This topic has been in the forefront of my mind recently as i’ve spent the past couple of months looking at various different strategies. As mentioned in my last post, I have started using a new swing trading system to compliment my base strategy. Establishing the exact one however didn’t happen overnight, there were many things to consider before committing. For me it had to fit the following primary criteria:
- be a technical trade follwing system
- utilise medium term trades for it to be easily manageable around work and life
- have a low risk to reward ratio
Now for others, this criteria is likely to be very different. You could be a fundamental trader, have the time to day trade, want to scalp the markets for an even risk to reward, and many more. The key to finding the right one is to establish what you are trying to achieve from the very start.
Technical tools overload
Using all types of technical tools such as Fibonnaci retracements, Elliot wave principle, MACD oscillators, Stochastic oscillator, support and resistance, moving averages, candle formations and so on, I explored various systems. I wanted to establish if, using my increased trading knowledge, I could find a system that matched my criteria and that would obviously be profitable. The problem I found was that I regularly struggled with the ambiguity of the data I was analysing. This is why I kept getting drawn to keeping it as systematic as possible.
As explained on previous posts, I trade best when my personality, feelings and emotion do not get involved in my trading decisions. Even when backtesting, I can feel my emotions influencing decisions I could have made so what hope have I got for live trading. Another systematic strategy that told me when to trade and when to exit was the solution for me to achieve consistency.
Simple is often best
Eventually taking a step back, I realised simplicity was best. I stuck to daily bar charts and plotted trend lines and various moving averages. I identified when trends had occurred, what MA’s worked best, when would have been good entry points and when would have been good exit points. An effective and simple way of catching trends in progress and profiting from the bulk of the move had been found.
Unfortunately though, this wasn’t the end. I may have worked out an entry point and a limit point but there were several other things to consider, such as:
- where to place the stop loss if the price went against me
- how much to risk per trade
- how regularly i’d need to monitor the markets for trade setups
Stop loss woes
The stop loss placement is by far the most difficult decision of all. Too tight (close to the entry) and it will easily get stopped out. Too loose and your trading will not be profitable as it reduces the amount per point you can trade (if sticking to good money management rules). Furthermore, decisions like, will you trail the stop loss and will you consider current volatility in your SL placement come in to play.
Having decided on a stop loss placement strategy I believe I can achieve a relatively high risk to reward ratio which will allow for higher loss to win ratio than many. I will however be trading far more frequently than the long term strategy and will therefore stick to risking only 0.5-1% of my account per trade.
I am pleased to say, having considered all of these aspects in my new medium term strategy and backtested it across various forex markets, I am very positive it will generate consistent positive results over the coming months.
As mentioned last week, I will keep the blog updated with these results so keep popping back to see how I am getting on and as ever, if you have any questions or anything to add please get in touch using the comments section, the contact page at www.tradecompoundgrow.com/contact or email me at email@example.com.