How can I improve my trading strategy?
If you want to be a successful trader, you have to be willing to make it over the learning curve. That’s true whether you’re trading in the forex market, the stock market, and any other financial market.
Even professional traders will tell you there’s always something new that has the potential to improve your trading performance. Most articles teaching about trading are geared toward a beginner who really doesn’t have any trading performance at all. When you’re new to trading, improvements aren’t that difficult to make.
But what if you’ve been trading for a little while, tweaked your strategy to profitability, and want to improve upon what you’re already doing?
Tips to Improve Your Trading Strategy
There’s always something you can do to improve your market performance, whether you’re a beginner who’s just getting your feet wet or an expert with a history of profitable trading. Small tweaks can make big differences, new tools pop up every day, and a willingness to keep learning just about always produces better outcomes.
Here are our tips to improve your trading strategy and performance.
1. Keep a Trading Journal
Trading journals track every aspect of trades, from the trade setup to its position size, profit target, stop-loss, and exit strategy. Some traders also include screenshots of the chart patterns they relied on when making the trades.
But logging your trades in a trading journal isn’t enough. It’s important to review the journal and look for opportunities to improve your overall trading plan.
Review your risk management strategy to determine if moving your stop-loss in one direction or another improves your overall outcome. Look into your entries and position sizes to determine if small changes in these parts of your strategy result in higher profitability. And look for any other patterns in your trading style that can be changed to improve your overall trading plan.
The best part is that you don’t have to do this on your own. There are several trading journal providers that log your trades automatically and offer technologies for finding opportunities to improve your strategy.
2. Backtest Your Strategy
Backtesting tools tell you how your strategy would have performed in real-life market conditions in the past. You input the details of your strategy into the tool, including the criteria assets must meet before you create a long or short position, stop-losses and profit targets, position size, test period, and starting capital. The tool tests the strategy using historical market data to tell you how it would have performed in the real world.
Take advantage of a good backtesting tool to see how you would have performed. Historic movement isn’t always indicative of future results, but it is a great gauge to see whether your strategy is on the right track. Do the following while you backtest your strategy:
- Adjust Your Stop-Losses and Price Targets. Run several backtests with different stop-losses and price targets to find the perfect mix.
- Adjust Your Position Size and Trade Frequency. You may be surprised how much your position size and trade frequency plays into your profitability.
- Adjust Long and Short Criteria. Use different rules to determine what criteria for entering a trade produces the most profits in the end.
3. Try Demo Trading
Several brokers and trading platforms offer access to demo accounts — also known as trading simulators — in an attempt to show potential traders and investors how effective their tools are. Beginners can use these accounts to test their strategies before risking real money in the market.
However, this tool is beneficial to beginners and experts alike.
As you review your trading journal and think of ways your strategy can change and improve, use a demo trading account to test your theories. If the market tells you they’ll be profitable in the simulated demo trading environment, adopt them in your real-world strategy.
4. Make Use of Technology
Technology has changed the way we do just about everything. You can bank from your smartphone, order food online, and lock your door with a voice command. If you’re like most people, you take advantage of the latest technology in multiple areas of your life.
Why not take advantage of the latest trading technology?
A computer algorithm can measure trends in volatility, find breakouts, and define patterns in charts better than a human ever could. Sure, the old-school ways of measuring price action and exploiting it for profits still work today, but there are far more efficient ways to trade.
Take advantage of state-of-the-art platforms and trading systems like MetaTrader 4 and thinkorswim by TD Ameritrade to bring your trading performance to the next level. You can dive deeper into the benefits of technology with algorithmic trading, a hands-off way to make the most of the markets.
No matter how you choose to do it, you can improve your trading outcomes by taking advantage of the best in trading technology.
5. Add More Trading Instruments and Markets
If you’ve been trading instruments like stocks, consider venturing into contracts for difference (CFDs), options, or futures. Each trading instrument moves differently, and adding new instruments to the fray has the potential to improve your overall outcome.
Different assets act differently in terms of speed of price movements, liquidity, number of market participants, and more.
For example, the forex market is the most liquid in the world and has more participants than any other market, so price movements happen differently in forex than they do in the stock market.
Stocks in different markets move differently as well. Many investors choose to invest in emerging markets because they tend to produce fast-paced gains, although there are added risks to consider.
