Education

Learn The Main Elements of The Trading Strategy

There are hundreds of different trading strategies based on fundamental and technical analysis.
These strategies combine different tools and trading techniques.
And even though, they are so different, they all have a very similar structure.

In this educational article, we will discuss 4 important elements every trading strategy should have.

1️⃣ The first compontent of a trading strategy is the list of the instruments that you trade.
You should know in advance what assets should be in your watch list. For example, if you are a forex trader, your strategy should define the currency pairs that you are trading.

2️⃣ The second element of any trading strategy is the entry reasons.
Entry reasons define the exact set of market conditions that you look for to execute the trade.
For example, trading key levels with confirmation, you should wait for a test of a key level first and then look for some kind of confirmation like a formation of price action pattern before you open a trade.

3️⃣ The third component of a trading strategy is the position size of your trades.
Your trading strategy should define in advance the rules for calculating the lot of size of your trades.
For example, with my trading strategy, I risk 1% of my trading account per trade. When I am planning the trading position, I calculate a lot size accordingly.

4️⃣ The fourth element of any trading strategy is trade management rules.
By trade management, I mean the exact conditions for closing the trade in a loss, taking the profit and trailing stop loss.
Trade management defines your actions when the trading position becomes active.

Here is the example.

I took a trade on Friday, following my top-down trading strategy.
I was trading Dollar Index (the instrument that is in my trading list).

Entry reason was a test of a key level on a daily and a formation of a horizontal range on 1H time frame.
The position was opened on a retest of its broken neckline.

Position size of this trade was based on 1% of my trading deposit.

Stop loss and targets were structure based.

Make sure that your trading strategy includes these 4 elements.
Of course, your strategy might be more sophisticated and involve more components, but these 4 elements are the core, the foundation of any strategy.

VasilyTrader

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