One of the greatest skills you can develop as a trader is the ability to create your own trading strategies.
Even if it’s based on others’ ideas.
If you can develop a strategy, you learn how to find your own answers, and you’ll never be dependent on anyone for trading info.
When I started out day trading stocks in 2005, I knew nothing about trading. I was fresh out of university. I applied to a proprietary day trading firm (they give me money and take part of my profits). Interestingly, they ONLY wanted people who knew nothing/little about trading.
No preconceived ideas. They wanted to create traders from scratch.
The firm basically told me: “Look at this chart and figure out how to make money.”
It was the most powerful trading instruction I ever received. The subtext was: “Become self-reliant because we can’t trade for you”.
Beautiful, and True. I said “Ok”
They then said…”Since you’re starting out, you can only lose $10 a day.” If I was profitable one day I could lose $20 the next (and kept increasing by $10). If I lost, I was back to $10 the next day. It progressed that way for months.
If I was profitable most days, I got more capital, could take bigger positions, could make more money, and thus could lose more. But only if I was profitable.
If I started losing, how much I could lose in a day dropped. Basically: super tight risk leash, and find a way to make money. After making $2000 in a month there was no more “level system” rather my maximum daily loss was based on my average daily profit. The idea is that you don’t lose much more in a day than you can make back on a typical day.
That was it. It may sound impossible just working with a chart for months on end and trying to figure out how to make money…but it is the greatest skill you can develop.
It means you NEVER need to be dependent on anyone for trading information ever again. You know how to look at a chart and develop a strategy. If you can control your risk, you have a viable way to make money. If conditions change, you have the skill to adapt. Since you developed everything, you know when the system is performing well and when it isn’t (when it is you and when it is the market…so you can adapt).
If the strategy stops working, you create another one or find a way to fix it.
An added benefit of developing your own strategy is there are fewer psychological issues. I am trading with only my own voice in my head. If you just keep consuming new material, instead of creating, you end up with lots of voices in your head. You have their voices plus your own voice, all saying what to do. You feel conflicted about which trades to take, when to get out, whether a trade is valid or not.
When it’s just your own voice it is pretty much ‘yes’ or ‘no’, ‘get in’, ‘get out’. A lot less chatter. I still trade that way, 18 years later. I come up with an idea for a strategy and I MAKE IT profitable.
The video below looks at some examples how how to come up with a strategy, how to test it, and then how to refine it over time for better performance by adding in additional rules such as when you take trade signals and when you don’t. As you trade a strategy, or even the more you test it, the more you will notice trades tend to work better under certain conditions than others, so you can incorporate rules to account for that and improve overall performance. You can actually do to your charts and see which set of rules works best. Additional insights on these topics are provided below the video.
Creating a Trading Strategy
Come up an idea and then get to the charts. Look through prior price action for setups that meet your basic objectives. As you look through them, more clearly define and improve your entries, where your stop loss will go, and how you will take profit. Come up with some rules and then find at least 30 trades based on those rules. Write down all the profits and losses. (I will briefly discuss “backtesting” at the end fo the article).
If you aren’t satisfied with the result, that doesn’t mean it is a bad idea. It may just need to be refined a bit more.
I look at winning and losing trades and see if I can find conditions where losers tend to occur too often. I write it down and avoid those situations. I look at reward/risk and win rate for whatever pattern or strategy I’m trying to trade. I look at ways to maybe squeeze a little more profit out of trades or reduce risk slightly. Every little bit helps.
It may be incremental. A 2.1:1 reward:risk may be feasible instead of 2:1. I like to be out of day trades pretty quickly. I don’t like holding through pullbacks if I can help it. Pullbacks can easily turn into reversals and that scares ME (maybe not you).
Someone else may want to hold for bigger profits, and that means holding through pullbacks. Someone may be ok with a big reward/risk but losing more often, whereas others want a high win rate and are ok with a lower reward/risk.
I decide how I want to trade the strategy idea and then I find a way to make it profitable. I align it with my goals and personality. That way I’m more likely to follow it and trust it.
I write down the results on a piece of paper. I look at how prior trades worked out, based on the rules I have currently developed. If it is profitable, great. How can I make it more profitable? If the result wasn’t profitable…how do I make it better?
Find an earlier entry (if getting in too late) or a later entry (if getting stopped before the big move), see if the stop loss can be decreased, or needs to be increased, see if the target is too far or too close based on taken trades. Make changes to make it profitable.
Understand that how I or someone else trades is based on their personality, their preferences, which may be different than yours. “Cory is a chicken sh*t and doesn’t like holding through pullbacks…but I (you) prefer trading less and taking only one or two big trades a day”. So you may want to trade differently than me…or alter my methods to suit you if you like some of the concepts.
