How to design a successful trading Strategy

As we mentioned in How to trade successfully, as a successful trader you need to have a detailed, structured, rule-based trading approach, also referred to as your “trading system” or” trading strategy”. Your structured approach should start with trade discovery, should have a defined entry point, a methodology of trade management, and an exit point which is defined prior to entering a trade.

The rules and structure of your trading system must be followed exactly, and there should be no room for guesses or emotion-driven decisions.

Trade discovery

There are approximately 4850 public companies in the US, which are traded on exchanges. The sheer volume of price charts makes analysis of each chart an impossible task. You need to be able to reduce your list to a select group of stocks. I personally statistically profile stocks for mathematical distributions which predispose the stock to take advantage of the mean reversion characteristic of stock movement. I reduce 4850 stocks to a workable list of 100 then select a watch list of 20 stocks for a watch list. From this list of approximately 20 stocks I can extract around six to eight stocks for trading.

Defining an entry point

A defined entry point is a point on a chart which motivates the trader to enter a trade. The trigger could be – but is not restricted to – cycle analysis, moving average crossovers, relative strength index, and Stochastic, MACD or pattern recognition.

Trade management

Start with defining your risk. How much are you willing to lose before quitting a trade? The “exit stop” or “stop loss” pre-defines the maximum loss before entry. The pre-calculated dollar value of loss should be a dollar amount that is smaller than the pre-calculated dollar value of profit. For example risking one dollar to make a theoretical four dollars would be an acceptable risk to reward relationship. Ratios of 1:1 up to 1:3 are quite common and achievable. Managing a trade also includes understanding how to lock in profit as the trade moves in your favour. This is accomplished by using a “trailing stop loss” which motivates the trader to lock in profit. Last of all trade management involves an understanding of when to maximise profit as a trade approaches its pre-determined exit point.

Defining your exit point

A variety of techniques can be used to define an exit point. They include support and resistance levels, Fibonacci extensions, cycle counts and moving average crossovers. In a directional trade there has to be an objective. The objective is for the price movement to reach the pre-defined exit point. The predefined exit point is not a predicted profit target, but a point on a chart in which the trader manages the trade with the intention of getting as close as possible to the predetermined exit.

Making sure your trading strategy will be successful

You need to be sure that your trading strategy is robust enough to survive and profit in different market environments. The best way to achieve this is to do extensive backtesting with large amounts of assets and historical market data. See our page How to backtest a trading strategy.


The above four points are embedded into every accurate trading strategy, but designing such a structured approach to trading is not a simple process and very few – if any – new entrants to financial markets possess the knowledge to design a workable system. The lack of ability stems from their lack of market knowledge and lack of experience with tools applicable to trading. Essentially as a new trader “you don’t know what you don’t know” and you start from a very low knowledge base. Lack of basic knowledge in how to design a trading system is the very first challenge you have to overcome.

If you want to fast-track the development of your trading strategy make sure you consider a trading coach or trading mentor who will teach you a complete system of trading. One such coaching program is our Options Mentoring program.