Why you MUST have a Trading Strategy

Whether you are in business, sports or whatever it is, you most likely have a plan for what you are doing and that is why you are good at it.  A trading strategy is effectively a discipline or a plan for how you are going to trade.  A predefined set of rules that one can follow to ensure that a trader performs the same consistent functions time and time again.  That is essentially what a business is right? It is about doing something repetitively for a consistent profit.

 

Take a look at a few of the key principles necessary in the business of trading:

1. Creating an EDGE in the market.   Having an edge in the market is the one key principle that will determine your success or failure.  An edge is defined by effectively setting up the trading process in your favor.  To do this you will need to affect two things in your trading: #1) Create a Reward-to-Risk ratio greater than 1-to-1, and #2) Improve your success rate beyond 50%.  By doing this you have created a scenario where you can actually be profitable.  For example, if you participate in a game of even chance for an even money payout, then over a large sample set of transactions you stand to gain nothing.  You have effectively lost from the outset.                                                                                                                               
2. Risk Management.  By having a predefined risk management plan, you know already how much you are willing to risk on any given trade.  Creating constant risk parameters for your trading ensures that you will be working with a reward:risk scenario that is favorable to you.  In other words, if you are consistently risking a $1 to make 50 cents then you will need an incredibly high success rate in order to be profitable.   But if your plan is to risk a $1 to make at least a $1 or more at a minimum then you have created a slight edge for yourself.                                                                                                                                                                
3. Trade Management.  Consistently managing your risk level as a trade moves in your favor is critical as well.  This gets you in the habit of managing trades to the breakeven point, or knowing how to continue to reduce your risk on each and every trade.  This benefits the trader by having more trade opportunities at the breakeven point with a potential for profit as opposed to riding out the entire position for a larger gain.  So very simply one could liquidate half of a position at the reward:risk scenario of 1:1 - getting the trade to breakeven and then holding the remaining half position for additional profit targets.

Utilizing a predefined trading strategy will encompass all of these concepts and help the trader to build consistency by creating an edge in the markets through an improved win/loss rate and correct risk management techniques.

 

At Trade With Precision we run two weekly live webinars across two different timezones which you can join us on to learn plenty more about how to successfully trade the markets.

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