One aspect many newer traders often ask is "What do I need to know to have a successful day trading strategy"? The answer is not as difficult as it might seem. No matter what market someone chooses to trade, there are trends that
develop over time. Without trends the price would never move up and down, it would consistently sit in a narrow range and randomly oscillate. Because all markets develop trends over time, this presents itself with an opportunity to develop methods to identify and time these trends. First off, it is important to understand how trends develop.
Each day the markets react to the combined buying and selling of millions of investors and traders. Each market trades a bit differently, but they all share a common bond. Each individual who places a buy or sell order has some sort of strategy they are using to make a decision, and these combined decisions create trends. Some use fundamentals such as earnings or independent research while others prefer to use computers to help them make buying and selling decisions. The thing they both types of traders have in common is a system of finding a trading idea and then executing on it. The main goal is to identify trends that can generate profitable trades.
One of the keys to successful trading strategies is trading in the direction of the current trend. While this seems simple, it gets overlooked easily. If there was only one rule to follow, this is the one. When the trend is higher, only trade in the direction of the trend. When the trend turns down you should exit long positions or enter a short position. Another simple mistake many traders and investors make is to try to guess the turning point of a trend to enter a position. In choppy markets where trends do not last long, this can be successful but often leads to losses during most market conditions. It is far easier to lower the risk of your trade by waiting for a confirmation that a trend has actually changed. This gives you a reasonable stop out point that is identified by a recent high or low where the trend changed. If the trend really has changed, it will not break that level.
Another key to developing a successful trading strategy is to watch and understand what the market is telling you rather than trying to impose a fixed set of rules on the markets. You might find a promising trade setup that looks to move higher and you enter the trade. The market moves higher over the next 3 days but the stock does not move and even edges lower. The market is telling you that your bet on direction is likely wrong. In such cases, the trade should be cut early or at the very least the stop-loss order moved closer to the current price to limit risk. The reason this happens is simple - there are too many sellers for every buyer and the price goes nowhere. When the market direction turns down, many trapped buyers who thought the stock would move higher who will look to exit. It is important to adapt to current market conditions and realize when something is off. This will save a lot of money in the long run and make trading a lot more enjoyable.
A good place to start developing your own trading strategy is to see what others have developed and used successfully. One of the best methods is to watch a few automated trading strategies in real time to get a feel of how they are looking at the market and what type of signals they generate.
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