Profitable trading is nothing more than a few simple disciplines executed daily!
My goal is to provide you with a step-by-step process to help you create and implement a profitable, systematic, rules-based, trading strategy! Using the tools and resources on this site you'll learn how to create a trend following trading strategy that matches your personality and only takes 15 minutes a day to execute. Trend following trading has been used by some of the worlds best traders including Tom Basso, Jerry Parker, Ed Seykota, Richard Dennis and the Turtle Traders to outperform the market for decades. Now you can follow in their footsteps and build your personalized trend following trading strategy!
Successful trading is simple but it is not easy. In order to be a profitable trader you need to follow these steps:
1. Find a market that is trending.
2. Determine a suitable entry point.
3. Enter a buy order, along with a stop loss that controls the amount of money you are willing to lose.
4. Hold on to the position until the trend ends, at which time you sell and bank your profits.
If this is all that is required to be a successful trader, then why do the majority of traders lose money?:
1. They do not have a written, systematic, rules- based, trading strategy that they have backtested to confirm that the strategy has a positive expectancy and will make money.
2. Once they have a backtested the trading strategy they become too emotional and do not consistently execute their trading plan day-in and day-out.
How to Build a Systematic, Rules-Based, Trading Strategy
Your goal as a trend following trader is to develop a systematic, rules-based, trading strategy that removes emotions from the trading process. Through backtesting you will confirm that your strategy has a positive expectancy, or an edge; and, therefore, you will take all signals generated by your strategy. The trading rules must be very clear and straight forward. Your trading strategy will include the following Trading Rules:
- 1. Which markets to trade
- 2. Identify potential trade set-ups
- 3. Entering the trade
- 4. Stop Loss Exit
- 5. Money Management
- 6. Profit Stop Exit
Sign up for the FREE Course Preview and receive your FREE Trading Strategy Template, that provides a trading strategy outline based on the above trading rules, and get started building your personalized Trading Strategy. You can get more details on each of the trading rules in the sections below.
Trading Rule #1 - Which Markets to Trade
You goal is to build a diversified portfolio of approximately 50 markets that you will trade. By trading diversified, uncorrelated markets it will help smooth out your equity curve by targeting your trades within the strongest trending markets. To get started it is recommended that you build your market portfolio using Exchange Traded Funds (ETF's) within the 4 main financial markets including:
- Equities
- Bonds
- Commodities
- Currencies
Trading Rule #2 - Identify potential trade set-ups
Part of your daily routine will be to scan your market portfolio for potential trading candidates and develop a watchlist of potential trade set-ups. You want to identify and trade the strongest markets in your market portfolio. This goes against the conventional investing advice of buy low, sell high. When trend following trading, you want to buy high and sell higher. The majority of trend following traders will buy on a breakout from some defined level. This defined level could be a breakout above a new 4-week high, a 40-week high, a 52-week high, a new all-time high, or some other level that allows you to catch the momentum of the trend.
Trading Rule #3 - Entering the Trade
To be a successful systematic trader you must have a clear trigger that allows you to enter the trade without second guessing the decision. If you are using a breakout system, the trigger could be close above the breakout level. Each day you would review your watchlist to see if any markets met your entry trigger criteria; and if they did, you would place a buy stop order at or above the high of the close with presumption that the trend would continue on the next trading day. Your buy stop would be hit, and you would be in the trade.
Trading Rule #4 - Stop Loss Exit
You need to accept the reality that with trend-following trading you will be wrong more often than you are right. Before you enter any trade, you need to define the price in which you will get out if the trade does not go as originally planned. There are many ways to determine your stop loss exit. Like the rest of your trading system, it must be something you are comfortable with and clearly understand the logic behind it. You can consider using a percentage stop loss (i.e., sell if stock price drops x% below purchase price) or a stop slightly below the breakout price, a specific moving average, or some multiple of the Average True Range (ATR).
Trading Rule #5 - Money Management
Money management is the most important component of your trading strategy. Money management defines, before you enter the trade, how much money you are willing to lose if you are wrong. Many studies have been undertaken that prove that you should not risk more than 2% of your portfolio on any one trade. In the previous trading rules you determined your entry price and stop loss exit. You can then apply your defined risk % per trade to calculate how many shares you can buy.
Trading Rule #6 - Profit Stop Exit
Your Trading Strategy has followed the successful traders mantra of "Cut you losses short and let your profits run." As such a number of your positions have continued to follow the prevailing trend, and you are making money on these positions. With a trend following trading strategy, you need to resist the urge to sell your profitable positions and let the trade continue so you can capture as much of the trend as possible. You should, however, have a trailing stop that follows your trade up and is always active; so that when the trend eventually ends, you will automatically be stopped out, so you can capture as much profit as possible.
