How to Create Day Trading Strategy and Investing Strategy Ideas

I always encourage traders to develop their own trading strategy, whether it be a day trading strategy, swing trading strategy or investing strategy. There are two main reasons why I believe it is important for traders to develop their own trading strategy.

First of all, developing a trading strategy requires the trader to strive for a greater knowledge of the market and its price movements.

Secondly, when a trader develops their own trading strategy they are tuned into how the strategy actually works, what will cause it not to work and they will be in a much better place to make adjustments when needed.

How to Create a Trading Strategy

This is the time consuming part, but can also be fun. For me the real fun is testing out what I come up with, but before we can test anything we need an idea. How I generate trading strategy ideas is by watching charts, both past and in real-time. No matter what time frame I am watching, I look for moves where there was/is good money to be made. Once I have found a move that looks profitable I start to ask myself questions about it:

What precipitated the move?

(*) Was it a chart pattern, a candlestick pattern, indicator level, trend line break, a news event or certain time of day? These are samples of the questions you want to attempt to answer.
(*) Did the move start before a certain session (NY, London, Tokyo, etc), near the close, mid-day? Is there any relation to an opening or closing market?
(*) Where could I enter?
(*) How could I have gotten into the trade?
(*) Looking at my answers from above, how could I take advantage of this opportunity in real-time?
(*) Does the pattern I am watching give an entry signal such as a break out of resistance/support/pattern, a certain amount of movement before it takes off, a certain time of day, a short term reversal pattern?
(*) Are there any indicators that aid in this?
(*) Does the stock/forex pair generally stay within an average range for the day?
(*) Look for anything that would allow you to enter into the big move as it is happening.

Where could I exit?

This is very important - more important than the entry!

(*) What signals are present once the move has topped or bottomed and started to reverse?
(*) If my entry criteria disappears, can I use that as an exit?
(*) How can you stay in the move to capture the bulk of it, but also not give up too much profit when it reverses?
(*) Are there any indicators that aid in this?
(*) Would a trailing stop have allowed me to capture a large profit? If so, what should my trailing stop be?
(*) Would a fixed number profit target work (ie. if stop is $100, then profit target is $350)
(*) Does the currency pair generally stay within a certain percentage move for the day? (all pairs and stocks have average movements per day)

Money management - is the trade worth taking?

(*) From the entry point you identify, what is your risk in dollars based on your position size?
(*) What is your potential profit?
(*) Based on the above two answers, was the trade worth taking? If the risk is too large, or you are getting into moves too late you will need to adjust. If you are giving up too much profit when prices reverse, you will also need to adjust.

Other things to consider

(*) Does this signal you identify for entry occur at other times, and not just before large moves? I.e are you going to get a lot of false signals?
(*) Can you cut down on false signals by only trading a certain time of day, adding indicators, or pattern filters?

In short, you want to analyze your charts and look for opportunities. Then examine those opportunities and construct how you turn those opportunities into real money...without exposing yourself to excessive risk.

Once you have gone through several opportunities in this fashion you will be well on your way to creating profitable trading strategy ideas. When you come with a trading strategy ideas that seems valid, see if the trading strategy would have worked on past movements. Then see if it works on upcoming movements. If it worked in the past is working in real-time then try using it with real have created a trading strategy.