For every market, there are infinite possible trades, but only some of those trades are good ones. The difficult part of trading is deciding which trades are the good ones, and which aren’t. Every good trader has a system to come up with and analyze ideas for good trades, which helps them be more efficient. Having a stable and systematic process, such as one based on a fixed risk-reward ratio, is an example of such a system. Good ideas for trades aren’t generated from the gut or market hype, but through analysis. One of the best methods, used by the pros, is to test your system by backtesting. Backtesting is the process of applying a strategy to historical data to see how successful it would have been.
Developing a strategy
Here are a few key things that effect markets to keep in mind:
- Economic announcements (scheduled news)
- Example: Government releasing GDP Reports/Unemployment Data
- Affects people’s perceptions of what is coming in the future
- Recurring, meaning that it has happened before and will happen again
- Example: Government releasing GDP Reports/Unemployment Data
- Natural disasters (un-scheduled news)
- Creates volatility because of uncertainty in certain areas
- Natural resources can be affected (e.g. oil, natural gas)
- Relevant current events (e.g. international relations news)
- Trade tariffs may effect the S&P 500
- Example: sanctions on Iran affecting oil prices
- Industry-specific news
- Example: approval of new drugs or new regulatory legislation
- Affects stocks of companies involved and their competitors
- Social media activity (e.g. Twitter)
- Example: Trump tweeting about national policy
- Time of day
- Lots of activity around opening/closing times
- Significant players tend to enter/close positions around this time
- Price actions – technical analysis
- The market moves up or down very quickly
- Effects must be observed by active traders
- When many traders looking about it – it starts to become a reality
Whatever strategy you chose to use, you should make sure it accounts for a few of the categories above. A strategy that accounts for several ensures that you will never be at a loss for trades to make. However, you don’t need a strategy that accounts for all the categories. It’s better to have a strategy that does a few things very well than everything poorly.
BetterTrader’s Trade Ideas
For new traders, developing ideas for trades can be daunting. BetterTrader.co can help by offering Trade Ideas, generated based on economic events and market situations. Each Trade Idea includes a recommendation for what to buy or sell, as well as a suggested entry price, stop loss, profit target, and trade duration. In addition, each Trade Idea has a historical success rate, which indicates the success rate in the past of similar Trade Ideas in similar situations.
Trade Ideas are generated by BetterTrader’s proprietary AI. Relevant situations which have potential to effect markets are identified, then similar past situations are analyzed. This recognizes market trends that have led to success in the past. However, some traders want to do that analysis on their own. Those traders can use the BackTester to view past situations similar to a relevant one, and look at each individually. This gives them access to a magnitude of historical data, allowing them to test their ideas empirically.