Look at your charts and trades and look for conditions where the strategy is present AND the price tends to run after. What conditions are present on those trades (trends or false breakouts)? Those are the trades to focus on not all the tiny trades Cory is taking. If you like my tiny trades, trade them. If you don’t, you can use the same strategy idea and just have bigger targets (ASSUMING YOU HAVE DONE YOUR OWN WORK TO MAKE SURE THE STRATEGY IS STILL FEASIBLE WITH THAT ALTERATION). Filter out the tiny trades accordingly. Trade for YOU. Create or modify the strategy for YOU. Make it profitable.
I don’t search for great strategies, I make them.
Pretty much every successful trader you read about did the same thing. They saw something, had an idea, and then they worked at it to make it profitable. The idea may have been their own, or someone else’s. Doesn’t matter. They made it their own. There are some famous traders who have written books, and their mentors have also written books. The material may have similarities, but it is different…because you need to trade based on YOU.
Taking my day trading or swing trading courses, you’re getting the end result of decades of work. But you miss out on the skill of developing your own method. So, create that skill! Use the information above to make a strategy YOUR OWN, personalized for your preferences. In each of my courses, I tell people to go through their OWN trades and find ways to improve them (like above); most don’t listen. They miss out on a way to greatly and positively impact their trading.
You can build a strategy from scratch, or use someone else’s idea and go through the process above. Tweak the idea to align with how you want to trade. That’s how YOU control your trading destiny, so you’re not reliant on someone else.
You don’t need my strategies. You can create your own. But if you want to see how I day trade stocks you can check out my Price Action Stock Day Trading Course. It highlights the precise patterns to watch for that present a favorable risk/reward opportunity
Backtesting Your Own Trading Strategies
I said above to find about 30 trades to see if your idea is profitable. Some people want hundreds or thousands of trades in their backtest. That is not required.
When you are creating a strategy it still needs to be refined. A small backtest that performs well means it works well in the conditions/context present during those trades. Note those conditions, they are important.
As long as those conditions/context are the same, that strategy should preform ok. I’ll start using a strategy right away (with a small position size) and as I accumulate data I can refine the strategy as I go (see section above). You can use a demo account, or a live account with very tiny position sizes to start.
If conditions/context changes and the strategy isn’t performing as well or losing, note that. Stop trading it until the conditions become more favorable (or make adjustments based on your experience in these new tougher conditions…seek out prior periods like it for insight). That is part of the strategy! To know when it performs well and when it doesn’t.
If you can take an idea and try to backtest on thousands of trades you will probably get stuck never finding something that works, or you get mediocre performance because you are just looking for thousands to entry signals and not considering the conditions/context around those signals.
That is why I prefer small backtests. Note the conditions, and then get work on improving the strategy through implementation. Of course, you have still done the work to define entry and exit rules and have done some refining already. Your tests show positive results.
I like small backtesting because then you can test out lots of ideas. As you trade them (doesn’t need to be live, can be a demo account) you get to see which ones really resonate with you, and which ones don’t. If you search for the perfect system and backtest it endlessly, you may be disappointed when you go to implement it and you don’t really like it or it doesn’t suit you or your lifestyle.
If something is working, I trade it and continually try to improve on it. If something isn’t working I stop using it till it works again or I try to add some additional context rules to keep it viable in those circumstances.
Most strategies are more dependent on conditions than an entry rule. An example: if the stock indices are dropping like a rock and you keep buying “quality stocks”. While they may eventually bounce, while indices are dropping those stocks are likely dropping too (80% of stocks follow the indices). You may have what you think is a great buy entry, but conditions will likely overwhelm it and that stock will fall. The strategy could be improved by considering conditions.
Strategies are not hard to come by. The ideas are in your head and floating around everyone online, in books, and in trading courses. I continually come up with new ideas. Many I don’t end up liking, but some I do, and I put in the work to refine them, start trading them live, and keep refining them.
I often try to come up with strategies that fill the “holes” in my current strategies. For example, a rounded top or bottom catches the reversal of a trend, but it is also nice to catch profits while the trend is underway, so there are Contractions and TCs that I also trade. I don’t hold stock swing trades through earnings, so I am putting in more time to refine how I trade following earnings and potentially capturing some of those stocks that take off.
Don’t get bogged down looking for perfection. The trading game is about taking an idea, and if you really want to trade with it, you keep refining it till it works. Then you can backtest it a whole bunch if you want.
I manually backtest, going through the charts by hand. No automation. Since I trade live (without automation) I want to train my eyes to see those patterns and trade setups while doing my backtesting.
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No searching for or researching individual stocks. Build that nest egg with a strategy that takes very little work and has been working for more than 100 years.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.