Before we start:
All Traders should have a mantra, as follows:
I will educate myself on how the market works.
I will learn how to find and place a trade.
I will create a trading plan and trade my plan.
I will not chase the market with emotions.
I will decide to be a day trader or an overnight trader (or longer) before I enter the market to help to control my emotions.
I will be patient and wait for a market set up.
I will never trade without a protective stop loss order.
The market will meet my criteria or I will not trade.
have refined a standard procedure that I use for the process of creating a trading strategy. I always start with the big picture and make increasingly more detailed decisions about the strategy.
I begin with the assessment of what type market action I want to trade and what kind of trader I am. Then I end up with making decisions on exits, and how far away to put my money management stops.
How can you adapt my strategy making to your personal psychology?
You Must Pick the Market
The first decision you must make is what type of market you want to trade. Although this may look like an easy decision, in fact, it is a difficult judgment, because most new traders only consider the profit aspect. They simply try to pick the strategy that they think will make the most money. Focusing on money will probably lead you to make the wrong decision. It is the psychological aspect of trading each of the markets that is the most important consideration. It does not make sense to create a very profitable strategy if you are unable to trade psychologically.
What is Your Trading Time Frame?
You need to decide whether you will day trade or trade on daily or weekly charts. It is very difficult to have a job and trade intra-day. It is not totally impossible, just very difficult.
Most people want to trade part time and still hold down a day job. If you want to do this, it is better to trade daily or weekly charts. You will only be able to look at the market outside of your working hours and your strategy design will have to take this into account.
The strategy should not require you to check the market during the day. I think that there is only a certain amount of money that you can get from the markets and that depends on the time frame you choose to trade.
Time frame choice is a personal decision, and of course there are no right or wrong answers. The ultimate decision is personal preference influenced by financial your considerations. But you have to make this decision before you start looking for indicators, as the choice of indicators is influenced by the time frame selection.
However remember the old saying: “if you ‘buy and hold’ then eventually everything will be fine. Remember the expression touted – “It’s time in the market, not timing the market.”
My guess is that more active investment management will be the key for anyone wanting to make a better-than-inflation return from shares over the next five years.
What I am trying to point out is that short term or day trading in this type of market is better than buy and hold. But it must fit in with your time availability.
The Types of Market
There are three types of market action: trending, directionless and volatile. I think a directionless market is very hard to trade, thus I will not discuss the directionless market here. I would suggest trading either a trending market or a volatility market.
You can choose a trend strategy, knowing that you are going to have to trade through periods of corrections during the directionless phase, or you choose a volatility strategy that will give you extended periods of doing nothing while you wait for the next trade. Which one is for you?
We will look at a volatile market and a trending market and build our strategy accordingly.
What is a Volatile Market?
A volatile market is characterized by sharp jumps in price, up or down. This type of market action involves a quick and unexpected change in volatility. One measure of volatility might be the difference or spread between two moving averages – the spread increases with volatility. Price action, such as gap openings or an increase in the daily range, can also be considered an indication of an increase in volatility.
Each of these two types of markets (Trending and Volatile) are tradable, but with markedly different trading strategies. Let’s take a look at each type of market behavior and the strategies that are appropriate to that type of market.
Strategy: Volatile market
Trades generated by this type of strategy are usually short-term, and when trading this type of strategy, you will be out of the market a significant amount of time.
Volatility strategies generate a high percentage of winning trades, although these trades usually generate small profits per trade. The Foreign Exchange (Forex) market is a typical market that I would class as volatile. Trend following strategies don’t work well in the Forex market.
Today’s market volatility is unprecedented, but so is the market opportunity if you have the right trading methodology. With CFD Trading you don’t have to worry about whether the market goes up, down or sideways as long as it stays within your boundaries. The record volatility has created great value for CFD or day trades, while allowing you to set conservative strike prices.
Whether you are a novice or experienced day trader, you now have the opportunity to learn how to take advantage of today’s chaotic market conditions and target attractive profits.
However you must realise that trading a volatile market, e.g. day trading, is inhabited by the sharpest minds in the game. They are all out to grab your money. The best way to start day trading is slowly, calmly and armed with all the education and the best mentorship you can muster. Look at your market indicators and learn how they interact.
Comparing medium or long term trading with day trading is like comparing a wombat with a kangaroo. Entry points, exit points and risk reward ratios are different. Go slowly when you begin day trading. Preserve your trading capital and most of all, don’t trade without a trading plan.
Let us have a look what indicators I use.
I use volume, 3 moving averages (MA), MACD and stochastic indicator.
Generally, I use a 5 minute chart with the MA set at 18, 39 at 50 periods. The MA18 and 39 are my main ones, while I keep the 50 as my trend indicator. I have also volume, MACD and stochastic on the chart.
When trading CFD, I set my daily range as per my Bias Indicator, as outlined on my web site. Then I look for possible trades on a number of charts in my watch list. I look for trends and volatility.