Why Traders Always Need A Strategy

In the trading world, there are 3 elements that make up a successful trader:

● Trading strategy

● Money management

● Trading psychology

Basically, trading psychology accounts for 60% chances of success; risk management accounts for 30%, and trading strategy only accounts for 10%.

Looking at these numbers, you might think that a trading strategy is not really important. However, if you have the opportunity to talk with 10 trading professionals, I am sure 10 out of 10 will say that you can’t be successful without a good trading strategy.

This article will explain why you need it, and how to build one.

Why You Need a Trading Strategy

Trading is considered a business, and like other businesses, it requires you to spend time and effort to succeed. You need to learn how to analyze the market movement, study the characteristics of assets, wait for the right opportunity to place orders, make decisions on where and when to take profits or to cut losses, etcetera.

However, if you don’t do things in a systematic way, you won’t be able to succeed in trading. Think about this: If sailors go out to sea without using compasses and weathering devices, can they safely return to shore? Of course not!

Trading is like sailing to the sea. In the binary options market, there are many events occurring every day. Believe it or not, you never accurately predict what will happen to an asset in the next few minutes (remember the CHF’s crash 4 years ago?). If you trade without a “compass”, the “waves” of the market will “sink” your money sooner or later.

That’s why you need a trading strategy. It is a set of rules that helps you eliminate subjective judgment and make objective trading decisions in the market. It tells you what to do in specific market conditions, like a compass telling which direction you are supposed to go.

Differences between random entries and systematic entries

Let’s assume that you enter the market randomly. Prices may go up or down; however, you have no idea why you opened your orders. This makes you stuck with the following questions:

● How will you set the contract’s expiry time?

● What should you do if a profitable order starts to reverse and go against you?

● How much should you risk for each order?

When you trade without a strategy, you are simply placing buy and sell orders in the hope that they will end in profit. This is totally luck-based trading, and it cannot generate profit in the long term.

So, do you want to build your own trading strategy? Let’s get started!

How to Build a Trading Strategy

A trading strategy will answer the following questions:

● When should you jump into the market?

● When should you jump out of the market?

● How much should you risk for each order?

So, a binary options trading strategy will basically consist of three components: an entry, the contract’s expiry time, and the amount of investment for each order.

Here are the steps to build a trading strategy:

Step # 1: Find an edge in the market

The first thing you need to understand when building a trading strategy is: the market behavior tends to repeat itself.

So you need to identify an edge where prices will likely have similar actions in the past.

For example, you have identified a price threshold where an upper bounce seems to occur. In other words, at this price, the buy side will enter the market.

Once you have identified such a threshold, you have found an edge – a market condition where something seems to happen. This price threshold (also called a support level) is where the market is likely to bounce back.

Of course, prices do not always rebound from this support level; it can be penetrated at any time. However, you need to remember that binary options trading is a game of probability; if your trades are based on an edge you have determined, your winning probability will increase.

Let’s go into detail with the chart below.

A USDCAD H4 Chart. Source: MetaTrader 5 FinmaxFX

As you can see, the USD/CAD currency pair has rebounded many times from the 1.3250 – 1.3286 support zone, giving you plenty of opportunities to place buy orders and collect profits.

Step # 2: Develop a set of trading rules based on the edge you have found

After finding an edge, you will need to develop a set of trading rules based on it. Let’s continue with the example above.

You have identified the support zone of 1.3250 – 1.3286 from which the USD/CAD exchange rate would likely bounce. Now, you need to identify clear price-action signals indicating that prices will bounce back from this support area. Those signals may be candles with long wicks, or reversal candle patterns.

Next, you need to determine the expiry time of the binary options contract. Using past price movements, you can set the order to end within 16 to 32 hours (4 to 8 candles on the 4-hour chart).

In case the price breaks below the support, you will need to set new trading plans with this support becoming a new resistance level.

After determining the entry and the contract’s expiry time, you will need to determine the investment amount for each order. According to experts, you should only risk 1 to 2% of your account balance for each trading opportunity; this ensures you can trade in the long term.

Step # 3: Test your strategy

With the two steps above, you almost finish building a trading strategy. Now, all you need to do is check the efficiency of the strategy you just built.

To do this, test your trading strategy with 50 trades on a demo account. If it is not profitable over 50 trades, modify the strategy and test it again with 50 other trades until the overall result is in profit.

The Bottom Line

As you can see, the trading strategy is indispensable despite the fact it only accounts for 10% of a trader’s success. Having a strategy allows you to enter and exit the market in the right conditions and you know exactly when you should end your binary options contract.

The basic components of a binary options trading strategy include an entry, the contract’s expiry time, and the investment amount for each order. To build a trading strategy, you need to find an edge, develop a set of trading rules based on that edge, and test your strategy objectively.

If you have trouble identifying an edge, try referring to the practical analysis of Finmax experts.

To improve your trading strategy, you can use a trading journal in which you record all information about your trades, including the entry point, the ending time of the contract, the investment amount, the reasons why you opened the order, the trading result, and important notes. This information will help you get a comprehensive outlook over your trading performance and, from there, gain experience to trade better in the future.

TRADE ON FINMAX

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”