Trading Strategy
A trading strategy is a defined method for deciding when to buy or sell, based on specific conditions that can be written down and tested.
A trading strategy turns ideas into rules: which market, which setup, where to enter, where to exit and how much to risk. Without one, every trade is a fresh guess, and results cannot be measured or improved. This entry explains the parts of a complete strategy, how to test it, and the main families of strategies traders use.
- Category
- Trading Strategies
- Reading time
- 4 min
- Also called
- Strategy, Trading method, Trading approach
- Updated
A trading strategy in plain words
A strategy is a recipe.1 It says what conditions must be true before you trade, exactly how you enter and exit, and how much you put at risk. See Trade Setup and Entry Trigger.
Because it is written down, a strategy can be tested on past data and judged on its results — something “gut feeling” cannot.2 See Backtesting.
How to build a strategy, step by step
Choose market and timeframe
What you trade and how long you hold. See Timeframe.
Define the setup
The conditions that must be present, such as an uptrend and a pullback. See Pullback.
Define the entry trigger
The exact event that opens the trade.
Define the exits
Stop-loss and profit target or trailing rule. See Stop Loss and Take Profit.
Define position size
Risk per trade as a fixed fraction of the account. See Risk per Trade.
Test, then trade small
Backtest, then trade live at small size and review results.
Worked examples
Example 1 — A simple trend strategy
RulesRules: trade only when price is above its 50-day average; buy a close above the prior day’s high after a pullback; stop below the pullback low; exit at 2R or on a close below the average.
| Setup | Uptrend + pullback |
| Trigger | Close above prior high |
| Exits | Stop, 2R target, trend exit |
Every part is specific enough to test. See Trend Following.
Example 2 — Measuring the result
PositiveOver 120 trades, the strategy wins 42%, with average win 2.1R and average loss 1R.
| Expectancy | 0.42 × 2.1 − 0.58 × 1 ≈ +0.30R per trade |
A positive expectancy after costs is the basic test of a strategy. See Expectancy.
Example 3 — Strategy hopping
No sampleA trader switches strategy after every three losses. After a year, no strategy has more than 15 trades.
| Evidence about any strategy | Almost none |
Losing streaks are normal. Judge a strategy on a meaningful sample, not a few trades.
Main strategy families
| Aspect | Idea | Works best when |
|---|---|---|
| Trend following | Ride sustained moves | Markets trend |
| Mean reversion | Fade stretched prices | Markets range. See Mean Reversion |
| Breakout | Enter as price leaves a range | Volatility expands. See Breakout |
| Momentum | Buy what is rising strongly | Leadership persists. See Momentum |
What a written strategy gives you
Consistency
The same decisions in the same situations.
Measurement
Results you can analyse in a journal. See Trading Journal.
Discipline
Fewer impulsive trades. See Trading Plan.
Improvement
Changing one rule at a time and seeing the effect.
Advantages and disadvantages
Advantages
- Makes trading repeatable and measurable.
- Can be tested before risking money.
- Reduces emotional decisions.
Disadvantages
- No strategy works in every market condition.
- Over-fitting to past data is easy.
- Rules still require discipline to follow.
- Edges can fade as markets change.
Going deeper
Read as far as you need. Each level builds on the one before it.
Strategy vs. plan
Beginner
A strategy defines trades; a trading plan also covers schedule, risk limits and review routines.
Edge
Intermediate
A strategy is worth trading only if it has an edge: a positive expectancy after costs that holds out of sample. See Trading Edge.
Robustness
Advanced
Good strategies keep working when parameters change slightly. If small tweaks destroy the results, the strategy is probably fitted to noise.
Common mistakes
Vague rules
If you cannot test it, it is not a rule.
Changing after a few losses
Collect enough trades first.
Ignoring costs
Include fees and slippage in every test.
Over-optimising
Perfect backtests rarely survive live trading.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A strategy is a written, testable set of trading rules.
- It covers setup, entry, exits and position size.
- Test it, then trade small before scaling up.
- Judge it on enough trades, after costs.
- Different strategies suit different market conditions.
Frequently asked questions
What is the best trading strategy?
How many trades do I need to judge a strategy?
Can I use more than one strategy?
Further learning
- Backtesting
Testing rules on past data.
- Trading Plan
Putting the strategy into a full plan.
- Expectancy
The number that tells you if it works.
- Trading Journal
Recording and reviewing live results.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CME Group. System-Based vs. Discretionary Trading (opens in a new tab) Checked .
- Charles Schwab. Backtesting (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Trading Strategies (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.