People who are new to the world of Trading, and many of those who have been here for years, are not aware of the importance of creating a well-defined Trading Strategy, with real market fundamentals and proven through long term Backtesting.
This, and no other, is the big reason why more than 80% of retail traders lose.
Newcomers, and even some traders who consider themselves as veterans, see charts moving up and down, and think: “ How nice, if I buy down here and sell up there I will have made a lot of money!” . How easy it seems at the beginning…
All rookies are without exception, guided by impulsive instincts, and helped by some “unbeatable” pattern of the famous technical analysis… sooner or later they end up succumbing to the reality of the Market, which is this: If you don’t really know what you are doing, or why, you are betting on a Russian roulette, which in the long run, will cause your account to go broke and will take you straight to bankruptcy.
Even a solid and proven strategy that has been validated through backtesting, will not ensure money earning, because you will then have to operate that strategy EXACTLY as you defined it. And you’ll better not start making changes at the slightest streak of losing trades.
But of course, if you start trading markets without following any strategy, guide, pattern, and you rely solely on your instinct or on things you read on the Internet without checking them through a backtesting, your account is destined to be doomed.
Let’s start from the base from which all strategies are born.
In order to detect and select a pattern that is repeated frequently and consistently on a particular asset, we must first understand the fundamental bases of the Market: how the price moves, why, what participants are in the market and in what way they trade.
Since you will be competing against many other Traders as you trade, it makes sense to know who they are and how they play, right?
Understanding all this will help us to recognize what is behind our pattern, while it is being drawn on a price chart.
We all like to detect visual figures on a chart without analyzing, but if we do not understand the reason and context related to these figures, it’ll be way more challenging to create a Trading strategy around this pattern / event / figure.
Once our pattern is understood and detected, we must verify that it is repeated a considerable number of times (at least a hundred in some cases), so at the end we can take advantage of this repetition.
This verified repetition is what we know as statistical advantage.
When you start working with trading strategies, most people are inclined to take a ready-made system without backtesting it. Big mistake. Let’s not forget that the real enemy of trading is not the market but our own behavior towards the market – trading psychology.
Expect excellent results in the long term as you adapt a clever trading strategy based on your personal preferences and behavior from the beginning, since that entails knowing it thoroughly. This will encourage discipline and finally, will lead to profits.
Now, when you adapt the strategy to your own trading style, by developing it little by little until you have it complete, it leads to a bond between the strategy and the trader; it is you OWN strategy, your work, your effort, and you’ll almost “predict” what it will do almost before it happens on the market.
You trust it because you adapted and worked on it for several times and that makes it easy to follow the signals as in a textbook; something that inconsistent traders usually skip.
When the bad results come, which will for sure come as you trade, you will suffer much less, as you trust your trading and you have backtested it HUNDREDS of times before.
On the other hand, if you haven’t find a trading style adaptable for you, there is a greater tendency to “tweak” certain parameters or rules, to execute only certain trades, thinking you know more than the system.
“As the last three trades were negative, in the next one I am going to change the Stop Loss, or the TP, or I am going to enter without the conditions required by the strategy …” Does that sound familiar?
A strategy, adapted to be so unique as you, will be much more reliable for yourself . As you have worked many hours on adapting it, you know it, you have interiorized it, you almost act as if you knew how it will behave, and you know the results as it has been backtested HUNDREDS of times.
All this gives you peace of mind – a state which comes despite losing streaks, and in the end, if you follow the plan outlined and remain true to your strategy,will allow you to see profits sooner or later.
This could perfectly be a check-list of things to understand and be clear about, and what steps to complete before attempting your next trades.
1- Understand how the Market works.
2- Understand how the other Market participants operate, by using CLEVER tools that help you identify how and why they act.
3- Select one or more assets to study.
4- Select an event / ocurrence / pattern with a repeatable logic over time, based on a clever tool you’ve adapted to your trading style.
5 – Make sure you understand why, how and even when this pattern is formed within the tool’s help.
6- Quantify that event / occurrence / pattern. Remember the statistical advantage.
7- Depending on the results, create money management around that CLEVER pattern.
8- Define your entry point, possible direction, TakeProfit, StopLoss, and money management methods – tools may help you to reach this goal.
9- Set parameters for possible optimization and/or filtering (Check market context; is it trending? Choppy? How does price react to certain levels? Are there any market news that could affect your trades?)
This process is 100% vital if you want to compete with the rest of Professional Traders in a serious way and profit from the market.
Easy money, without work and effort, does not exist. The good part is that this whole process is exciting and as you stay consistent by trading the same pattern ALWAYS, you will start profiting from markets.
Then, how to be consistent with a great trading strategy which adapts to your style?
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