What is a trading strategy?

A trading strategy is a set of well-defined rules for trading in financial markets. For example, signals for opening and closing positions, risk level, and expected profit. These include the primary tools of a trader, which give them an advantage in the market. The trading strategy is considered successful if the overall result of all the trades conducted using this strategy during a specific period (month, quarter, year) is positive or profitable.

Types of trading strategies

Methods of conducting trades:

  • Manual – trading is carried out manually
  • Automated – trading is conducted using special algorithms (trading advisors)
  • Discretionary – this involves the use of both trading algorithms and manual trading

How long positions are open:

  • Long-term – from a week to a year and more
  • Medium-term – from several days to several weeks
  • Short-term – this involves intraday trading

Using trading indicators:

  • Indicator-based – these are strategies fully based on the signals of indicators
  • No indicator – these are strategies that do not use indicators
  • Mixed – these strategies involve the joint use of indicators and other types of analysis

How to create a trading strategy

A great variety of trading strategies are available on the Internet nowadays for both small and popular traders to reference. Traders can use one of these strategies as a basis, supplementing and adapting it to their needs, or they can develop a completely new system on their own.

Traders can select financial instruments for trading (stocks, currency pairs, or other assets), the methods for conducting trades (manual, automated, or mixed mode) and searching for trading signals (fundamental or technical analysis or indicator signals), and the duration of trading (short-term, medium-term, or long-term).

How to test a trading strategy

Testing a trading strategy allows a trader to evaluate how viable the idea is in general, check its effectiveness, and optimise its parameters. There are several methods for testing a trading strategy:

  • Manual backtesting – this is a rather time-consuming process, in which one must manually find trades related to the strategy in the price chart history and analyse their overall result. It is used in cases when the automated mode cannot be applied
  • Automated backtesting – this process involves using special software to find trades relevant to the strategy rules. Many trading platforms have this feature implemented
  • Forward testing – this is a process of real-time trading using the strategy in the current market environment