A trading strategy is a plan traders use to determine when to place buy or sell orders. Research suggests that over 70% of traders make impulsive trading decisions based on emotions.
The lack of structure and objective market analysis results in uncontrolled losses and missed profit opportunities.
There is a way to reduce losses and increase your profit potential. With a structured approach, you can identify entry and exit points, manage risks, foster discipline, and avoid emotional decisions.
In this lesson, we’ll provide an example of a trading strategy and its components and explain how to implement it.
Discover Giant Hunter AI
Strategy steps
The strategy we will talk about contains four simple steps.
- Find a suitable horizontal line. Find the area where the price movement might start.
- Choose an entry point. Analyze chart or candlestick patterns to determine the best moment to trade.
- Manage your risks. Establish your safety net to limit potential losses and place a stop-loss order. Also, a take-profit order should be placed to determine the ideal moment to gain profit if the price moves as expected.
- Make your move. Open a buy or sell order based on the levels and patterns you have discovered earlier.
Trading strategy example
This course will cover a simple trading strategy that is easy to use for beginner traders. It includes horizontal lines to confirm a price level and candlestick patterns (Hammer, Doji, Evening and Morning Star, Engulfing) to determine an entry point. These elements combine into a strategy to help you open a buy or sell order.
Here is an example of opening an order using the mentioned strategy. We will explore it in detail in the upcoming lessons.
The first step is to draw a horizontal support or resistance line across one or more points, which you’ll learn to do in the next lesson.
By now, we have a better understanding of potential market movements. The presence of the engulfing pattern significantly increases the likelihood of potential movement. You will learn how to use the other candlestick patterns in the upcoming lessons.
- Each candlestick pattern has a different approach.
You will learn about them in the following lessons. In this case, the engulfing pattern helps us determine that the market will move upward. That is why, in the next step, we can open a buy order. - The next step is to set a stop loss at a distance twice lower than the pattern’s highest point.
- If it’s a single candlestick pattern like Hammer and Doji, measure the distance from the candlestick itself.
In patterns consisting of several candlesticks, like the Engulfing or Morning and Evening Star, use the last candlestick. See the picture below. - The following step is to set a take profit, placing it at a distance that exceeds the area between the entry point and the local minimum four times.
After taking these steps, we opened a buy order, which closed in profit.
You can follow the same steps to open a sell order. The difference is that the horizontal line will be above the candlesticks, and the market will move downwards. So you’ll have to place a stop loss above the pattern’s highest point and take profit at a distance that exceeds the area between the entry point and the local maximum four times. See the example below.
Thanks to this structured approach with built-in risk management, you can make informed decisions about when to enter and exit markets, enhancing your potential for profits.
The strategy you have read about is just one of many available trading systems, each with pros and cons. If you want a strategy to be effective, choose it based on your trading style and preferences. The one we mentioned here works best for intraday trading.
Need more trading examples on real charts?
Stay tuned and read the next lessons! We will cover more market situations and give you a detailed video comment from our trading expert. You will also get step-by-step instructions on how to open real orders.
Summary
- A trading strategy is a step-by-step plan that aims to increase the probability of a profitable trade.
- Variable strategies are available, and none is universally the best. But if you are just exploring the market, you can create a trading system using a simple strategy with two elements.
In the upcoming lessons, we’ll explore this strategy in depth, helping you refine your choice and application for better trading results. As a first step, you’ll learn how to identify support and resistance levels.
Discover Giant Hunter AI
