Developing a strategy can be as easy or as complicated as you want to make it. Some people like to have many technical indicators to confirm what they believe is going to happen others don’t use any indicators. The important thing is that the strategy is right for you and your style of trading.
The strategy that you trade needs to fit in with your lifestyle and should work around you not you working around it. If, like me, you only have a few hours a day, if that, to devote to trading then you don’t want to be looking at charts for hours on end. You need some way to cut down the amount of time you spend searching for potential trades. Me personally I use proRealTimes proScreeners. proRealTime offers a free EOD charting package and allows you write your own stock screeners to save you time looking through hundreds of charts.
When it comes to developing a strategy there are several things that you need to consider.
• Setup
• Entry triggers
• Stop placement
• % of funds to risk
• Position size
• When to move stops
• When to exit the trade
(This is by no means a definitive list)
Length of the trade
This is something that will affect your entire strategy. There are several options here depending on your own trading style.
Intra day trading / Day trader
This is where trades typically last less than a day. They can last a few seconds or a few hours but generally do not last longer than a day. This is a very labour intensive way to trade and requires constant attention from the trader. If you have the time and want to do this, that’s your choice. I personally like to trade on a days/weeks/months time frame.
Days to weeks
This is where trades last from days to weeks. I do sometimes trade this way. I have traded like this in the past.
Weeks to months
This is where trades last from weeks to months. This is a great way to trade if you only have time to look for trades at the weekend. You can find potential trades over the weekend and place them as orders in your spread betting account for them to potentially execute over the next week.
No Fixed time limit
This is where your trades stay open as long as the need to stay open. I currently trade this way as my strategy dictates this. My trades stay open until my stop gets hit. This can potentially be never if the stock continues to rise and rise and rise, or if the stock stagnates and goes nowhere.
The biggest thing to consider when picking a time frame is that it suits you. If you have to work 8 hours a day then being a day trader is probably not the best option for you.
The setup
This should clearly define what circumstances need to be in place for it to be a potential trade. Personally I mostly trade from technical analysis. I find trading fundamental analysis too hard. Therefore an example could be we will look for positions to go long on that are currently trading above the 200 day moving average.
Entry triggers
This is what needs to happen for the trade to execute. For instance if you are using a trend following strategy, buying dips and selling rallies, then you could set the high if the previous day to be your entry price if it’s a buying dips strategy. This way the price has to rise from the current level, possibly indicating a continued rise, for your trade to trigger.
Stop placement
It is vitally important that you know what your stop placement is before entering any trade. Trading without a stop is a recipe for disaster. Spread betting is a leveraged product and it is highly likely that you can lose more money than you have deposited in your account if you trade with out a stop loss. Even if you do use a stop loss you can still suffer slippage. It’s important that you are aware of the risks before placing any trades.
Again if you are using a trend following strategy of buying dips and selling rallies the you could set your stop to be below the low of the previous day of the previous two days etc. I personally like the idea of having a stop below the low of the previous X bars as it’s clearly defined. I also like to set my stop at some factor of ATR away from the price. There are various ways to determine your initial stop level, you need to pick the one that is right for your strategy.
% of funds to risk
I personally like to stick to risking a maximum of 1% of funds on any one trade. This way my strategy has to be wrong 100 times in a row for my funds to wiped out. This isn’t very likely but could possibly happen. I think the reason most people give up on spread betting is because they risk to much per trade, suffer heavy losses in a short space of time, decide spread betting isn’t for them and give up on it forever. It’s a shame really. I think most people can potentially be successful at spread betting if they manage their risk effectively.
Position size
If you have a stop position calculated and have worked out the % of funds to risk on any one trade then the position size should be a factor of these two values. I have more detail on position sizing in my beginners guide. You can read about position sizing and even use my free position sizing calculator.
When to move stops
If and when you move your stop level needs to be considered when creating a spread betting strategy. You may decide that your strategy will not use a trailing stop loss, as I prefer, and you will exit the trade when certain conditions are met or a certain price target is reached. So in this case you would not look to move your original stop loss.
I prefer to trail my stop loss, usually by some factor of ATR. One important thing to note if you do decide your strategy will move your stop loss is that it must always move in the same direction as your trade. E.g. If you are long, move your stop upwards. If you are short, move your stop downwards. This way you are always either reducing your risk or locking in profit as the trade progresses. Never, I repeat NEVER, move a stop loss against your favour after it’s initial placement. This will only lead to bad things and you will question your own actions after it. “Why did I move my stop loss? I’ve now lost 10% on that trade where I only initially risked 1%.” Take it from made it’s better to take the 1% hit and live to trade another day.
When to exit the trade
Your strategy must also indicate you when you are to exit the trade. This can take various forms. If you use a trailing stop the you will exit the trade when the stop level is reached. That said you may have additional conditions which would see you exit the trade before your stop level is breached. This could be a price target or if the reason for the trade has disappeared. If the reason for the trade has gone then do you really want to still be in the trade?
This guide to strategy development is a work in progress. If you would like to contribute to it please see the strategy development topic over on the spread betting forum.
