The Need for a Core Strategy

Posted November 3rd, 2011 by Sam Evans in Education

The Need for a Core Strategy

With the Forex markets in a constant state of uncertainty, and with overall market volatility on the rise, there has never been more of a need for traders across the board to make sure that they know exactly why they are taking action in the market at any given time and maintain discipline at all times. In the reality of the financial markets, this can only ever be achieved if a trader is disciplined enough to implement a core strategy of their own. Now while this may seem obvious, it is far easier said than done when emotions and real money are brought to the table. It is also often the case that most new traders are totally unaware of how to even develop and design a core strategy of their own. For me, it all comes down to a very simple set of guidelines, which we will walk through now:

IDENTIFICATION

An effective core strategy needs to be easily recognizable on a price chart, and more importantly, it also has to be objective in nature. A trader should ideally never be looking for a trade opportunity, but rather the trade opportunity should present itself to the trader without thought. If we look too hard for a chance to enter the market, then there is the possible danger that we could be taking a trade for trading's sake, as opposed to there being a quality trade on offer in the market. Patience is definitely required when scanning the market for entries and we must also understand that if there is not a setup which meets our core strategy parameters, then we should really just sit back and do nothing. A quality core strategy is comprised of the identification of a low risk, high potential reward trade, with good probability for success on its side.

ASSESSMENT

Once the trader has objectively analyzed and recognized their trading setup or opportunity, it is now time to assess all aspects of the trade in an effort quantify the probability of it working. In the ongoing Extended Learning Track (XLT) program, we typically call this phase the "Odds Enhancers." Knowing such things as where your trade is placed in the bigger picture trend, how large the potential reward is and what other technical factors the opportunity has on its side, are all vital ingredients in the perfect trading recipe. Many times in the market it is easy to identify a trade setup, which at first glance looks ideal, however, when a further assessment is carried out, we may discover that the potential for a trade is not quite as great as we first thought. Always remember that a major part of any core strategy understands when one trade opportunity has more or less going for it than another.

EXECUTION

Finally, we have execution, the final component in the development of a solid and consistent core strategy. Without it, there will never be a trade at all! After having identified our setup, then assessing its chances for success, we then must know exactly what will be the criteria for pulling the trigger and entering the position. Will you look for confirmation when the price reaches your entry level, or will you place an order ahead of time and be right at the front of the queue to buy or sell? Both ways have their own advantages and disadvantages, but it is ultimately down to the individual trader's taste to determine what is more comfortable for him or her. Once we enter into the trade, how will it be managed and more importantly, when will we exit when or if we are wrong? Often, the most challenges in trading are found in this area or execution, stop placement and trade management, yet I always stress to my students that while there may be challenges in execution, there are also great advantages on the flip side. Without proper attention to the details on the execution phase, it is unlikely that any consistency in trading will ever be achieved.

Take care and be well, Sam Evans