Trading CFDs carries considerable risk of capital loss. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.

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Components of a Good Trading Strategy

This article is going to teach you what the components of a good trading strategy are and how to bring all that you'll learn into a workable trading system. The first features of a trading strategy have to be based on sound concepts; it has to be based on things that you've learned in technical analysis about trends, about the way the market behaves. It can't be based on any offbeat things that work just occasionally it needs to be based on something that has principles that you understand. Also, it has to have repeatable results and obviously you need to be able to test it in various markets. You need to find a trading system that is likely to give you the same sort of results in the future as it has in the past.

The three key components of any trading system must include the following factors:

  • High percentage setups
  • Mechanical rules to follow
  • Emotional and technical discipline

Think of the high percentage setups as the tools we use to trade with. These high percentage setups when used properly, are very responsive, they're very consistent, and they're very profitable. To make sure that we use them properly, we need to follow some mechanical rules. Think of the mechanical rules as the instruction book.

The third component is emotional and technical discipline. As with most instruction books, if you don't actually read it, it's not going to help you. If you don't actually implement the instructions that the mechanical rules tell you to do then, of course, we really can't expect our higher percentage trade setups to work very often. We must practice emotional and technical discipline to follow those mechanical rules, to use this recipe for success and to stay away from trades that don't fit inside those mechanical rules.

Consider Your Trading Concepts

The first thing to do for your system is to figure out the trading ideas. What is your trading concept? Do you want to base it around moving averages? Are you looking for a double crossover to give you signal to go into a trade? How do you want to make it work? Is it with moving averages or do you want to use indicators looking for overbought or oversold situations? Perhaps looking for a candlestick pattern that will give you the trigger to go into the trade?

There are also pattern-based concepts that can help you trade trends as well as reversals. The most common ones are the Head-and-Shoulder pattern, double and triple top/bottoms, bearish/bullish engulfing bars and so on. These patterns can be a trigger for you to go into a trade. Once you have decided what you're going to use try writing your system around those trading concepts.

Formulate Trading Rules

Your trading rules must be unambiguous. You've got to have something that you can explain to everyone and can be easily understood. If you would hand them to another person they need to be able to follow those trading rules. The three most important rules need to cover your entry, position size or risk management and last but not least your exit technique.

Often traders tend to focus and worry too much about the entry conditions as if that's the only one thing that will determine whether you'll make profits or not. This is not really true. Obviously, we want to have good entries, but there are other factors that can impact our profitability. Certainly, your rules will have to cover position sizing and risk management techniques. As a general rule, you don't want to risk more than 2% of your account on any of your trades just in case something goes wrong.

The final section of the rules is the exit technique. When you're going to get out of the trade it's very important because it will minimize your losses if that happens to be a losing trade or it can maximize your profits if that happens to be a profitable trade.

The Three Jobs of a Professional Trader

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The three jobs of a professional trader are to identify, adjust and execute. The first job is to identify the news events and the type of market that we're trading (trend vs. range). Job number two is to adjust to what we have now identified which is to adjust to the market conditions and mark our support and resistance levels. If we do these first two jobs correctly, then our job number three is very easy which is to execute our trades. We need to practice discipline and patience to wait for the high percentage pattern and high probability opportunity. It's important that we don't overthink our trades and let our trading strategy rules to do the trading for us.