When you have no strategy is like walking in the darkness
|I am often asked, what is the importance of strategy and why is it so valuable? Using simple words, I would say that strategy is the art of spotlight these issues that ensure we do not walk in the darkness. And it is valuable because if you are walking in the darkness means that you will never know the reasons you have positive or negative returns, as well as, you are not able to see what are the obstacles when you stumble.
Therefore, in the strategy, we need to define, the critical issues of how, when, and why we can get returns while recognizing the obstacles.
In a strategy of trading, the critical issues that need to be spotlighting include:
When do you participate in a trade?
The answer must be logical: when specific criteria for trade are confirmed. The point, then, is to define the criteria. How are these criteria defined? Following patterns that define with clear rules, the entry price, the stop-loss price, and the target price. So, the first crucial issue is: DEFINE CRITERIA USING PATTERNS.
Why are you in a trade?
The answer must be rational: because the expected gains are much higher than the expected losses. How can this be measured? When the target price is much higher than the stop-loss price, then the expected profit /loss ratio is positive. Therefore, the second issue is: SET THE EXPECTED PROFIT/LOSS RATIO TO ALWAYS BE POSITIVE.
How much, do you need to participate in a trade?
The answer is based on psychology as it depends on the loss that a trader or investor can accept. As a rule, no one can rationally manage a capital loss for an individual trading or investment position, if it exceeds 10% of his total capital to be invested. Based on this, a trader or investor should not take, an investment or trading position that could cause a possible loss in terms of total wealth if the loss will exceed this number. So, the third issue is: DETERMINE THE SIZE OF A TRADING POSITION BASED ON THE MAXIMUM LOSS OF CAPITAL that should not exceed 10% of the total capital to be invested.
Once a trader has identified these three issues, he or she will be well placed to know the reasons behind the positive or negative returns and to be aware of any obstacles that may arise.
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