Whether you look into different markets or asset classes, consider mixing things up to find more profitable opportunities.
6. Try Different Time Frames
There’s no question you’ve heard the old adage “time is money.” It’s no more true anywhere in the world than in financial markets. If you miss a trade by minutes, you might as well have missed it by years.
The time frames you use have a bearing on your overall outcome, on your charts as you assess the market, and in your trades as you act on what you find. Make small adjustments to your time frame using backtesters and demo accounts to see how the adjustments play out in a real-world environment.
7. Consider Changing Your Strategy Completely
You might be a beginner investor who chose the swing trading strategy due to its simplicity or an expert investor who fell in love with the fast-paced action involved in the scalping strategy. Either way, an affinity for one strategy may result in an unwillingness to try others.
If you’re a swing trader, there’s no shame in trying your hand at short-term trading using fast-paced day trading strategies and vice versa. You may even find that stepping out of your comfort zone and trying other strategies greatly improves your overall profitability.
8. Know When to Walk Away
You’ve likely heard the idea that financial markets are a battle between fear and greed. As human beings, we tend to bring emotion into everything we do. Successful traders know these emotions can devastate your returns.
When a trade seems like it’s going wrong, fear can take over and urge you to make an early exit. More often than not, you’ll find that your outcomes are better if you ignore the urge to exit and stick to your strategy.
That can be easier said than done. In some cases, you’ll find it harder to kick emotions out of the trading room than it is to scale Mount Everest.
What do you do?
When emotions take over and you can’t seem to reliably stick to your trading strategy, it’s time to walk away.
In some cases, getting up from the trading desk and taking a half-hour walk around your neighborhood may be all you need to reset your mind and focus on your trading. In other cases, it may be best to step away for the day, relax, and come back to trade another day.
9. Stay On Top of the News
The financial markets move based on supply and demand. The news tends to push supply and demand in one direction or another. Keep your finger on the pulse with financial media to stay abreast of market conditions that could have an impact on your trading day.
Some of the top news websites for traders include:
- CNBC. CNBC is one of the highest-rated financial news networks in the world. The outlet discusses everything from the state of the overall economy and market to specific stocks.
- Seeking Alpha. Seeking Alpha is a user-generated content publication that features analysis of countless stocks from thousands of contributors.
- Bloomberg. Bloomberg is another mainstream news source that discusses wide-ranging market topics from the economy to specific stocks and other investments.
- Benzinga. Benzinga has in-house analysts and accepts articles from its users. The company is one of the most comprehensive real-time news sources for specific stocks online today.
10. Mix Fundamental Analysis Into Your Research
Traders often focus all their efforts on technical analysis. Unfortunately, history doesn’t always repeat itself. Sure technical analysis can lead to profits, but when all you’re doing is looking at patterns that historically tell you a specific type of price movement is coming, you’re going to miss things.
As mentioned above, the news moves the market. That’s the case whether you’re trading stocks in the stock market or forex trading. You become more informed when you pay attention to fundamental changes to specific assets and on a market-wide scale.
Fundamental data gives you a better understanding of why you see what you see when you find patterns on a chart. In some cases, the fundamentals confirm the technical indicators, telling you a big run is likely on the horizon. In other cases, the fundamentals contradict technical indicators, pointing to a potential false signal in the making.
11. Never Stop Learning
There’s always room for improvement no matter what trading skills you already have. Even expert traders are often amazed at the countless uses for moving averages and other tools most traders take advantage of. New trading strategies, concepts, and algorithms are being released every day.
One of the biggest mistakes traders make is becoming successful and falling under the perception that there’s no more room for improvement.
Even when you lock onto a trading strategy that works great, take the time to go through your trading journal and look for opportunities for improvement. Don’t brush off new trading strategies you come across. Backtest them and use them in demo accounts, comparing the results to the strategies you currently use.
Never become so happy with your own progress that you close the door to further growth.
There’s always room for improvement no matter what you’re doing or how good you are at it. Trading is no different.
There are several ways to improve your outcomes in the financial markets. Doing so often only takes a willingness to learn and make small adjustments to your trading plan as you go. It’s fun too. After all, who doesn’t like to try new things?