be attributed to:
- Poor risk management
- Using too much leverage, and
- Over-complication of the process pertaining to analysis, to only name a few.
Traders need to ensure that they have enough information and knowledge pertaining to the financial instruments and markets, in addition to broker information. There is no shame in re-visiting educational resources provided.
Keep trading despite failure
A lot of traders, be it beginners or those who are more advanced, may be discouraged from trading based on trading strategies failing.
Even if and when failures occur, it is imperative to learn from mistakes and modify strategies or even develop new strategies.
One Trading Strategy at a time
When traders start developing strategies that they would like to test out on several financial instruments, it is important to consider taking it one strategy at a time.
The focus should be on developing a trading strategy and ensuring that the trader learns all there is to know about that one strategy first before moving on to the next.
Traders may be overwhelmed by the amount of information that they are presented with and this may lead to jumping from one strategy to the next without conducting proper research, formulating one strategy, and going through the process of testing it first.
Most successful traders do not have an array of trading strategies that they use, they may only use one or two. The reason for this is that a lot of time and effort went into developing those strategies and they have been thoroughly tested and found to have worked.
Markets range and trend, it is necessary for traders to have a strategy for each market that can cater for these ranges, trends, and any way in which the market can move.
To have one good strategy that is solid and thoroughly tested will serve the trader a lot better than having several poor strategies that lead to more losses than profits.
Traders should focus on a strategy that they know inside out and that they have tested in a variety of markets, making the necessary modifications to it as they keep testing it.
Some of the best MetaTrader 5 trading strategies revealed
Trading strategies differ as much as the traders who use them and where one strategy may work for one trader trading a financial instrument, it may not work for another trader who is trading the same.
Some of common trading strategies include:
- Algorithmic Trading Strategies
- Day Trading Strategies
- Swing Trading Strategies
- Position Trading Strategies
- Seasonal Trading Strategies
- Investing Strategies
Although trading strategies differ as much as the traders who use them, there are a vast majority which can be used while working through MetaTrader 5’s trading platform.
Before implementing any of these strategies, traders need to ensure that they have a sound trading plan in place, and they need to conduct thorough research into whether these trading strategies are in line with the trading plan that they have in place.
Algorithmic Trading Strategy
This is a trading strategy that has become increasingly popular in the digital age as technology has made more provision for it. MetaTrader 5 makes provision especially for this type of trading through the use of Expert Advisors, or EAs.
EAs are used by traders according to a defined set of instructions to place a trade. These EAs, in accordance with their instructions, can open and close trades on behalf of the trader.
The defined set of instructions provided to the EA are based on timing, price, quantity, or any other given mathematical model.
It is important for traders to ensure that the instructions and parameters are correct when EAs are used and MetaTrader 5 provides the perfect tool for testing EAs through its Strategy Tester which is built into the platform.
Not only does it test the efficiency of an EA, but it also detects the best input parameters before the trader runs this EA on their real account.
The strategy tester provided by MetaTrader 5 operates based on historical quotes pertaining particularly to currencies, stocks, and other assets.
When being tested, the EA runs through these accumulated quotes and virtual transactions are executed according to the algorithm that has been set.
The tester can be used to test the EA on multiple currencies and trading robots have access to all the financial instruments in addition to being able to perform transactions on any of them.
Day Trading Strategies
Day trading strategies are one of the most commonly used strategies utilized by both beginner and advanced traders, it may be quite challenging, but it is possible to learn the techniques and apply them until the trader masters the strategy.
It is important for day traders to determine the markets that they will trade on along with the timeframe that they will focus on. Choosing a timeframe will depend on the trader’s availability.
Traders also need to determine which indicators will work best for them by focusing on one or two and mastering them first before moving onto the next. It is important to focus on one or two aspects at a time to prevent becoming overwhelmed.
Most day traders use the moving average indicator as it can be used to differentiate between changing market conditions.
Day trading can further be broken down further into components that include:
- Scalping – where traders sell almost immediately once a trade has become profitable
- Daily pivots – where traders determine pivot points based on the previous day’s information and attempt to buy at the low of the day and sell at the high of the day.
- Momentum – which involves trading according to news releases and riding a trend until it starts exhibiting signs that indicate reversal
Swing Trading Strategies
As opposed to day trading strategies, swing trading strategies are relatively simple and make use of a wide variety of technical indicators. MetaTrader 5 offers traders with multiple indicators that are built into the platform.
Traders also have access to indicators by downloading them from the Code Base, the Market and by obtaining them by using the Freelance Service which supports independent developers.
Swing traders make use of an intermediate timeframe to identify market trends along with open position. They take advantage of these ‘swings’ depending on whether conditions are swinging upwards or downwards.
Traders using this strategy will open a position or a trade when the trend swings upwards and sell or close a trade as soon as the trend moves in a downward direction.
Examples of swing trading strategies include:
- Mean Reversion – Traders use the advantage of the market swinging too far from its mean in either direction by identifying when it is ideal to open or close positions
- Momentum Swing – consists of two strategies namely breakout; when the price extends over or under the breakout level set and trend; which allows traders to capture large movements in the market.
Position Trading Strategies
These strategies involve a trader holding a position for a long period of time. This period may stretch over a number of weeks, months and even years.
Traders who use this type of strategy are not concerned with short-term price movements and instead focus on profits derived from long-term trends. Although there is an increased chance of risk involved, there is also a greater potential for profit.
Conclusion
Trading strategies can be complex and particularly complex for beginner traders. That is why it is important to formulate a solid trading plan in addition to conducting extensive research to understand the principles of trading along with the factors involved.
Trading strategies need to be developed and implemented in accordance with a sound trading plan that is in place and traders need to adhere to this plan despite facing challenges and losses when trading.
Traders need to ensure that they know their trading strategy inside and out before using it in a live trading environment and by using demo accounts, traders can test their strategies without running the risk of significant losses.
MetaTrader 5 provides the perfect environment in which traders can test their trading strategies and traders can utilize demo accounts from their brokers, or MetaQuotes’ default demo account to test strategies in a risk free manner.
MetaTrader 5 also includes a Strategy Tester which can be used to test EAs when utilising algorithmic or automated trading strategies.
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