How to Develop a Profitable Trading Strategy for Prop Firms
The main goal of trading is to be profitable. In the prop trading space, you can’t do that without having a well-defined trading strategy. It is a step that can not be overlooked as it is the bedrock of a successful trading journey.
All traders have one or two strategies but the question is not about how many strategies you implore, it’s “how many of those strategies is a money maker”.
A good trading strategy is important as it guides one’s trading decisions.
Steps on How to Develop a Profitable Trading Strategy for Prop Firms
However, over ¾ of prop firm traders remain unprofitable while some even give up on the long run.
Here at Fundedbits, we prioritize your growth and this article discusses the steps on how to develop a profitable strategy for prop firm trading.
1. Understand the principles of a trading strategy: Before you can successfully create a trading strategy, you must understand what makes up a trading strategy. Whether you’re trading forex, crypto, synthetic indices, stock pairs, or futures pairs, your trading strategy must be built on market analysis (technical/fundamental), tested data, and well defined risk management plan.
Let’s break these three concepts into decipherable contents.
i. Market analysis: market analysis refers to the process of evaluating the market to make informed trading decisions. It encompasses technical and fundamental analysis. The fundamental aspect of market analysis focuses on the economic, political, and social factors that affect currency values. While technical analysis (TA) focuses on analyzing past market movements (data) and patterns to predict possible future price movement.
ii. Tested data: for an effective result, your strategy must be built on tested (either backtested or front tested) data. Choose a relevant historical data, test on multiple occasions, and analyze its performance metrics. It is believed that what happened in the past has the probability of recurring now and in the future.
iii. Risk management: every profitable strategy has a proper risk management plan incorporated in it. Your strategy should clearly provide an invalidation point as SL, and also a clear exit criteria for your TP.
2. Choose a Firm that Suits your Trading Style or Vice Versa: there are a variety of styles you can choose from as a trader – be it scalping, day trading, swing trading, or position trading. FundedBits embraces any trading style of your choice. Why limit our traders’ potential when we can help them achieve their goals? Not only do you get to trade on week days but also on weekends with considerable commissions on our crypto pairs.
3. Build an effective risk management plan: risk management is one of the most fundamental tools you need to succeed as a trader. Losses will come, but how you manage your risks is what determines the effects of the losing days on you.
Worry less, we have a guide on how you can develop an effective risk management plan that suits you.
Follow these steps:
i. Define your risk per trade
ii. Define your entry point and exit criteria
iii. Identify overall risks that align with your level of tolerance.
4. Journal and review your trades: a trading journal is an important tool for building a profitable trading strategy. It helps you identify your strengths, weaknesses, and how to improve.
Here are some basic details to be included in your trading journal:
i. Trade details (date and time, asset, lot size, entry price, exit price, and bias.
ii. Reason for entering the trade
iii. Strategy and risk to reward ratio
iv. Risk management (stop loss, take profit, and lot size)
v. Trade outcome – profit or loss
vi. Emotional and psychological state of mind before, during, and after the trade
vii. Lessons learned
Viii. Performance metrics
It is important to note that journaling alone doesn’t guarantee success. The importance of journaling is for revisitation and review. Just like a dedicated student revisits his notebook, review your journal and work on improving your strategy.
5. Develop a Solid Trading Plan: A trading plan is a comprehensive strategy that outlines the rules and guidelines a trader follows to make trading decisions. Your trading plan should consist of your trading goals, the pairs you trade, your trading strategy, trade frequency, entry and exit criteria for your trades, and risk per trade amongst all.
Wondering why a solid trading plan is important? It is important you make informed and calculated decisions as a trader. Your trading plan helps in achieving this. It is important to keep your trading plan simple and clear to avoid confusion.
Developing a profitable trading strategy requires a lot of effort and it might take time before the result becomes efficient. Hence, the need for consistency and persistence is paramount.
