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3 Stages of a Profitable Trading Strategy

A consistently profitable strategy is actually developed in three stages. This post will show you if you are making the mistake of trading something that is not a proven Strategy.

Home / Forex Trading Strategies / 3 Stages of a Profitable Trading Strategy

By Hugh Kimura

Once in awhile, I get emails asking me to review a trading strategy (and tell the trader what's “wrong” with it).

Most of the time, the trader is trading an Idea, not a Strategy. If you aren't familiar with the difference, then this post will show you how to tell.

There are actually two stages that come before you have a proven trading Strategy. You need to go through all three stages, in order to have a trading method that works and that you are confident in.

If you choose to ignore these steps, you can end up spinning your wheels for years. I would like to help you avoid that fate.

Here's how…

Stage 1: Idea

Profitable trading idea

An Idea is a very general concept. It could be something like:

SEE ALSO: The Top 7 Manual Backtesting Software Solutions Compared

  • “I notice that the Asian Drift usually goes in the opposite direction of the actual trend for the day.”
  • “Looking for a strong trend on the daily chart, then waiting for a pullback on the one hour chart looks like it would be profitable.”
  • “Price tends to reverse at daily pivot points.”

However, some traders mistake these generalizations for a trading Strategy and start trading it in their live account.

That obviously never ends well.

Don't get me wrong, the overall concept behind a lot of trading Ideas are sound. But if you don't test and apply them in a uniformed manner, you have zero chance of becoming consistently profitable.

These simple Ideas could be traded in so many ways.

That's why you need a Sketch…

Stage 2: Sketch

sketching out a profitable trading strategy

Here's where things get interesting.

SEE ALSO: The Best Trading Psychology Books of All-Time

An Idea is a general hypothesis on how to profitably enter the market. But a sketch takes it one step further and defines specific trade entry, management, exit parameters and more.

Also consider:

  • Will you scale in to the trade or only have one entry?
  • Will you scale out of the trade?
  • Will you add to a winning trade (pyramid)?
  • Are there certain days that you should not be trading?
  • How do you know if you should bail early?
  • And more!

To create a complete sketch from any trading idea, download this free worksheet. It will give you all the parameters you need to create your own Sketch.

But you still are not ready to trade live yet…

Stage 3: Strategy

Once the Sketch has been proven in backtesting and forward testing, then it is time to take it into live trading, with real money. If the Sketch holds up under live conditions, only then is it considered a proven Strategy.

Anything else is just an Idea, opinion, rumor or untested Sketch.

Final Thoughts on Developing a Profitable Trading Strategy

So if you are losing consistently, ask yourself if you really have a Strategy, or if you are actually trading an Idea or a Sketch. 

There is a huge difference between the three of them.

Once you understand where you are in the process, it's easy to move forward to the next step.

But what if your Sketch doesn't test well? Keep testing different things or find a course that can give you proven strategies.

Just be sure that they match your trading personality.

 

Related Articles

RSI Trading Strategies: 3 Complete Trading Plans
How to Create a Precise Forex Trading Plan: Step-By-Step Guide
How to Chart Forex Correlation

Category: Forex Trading Strategies Tag: Trading Strategy Development

About Hugh Kimura

Hi, I'm Hugh. I'm an independent trader, educator and researcher. I help traders develop their trading psychology and trading strategies. Learn more about me here.

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First posted: May 15, 2018
Last updated: May 16, 2020

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CFTC Rules 4.41 - Hypothetical or Simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, because the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs, in general, are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown. Testimonials appearing may not be representative of other clients or customers and is not a guarantee of future performance or success.

 

 

 

 

 

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