By Taro Hideyoshi
Trading strategy is a method of trading that use objective entry and exit criteria that have been validated by historical testing (back-testing) on quantifiable data.
A strategy trader is trader who trades a strategy which means the strategy trader is restricted by a set of trading rules. These trading rules make up the strategy.
As a strategy trader, you have to strictly follow the rules. You must not deviate from the rules unless you change your trading strategy.
To be success as a strategy trader, when your strategy tells you to buy, you must buy. Also when your strategy tells you to sell, you must sell. And you must buy or sell exactly how much your strategy tells you. When follow the amount of buying or selling the rules tell you, you will be limited by them how much money you risk on each trade.
You must not make trading decisions on your own and do not let your opinions override your strategy. Although every newspaper or your marketing suggest against your rules, you must still follow the rules.
Of course! Before using and following a trading strategy, you have to spend a lot of time and research in creating or finding trading rules. You may imitate trading rules from famous and successful traders but even you use the same rules as them, it does not guarantee that you will succeed like them.
You have to do historical testing (back-testing) the rules to see if it can make you profits. This will build up your confidence in the strategy. When you have confidence in your strategy, it is much easier to be restricted by its rules. Your emotions might still go as high and low as the market but at least they are not causing you to make bad trading decisions if you are stick with the rules.
By back-testing you will know yourself. You will see and get ideas that how much amounts of drawdown can you accept. You will learn that you can only stomach a certain number of losing trade in a row.
Saying that you have to follow what the rules tell you, it does not mean that you cannot change anything of the strategy. Even you imitate your strategy from a famous and successful traders, when you back-test, you have to learn to customize the parameters of the strategy to fit your personality and trading style.
About the Author
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
If you would like to find more articles on MetaStock Tutorials, MetaStock Formulas, Trading Systems and Money Management. Please go to MetaStock Trading System.
You would also find the list of recommended books for trading & investing at The Investing Books.
