How to Build an Investment Strategy In 7 Steps
There are many articles and seminars which offer a bespoke investment strategy. Some of them are free, for others are paid. Some are aggressive, others more passive. Some will provide useful ideas and insight, others are simply scams.
In the age of the internet and modern technology, we don’t need to leave home anymore to find a new strategy. The investor is looking for the Holy Grail, the provider promises he can deliver!
Consider this: If someone creates a money-making strategy, does that mean any investor can make money using the same methodology?
We are all different. Our trading patterns are determined by our own character, risk appetite and goals. Of course, we all trade to make a profit, but it depends on what we are trading for; are you looking to supplement your salary, create a nest-egg or provide for some luxuries? Time is a major factor. The less time we are able to devote to trading the less sophisticated, by necessity, our trading will be.
There is, of course, no perfect strategy, that would indeed be alchemy. Each strategy is as individual as its user. Ten people using the same strategy would experience different outcomes for the reasons we have already mentioned above.
Why is the vendor selling this strategy? If it is indeed the Holy Grail why is he selling? He could keep it for himself and make millions on his own.
It is not my intention to attack all instructors or coaches. Not everyone is selling something. There are several investors keen to share their experience. This is extremely valuable but always hope for the best and prepare for the worst.
Table of Contents
How to Build an Investment Strategy In 7 Steps
Back to the topic
As mentioned, we are all different and each has their own trading style. Some traders are long term, short term. Technical traders pore over charts where fundamental traders rely on data, politics and events as drivers of their positions.
Then, within technical analysis, there is no constant. Strategies can be based on market geometry, harmonic patterns, moving averages, ichimoku, price action etc. The variety is almost endless!
There are few key factors which traders should do to personalize a strategy. These should come naturally as a good trader will always reflect his personality when taking positions. We are all nervous, excitable, calm, methodical or driven and our trading style will naturally reflect this.
First, consider how much time you can devote to trading. Is it a hobby like yoga or pilates, a pastime like reading or a passion like sport?
It is not a case of what you can afford timewise, it is how much time you want to spend. It should be enjoyable.
It ranges from a few hours every day, on the one hand, to once or twice a month. This, of course, influences trading style. Irrespective of a technical or fundamental style, an up to date awareness of current affairs and macroeconomic data is vital. Knowledge of the market can only be built over time and comes with experience. The less time you are willing to devote, the longer it will take to build the experience.
Finance is, possibly, the most crucial factor. You will see and hear the warnings everywhere but there is one simple tenet. Do not invest, in any circumstance, more than you can afford to lose.
This doesn’t necessarily mean that you should have wider stop losses. If you want to do that, take smaller positions.
Discipline is crucial. It is the most important factor. Every decision should be considered carefully.
Many brokers offer micro accounts to enable traders to take small positions. It is also useful to open a demo account to test a new strategy without risking capital.
Risk. That is one word that should be written on big letters above every trader’s desk. Understand your “risk profile”. That will encapsulate everything you will learn in this and any other article.
Where do you want to invest? What interests you? Is it Precious Metals? Gold or Silver? Commodities? Hard or Soft? Currencies? Majors? Crosses? Equities? Domestic or Overseas?.
No one can master all and given, even, ten hours a day, a specialization is crucial. It is better to know a lot about a little than a little about a lot. Well, when it comes to trading anyway. Education is the most important thing in trading.
Do you understand your broker’s fee structure? Can you still make money if you add his cost to the spread you are paying? Remember, the shorter time frame you are trading the most costly any fees appear.
How volatile is your chosen market? How does that affect your ability to trade within your parameters? Look for correlation. What drives the U.S. economy that isn’t so vital to the U.K.? How does Chinese economic growth make the Australian dollar more volatile?
This cannot be taught. Nor is it found it a textbook? No one would advocate jumping straight in. Learn the various indicators, but study them on a chart. It is far easier to spot support/resistance if you know what you are looking for admittedly, but equally, if you train your eye they will literally jump off the screen at you!
Use an MT4 platform. This is the industry standard and was developed by a firm called Meta traders many years ago. Most brokers offer MT4 and those that don’t often tend to be on the fringes trying to get traders to use a less developed platform. Meta traders have developed MT5 but cannot get brokers to offer it as they are worried their clients will disappear to an MT4 broker.
Do not get bogged down in technicals. Get to know a few wells as was said above. An old adage is that news drives markets, technicals simply give entry and exit levels.
Before opening a position there are several common-sense tactical considerations:
- Define stop loss (once you know what a stop loss is) The stop loss will be the determinant of all other considerations. Once you know your maximum loss other factors fall into place.
- Determine position size
- Define take profit. This is a factor of your stop loss. You will have already decided as part of your risk profile your risk-reward ratio. That is to say what multiple of your loss do you wish to take as a profit?
- Define position management. Hands-off is the most recommended course of action. All steps should be taken before the position is entered into. Unless there is a major shift not considered when the position was opened it should be left to run its course.
Position size is critical. Do not risk too much of your total capital. There is no such thing as a “sure thing”. Adding to a profitable position if there is a room before the take profit level is sensible. As is raising the stop loss on a winning trade.
NEVER add to a losing trade and only take profit early if your confidence level falls. If needed, learn to use partial close of trades.
There is nothing wrong with closing a position and starting again. More factors come to light. Of course, trade tenor is a determinant in many money management decisions.
There is nothing new in heaven or on earth. If you have a strategy, test it out. Use historical data. MT4 can give you what you need in this regard.
Use your demo account. It will save money in the long run. Use live and demo in conjunction. One with a small deposit which we can afford to lose.
Every trader is different.
Nothing is guaranteed. Learn from your mistakes. Yes, you will make some. Just make sure they are not too painful!
Be yourself but check out copy trading sites. They give you a great insight into what other, successful traders are doing. Would you have done the same thing? Yes? Great you are on the same wavelength. No? Great you are being yourself.
Trust what works for you!
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