Formulating a Trading Strategy and Backtesting
A trading strategy is a plan, that can have rules, which
guides you when to place a trade.
For example, you can create a trading strategy that allows
you to buy only when a currency pair is in an uptrend, and the RSI indicator
says that the pair is oversold.
Whenever you come up with a strategy, you must do something
known as backtesting.
Backtesting, is looking at historical Forex charts to see
whether your strategy would have worked with a win rate of more than 50% with a
risk to reward ratio of more than 1:1.
Historical doesn’t mean that that you are supposed to go and
look for some ancient charts somewhere.
It simply means scrolling backwards and looking the already
recorded price action.
Even if a strategy has a 50% win rate, the results are not
evenly distributed. You can have a winning or a losing streak.
Use that strategy in a Demo account for weeks until you
become fully confident with it.
Consistent execution of trades and journaling
Once you formulate a strategy or even two strategies and
started to execute them, you should start journaling.
A trading journal can be an Excel Spreadsheet, where you
record all the trades you have placed and their respective outcome.
Journaling enables you to keep track of your trading
progress.
Journaling also makes you stick to strategies that you have
backtested.
When you become well competent with a strategy, your results
will become consistent.
Below, is an example of a Trading Journal.
You can see details like trade number, date, pair traded,
the direction taken and the outcome.
