Approaches to creating a trading strategy

Kopito Academy
06 Jan 2023

Trading strategy


A trading strategy is a set of rules or guidelines to inform a trader's decision-making process when trading in the financial markets. Trading strategies may include technical analysis, fundamental analysis, quantitative analysis, sentimental analysis, or a combination. A successful trading strategy is based on research, analysis, and risk management.

Defining critical factors for a strategy can help traders identify entry and exit points, set stop-loss and take-profit levels, and determine risk tolerance. It should also include a plan for managing emotions, such as fear and greed, which can significantly impact decision-making.

Trading strategy’s creation roadmap

Trading strategy’s creation roadmap

There are many approaches to creating a trading strategy in the financial markets. Here are some steps that you might consider when developing one:

  1. Define your investment objectives: Clearly define your investment goals and risk tolerance before you start trading. This will help you determine what types of trades to make and how much risk to take.
  2. Choose a market or asset class: Decide which financial markets or asset classes you want to trade. This will depend on your investment objectives and risk tolerance.
  3. Identify a trading style: Determine whether you want to be a day trader, swing trader, or long-term investor. Each type has its own set of strategies and risk/reward profiles.
  4. Develop a trading plan: Create a written plan that outlines your trade strategy, including entry and exit points, risk management techniques, and any other relevant details.
  5. Test your strategy: Use historical data or a simulated trading environment to test your system and fine-tune it as needed.
  6. Implement your strategy: Once you are confident, start implementing it in the real market. Remember to stick to your plan and make adjustments as needed.

These steps are crucial to ensure that our trading strategy is successful and profitable. Developing a successful strategy is an ongoing process and may require adapting and adjusting your system as market conditions change.

Approaches to creating a trading strategy

Approaches to creating a trading strategy

There are diverse approaches to creating a trading strategy, including technical, fundamental, quantitative, and sentiment analysis.

Technical analysis is a strategy that uses past price action to predict future price movements. It involves using chart patterns, indicators, and trend lines to identify potential entry and exit points.

Fundamental analysis is a strategy that focuses on the economic and financial factors that can affect the price of an instrument. It involves analysing economic reports, financial statements, and industry trends to identify potential trading opportunities.

Quantitative analysis is a strategy that uses mathematical models and algorithms to detect and analyse patterns in financial data. It involves using advanced mathematical techniques to identify potential entry and exit points.

Sentiment analysis is a strategy that uses information from the news, social media, and other sources to gauge investor sentiment and make trading decisions. It involves using sentiment indicators and natural language processing to identify potential trading opportunities.

Combining different approaches to creating a trading strategy can help traders identify potential trading opportunities and can be a powerful way to increase the potential for success and reduce risk. For example, a trader can combine technical and fundamental analysis to understand the market better. Similarly, a trader could combine quantitative analysis and sentiment analysis to take advantage of the unique insights that each approach can provide.

Most important parameters for evaluating a trading strategy

Most important parameters for evaluating a trading strategy

Several parameters can be used to evaluate the effectiveness of a trading strategy in the forex market. Here are a few examples:

  1. Profit/loss ratio: The ratio of winning and losing trades. A high profit/loss ratio strategy is generally more effective, as it can generate more winning than losing trades.
  2. Risk/reward ratio: This is the ratio of the potential profit of a trade to the possible loss. A strategy with a high risk/reward ratio is generally more effective, allowing traders to make more significant profits while still managing risk potentially.
  3. Drawdown: This is the percentage loss from a peak in equity to a valley in equity. A strategy with a low drawdown is generally more effective, as it can maintain a higher level of equity even during periods of market volatility.
  4. Win rate: This is the percentage of profitable trades. A high win rate strategy is generally more effective, as it can generate more profits.
  5. Average profit/loss per trade: This is the average amount of money gained or lost. A high average profit per trade strategy is more effective, as it can generate more significant profits.

It is worth noting that no single parameter is a perfect measure of the effectiveness of a trading strategy. Instead, traders should consider a combination of these parameters when evaluating the performance of a system.

Trading Strategy assessment

Trading Strategy assessment

There are a few different ways that you can check the accuracy and win rate of a strategy in the forex market:

  1. Back-testing: One method uses historical data to back-test the strategy. This involves using software to simulate trades based on the strategy’s criteria and see how it would have performed in the past. While back-testing can give you an idea of how a system might have served in the past, there are better representations of real-world market conditions.
  2. Forward testing: Another method is to forward test the strategy using a demo or simulated trading account or a small live account. This involves implementing the plan in real-time market conditions and seeing how it performs. Forward testing can give you a better idea of how the system might perform in the real world, but it still needs to be a perfect representation of real-world market conditions.
  3. Track results: As you implement the strategy in real-time market conditions, track your results. This includes keeping track of your winning and losing trades, the percentage of winning trades, and the average profit/loss per trade. This can help you identify trends and adjust your strategy as needed.

It is important to note that every trading strategy is flawed, and all systems will have losing trades. The key is to focus on the strategy’s long-term performance and continually assess and adjust the plan as needed. After evaluating a strategy, traders should review their results and make any necessary adjustments to optimise its performance.

Importance of psychological factors in developing a trading strategy

It can be essential to consider psychological factors when designing a trading strategy. Trading is a psychological activity, and traders can be influenced by their emotions, expectations, and beliefs. These psychological factors can impact a trader's decision-making process and lead to impulsive or irrational trades.

To help manage psychological biases, developing a trading plan that includes risk management techniques, such as setting stop-loss orders and limiting position sizes, is essential. It can also be helpful to practice good risk management habits, such as keeping emotions in check and avoiding overtrading.

Incorporating psychological considerations into your strategy can help you make more informed and rational decisions, leading to more successful trades.

Implementing a trading strategy

Implementing a trading strategy

When traders are confident that their strategy works, they should implement it in their actual trades. This may involve setting up automated trading systems or manually executing trades based on the strategy.

It is important to remember that even if a strategy has been successful in the past, there is no guarantee of future success. Therefore, it is essential to monitor the strategy’s performance and make adjustments as necessary.


A trading strategy is the set of rules or guidelines used to form traders’ decision-making process. There are several steps to creating and assessing a strategy, such as defining risk tolerance, researching markets, analysing data, and setting stop-loss and take-profit levels. Additionally, a system can be evaluated by back-testing, forward-testing, and tracking performance. After assessing the trading strategy, traders should make necessary adjustments to optimise its performance and implement the plan in their real trades.