How to Optimize A Trading Strategy

A trading strategy is the process used to enter and exit positions in a market based on quantified signals on when to buy and sell. A trading strategy will have trading plan to express a methodology that defines a traders return goals, risk tolerance, and time frame. A successful strategy should have an edge expressed in how trades are entered and managed to maximize gains and minimize losses.

A trading strategy has three primary processes, they are entries, exits, and position sizing.

An entry signal should get a trader into a trade when the odds of it being a winner are greatest. Whether a momentum signal is entered because the odds are a breakout will continue to go in the path of least resistance or a dip is bought because the odds are that at an extreme oversold level that price will bounce, both setups should have a higher probability of being a winner.

An exit has two primary purposes, one can be to keep a loss small and the other is to lock in profits while they are still there. A stop loss keeps losses small when the odds are that the trade is not going to work out and a trailing stop signals it is time to lock in a winner when a trend starts to bend.

Position size is set based on the maximum capital a trader wants to lose if their stop loss is triggered. A position should also not be so big that a trader has issues following their trading strategy because emotions or ego interfere due to the stress of trade size.

Studying historical charts can allow you to see the nature of trends, price ranges, and volatility on charts over time. Quantifying repeating patterns of price action can help you see how to use reactive technical analysis to structure entries and exits for big wins, small wins, or small losses to create profitability over the long term in your trading time frame.