Building Your First Strategy
If it's not written down, it's not a strategy. It's a hope.
Researched and written by Laurent Why "Strategy" Matters
Most traders don't have a strategy. They have an approach: a general sense of "buy when it looks like it's going up." That's not a strategy. The moment the market does something unexpected, a "feeling" falls apart. A written strategy with rules doesn't fall apart: you either followed it or you didn't.
Rules also give you something to measure and improve. If you don't have clear entry criteria, you can't tell if your entries are the problem or your exits are. With written rules, every trade is a data point.
The Five-Step Framework
Every trade you ever take can be mapped to these five steps. Before you click "buy" or "sell," all five must be answered:
- Define the trend: What does the higher timeframe say? (200 EMA position, price structure, chart pattern context) Only trade in the direction of the trend.
- Wait for a setup: What specific condition must be met for this particular entry? (RSI crossing 50 from below, bullish engulfing at support, MACD crossover above zero, whatever your rules say)
- Define entry, stop-loss, and take-profit BEFORE entering: Know exactly where you're wrong (SL) and where you're right (TP) before you're emotionally invested in the trade.
- Calculate position size: Risk 1-2% of account. Use ATR or your fixed pip stop to determine lot size. Use the Position Size Calculator.
- Execute and manage: Enter per your rules. After that, either wait for SL/TP to be hit, or trail your stop using pre-defined rules. Don't improvise in real time.
Example Written Strategy
Trend filter: Price must be above 200 EMA on the H4 chart for longs. Below for shorts.
Setup: Price pulls back to the 50 EMA on H4 while RSI is between 40-50 (cooling but not oversold).
Entry: Bullish engulfing candle closes on H4 chart after touching 50 EMA.
Stop-loss: 1.5× H4 ATR below the entry candle low.
Take-profit: 2× the risk distance from entry (1:2 minimum risk-reward).
Position size: Risk exactly 1% of account on every trade.
Management: Move stop to breakeven after price moves 1× risk in my favor.
The Importance of Risk-Reward
Your strategy must have a minimum risk-reward ratio built in. If you risk 50 pips to make 50 pips (1:1), you need to be right more than 50% of the time just to break even (because of spreads and commissions). With a 1:2 ratio, you only need to be right 34% of the time to break even. Most good strategies target 1:2 or better.
Keep It Simple Enough to Follow Under Stress
Every rule you add creates one more opportunity to rationalize breaking it. A strategy with two clear rules is more likely to be followed consistently than one with ten nuanced conditions. The best strategies are simple enough to explain to another person in two minutes.
Key Takeaways
- • A strategy has specific, written rules for entry, stop-loss, take-profit, and position sizing.
- • The five-step template: define trend, wait for setup, define SL/TP, calculate size, execute.
- • Your strategy must have a positive expectancy to be profitable over time.
- • Simplicity is a feature. Complex strategies break down under emotional pressure.