Anyone who wants to become a profitable crypto trader needs to spend a few minutes online to find such phrases as “Trading strategy; trade your plan” and “keep your losses to a minimum.” For new traders, these habits can seem more like a distraction than actionable advice.
What is a Trading Strategy?
In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets.
The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistency, and objectivity. While fundamental analysis can be used to predict price movements, most strategies focus on specific technical indicators.
Each of the rules that are about to be mentioned in this article is very important and needs to be taken seriously, but when they work together the effects are strong. Keeping them in mind can greatly increase your odds of succeeding in the markets.
8 rules to create a successful trading strategy
As a crypto trader, for you to become profitable, you need a set of trading rules. Below are 8 rules you can use to create a successful trading strategy.
- Always use a plan
- Protect your trading capital
- Use technology to your advantage
- Become a student of the market
- Risk only what you can afford to lose
- Always use a stop loss
- Know when to stop trading
Rule 1:Always Use a Trading Plan
A trading plan is a written set of rules that specifies a trader’s entry, exit, and money management criteria for every purchase.
With today’s technology, it is easy to test a trading idea before risking real money. Known as backtesting, this practice allows you to apply your trading idea using historical data and determine if it is viable. Once a plan has been developed and backtesting shows good results, the plan can be used in real trading.
Key Takeaways –The key here is to stick to the plan. Taking trades outside of the trading plan, even if they turn out to be winners, is considered a poor strategy. Sometimes your trading plans might not always work. At that moment you can bail out of it and start over.
Rule 2:Treat Trading Like a Business
To be successful, you must approach trading as a full- or part-time business, not as a hobby or a job.
If it’s approached as a hobby, there is no real commitment to learning. If it’s a job, it can be frustrating because there is no regular paycheck.
Trading is a business and incurs expenses, losses, taxes, uncertainty, stress, and risk. As a trader, you are essentially a small business owner, and you must research and strategize to maximize your business’s potential.
Rule 3:Protect Your Trading Capital
Saving enough money to fund a trading account takes a great deal of time and effort. It can be even more difficult if you have to do it twice.
It is important to note that protecting your trading capital is not synonymous with never experiencing a losing trade. All traders have losing trades. Protecting capital entails not taking unnecessary risks and doing everything you can to preserve your trading business.
Rule 4:Use Technology to Your Advantage
Trading is a competitive business. It’s safe to assume that the person sitting on the other side of a trade is taking full advantage of all of the available technology.
Charting platforms give traders an infinite variety of ways to view and analyze markets. Backtesting an idea using historical data prevents costly missteps. Getting market updates via smartphone allows us to monitor trades anywhere. Technology that we take for granted, like a high-speed internet connection, can greatly increase trading performance.
Using technology to your advantage, and keeping current with new products, can be fun and rewarding in trading.
Rule 5:Become a Student of the Markets
Think of it as continuing education. The traders need to remain focused on learning more each day. It is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process. Hard research allows traders to understand the facts, like what the different economic reports mean. Focus and observation allow traders to sharpen their instincts and learn the nuances.
World politics, news events, and economic trends—even the weather—all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they are to face the future.
Rule 6:Risk Only What You Can Afford to Lose
Before you start using real cash, make sure that all of the money in that trading account is truly expendable. If it’s not, the trader should keep saving until it is.
Money in a trading account should not be allocated for the kid’s college tuition or paying the mortgage. Traders must never allow themselves to think they are simply borrowing money from these other important obligations.
Losing money is traumatic enough. It is even more so if it is capital that should have never been risked in the first place.
Rule 7:Always Use a Stop Loss
A stop loss is a predetermined amount of risk that a trader is willing to accept with each trade. The stop loss can be a dollar amount or percentage, but either way, it limits the trader’s exposure during a trade. Using a stop loss can take some of the stress out of trading since we know that we will only lose X amount on any given trade.
Not having a stop loss is bad practice, even if it leads to a winning trade. Exiting with a stop loss, and therefore having a losing trade, is still good trading if it falls within the trading plan’s rules.
The idea is to exit all trades with a profit, but that is not realistic. Using a protective stop loss helps ensure that losses and risks are limited.
Rule 8:Know When To Stop Trading
There are two reasons to stop trading: an ineffective trading plan, and an ineffective trader.
An ineffective trading plan shows much greater losses than were anticipated in historical testing
Markets may have changed, or volatility may have lessened. For whatever reason, the trading plan simply is not performing as expected.
An ineffective trader makes a trading plan but is unable to follow it. External stress, poor habits, and lack of physical activity can all contribute to this problem. A trader who is not in peak condition for trading should consider taking a break. After any difficulties and challenges have been dealt with, the trader can return to business. Stay unemotional and businesslike. It’s time to reevaluate the trading plan and make a few changes or to start over with a new trading plan. An unsuccessful trading plan is a problem that needs to be solved. It is not necessarily the end of the trading business.
Conclusion
A successful trading strategy might be quite important and helpful which will provide a greater advantage in trading the financial market.
However, it does not guarantee that you will find success every time you analyze a trade.
Despite this trading strategy is regarded as one of the most effective and successful tactics in crypto trading.
