The essential components of a profitable trading strategy

While there are a few more things to incorporate in a trading strategy, we will talk you through the essential components you need to build a trading system. These components can work for manual trading strategies. However, they are especially important for an auto trading robot.

28 September 2020

Components of a winning trading strategy: Top 9 picks

Although the components of a trading system may be apparent, a few of them are frequently unnoticed. We are going to discuss the following components in this guide:

  • Multiple Time Frames.

  • Instrument Universe.

  • Position Size.

  • Momentum.

  • Price Pivot Areas.

  • Volatility.

  • Trend Filters.

Thinking through each of these elements when developing your trading strategy will ensure that there are no surprises down the line when your trading bot begins live trading.

Entry strategy

Entry Strategy

You know that you lack a well-thought-out entry strategy when you find yourself not knowing when to pull the trigger.

An entry strategy is a set of rules that lets you know the right time to pull the trigger, place an entry, or stop one.

If you can coordinate this properly, then you are on a smooth sailing ship. For you to make a trade, you need a trading signal or trigger.

It could be complex like the one which requires confirmation or simple like a moving average crossover. You must check the current position of a trade and the capability to accommodate fresh risks before generating a trading signal.

Exit Strategy and Trade Management

Several trading systems possess a blend of exit strategies that form a trade management arrangement when together. You can exit a trade by either reaching a profit target, a trailing stop kicks in to protect an open profit, or simply stopping it at the initial Stop Loss level.

Using various exit strategies and targets to split the position up may not boost its long-term productivity. However, it can make the equity curve smoother by shielding some profits while letting a fraction of the trade gain from extensive moves.

Several automatic trading software can contain quite complicated exit strategies, so it’s good to use this technicality to smoothen the equity curve.

Exit Strategy and Trade Management

Position size

Position sizing is sometimes sophisticated or simple when the system holds several positions. The system should be able to read the overall account size and current position to calculate the possibility of attempting an additional risk.

Several traders ignore the trading instruments. It is wrong because each lot's notional value determines the minimum position size, which determines the minimum account trading strategy size. $100,000 is normally used when using automatic trading software to do a backtest. When trading a smaller live account of $10,000, the lot's size might be huge; hence, you must consider the minimum viable account size when developing a strategy.

Momentum

Momentum

It can be tremendously helpful to insert an additional level of perception through "momentum" indicators. Since price moves have different movements, it's imperative to be able to evaluate the strength (or weakness) behind a price move. Additionally, you can anticipate the holding or breaking possibility of an area by gauging momentum into potential pivot areas.

Profit Targets

Profit Targets

There are numerous options when using profit targets. In a particular section are traders who employ automatic profit targets, dependent on the pre-determined value of dollars.

An instance is when Trader A might use an automatic target of 4 points ($200 per contract) on the S&P 500 e-mini futures contract.

On the other hand, you don't need to use a target and close the trade only when the market's exiting conditions look favorable.

Hence, we employ "dynamic profit targets", to have a way to determine the primary profit prospect on a trade, and at the same time, leaving us open to take profit before or past our primary target based on what the market is displaying before us concurrently.

Price Pivot Areas

Price Pivot Areas

We do not mean floor trader pivots or any single way of pre-plotting potential pivot areas when we mention "price pivot areas". Instead, we're observing the market doings in the meantime to find out recent areas where the possibility of the market to change direction is high.

You can find pivot areas in numerous ways. For instance, you can use fundamental price support and resistance. Furthermore, you can use various indicators and oscillators though very meticulously, to predict an accurate time that the price will see a pivot.

Volatility and Trend Filters

Volatility and Trend Filters

Though filters are not a total necessity, many trading systems possess them.

A filter’s work is to identify a trade’s setup and the market conditions to carry out the trade. When you combine volatility and trend indicators, you will create a filter that identifies the correct market conditions.

Several large-trading systems halt performance immediately when there are alterations in the market conditions — this is the best for you to reduce worry or loss of money.

Instrument Universe

It is unnecessary to write the trading instruments list in the code though it is a part of the strategy. It is only when a trading bot doesn’t function alongside some instruments, so then you can include this in the code or simply jot it down somewhere as a reminder. It will prevent you from mistakenly running the system on a currency pair or instrument with no profit.

Multiple Time Frames

Many traders get confused here as they use a dozen timeframes for a single market; meanwhile, it should be just two timeframes to trade a single market. It will allow you to have various "zoom levels'' to help you pinpoint your entries and manage your exits.

Additionally, you should use your "main chart" when looking for setups to line up and a smaller chart as your "entry chart" to help you pinpoint the entry and determine temporary momentum.

Conclusion

To have a profitable trading strategy, you must be consistent in your dealings. When you come across something that functions properly, maintain it, instead of following other traders to “system hop”, thereby losing money and time.

You should ensure that the strategy you find is at least 110% certain to help you draw consistent profits from the market.

However, you might have gone through our write-up completely and are willing to take your trading strategy to another height.

You can automate your Forex trading strategy by contacting us.

At 4xDev, we handle MQL4/MQL5 programming services and develop EAs and Custom Indicators for MetaTrader® 4 and MetaTrader® 5 trading platforms. All we need is your idea from which it is possible to select a set of rules that can be implemented programmatically for the strategy, then we draw you a quote and begin work.

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