The Right Way To Evaluate A Day Trading Strategy?
A day trading strategy is not merely a set of rules. It is a idea of how the market works and the way traders react to cost movements. This idea is the idea of the trading rules. Without understanding the concept underlying the day trading strategy, you cannot decide if the rules makes sense. You are also unable to enhance investments on the rules and differentiate the higher trade setups from the worse.
Let's take the favored Holy Grail trading setup by Linda Raschke as an example. The concept behind this trading strategy is that in very sturdy developments, pullbacks are inclined to fail. The strategy then makes use of the Average Directional Index (ADX) indicator to search out robust trends. If the market is trending upwards, as soon as costs pull back to the moving common, we'll purchase, and hopefully the pattern will resume.
Indicators usually are not perfect. However, with the concept of this strategy in mind, regardless of what the ADX shows, you must look at the chart and ask your self if the chart shows a powerful trend. If it doesn't, regardless of the worth of the ADX, it's best to skip the trade.
After understanding the idea of the strategy and why it works, you need to classify the strategy. There are four types of primary trade setups: reversal, retracement, range-bound, and breakout. The win rate and reward-to-threat ratio depends upon the type of trade setup. The Holy Grail strategy is a retracement type strategy with high win rate and lower reward-to-risk ratio.
Earlier than accepting the strategy into your day trading arsenal, you must also be aware of the symptoms wanted and in case you have entry to these indicators. Some indicators is perhaps proprietary and it's possible you'll need to fork out a hefty sum to get them. Even when the indications are freely available, you also needs to check if your trading platform provides them. This is a crucial step as having the best indicator is crucial to employing any day trading strategy.
Final but not least, you also needs to consider if the strategy is mechanical or discretionary. If the strategy needs discretion, you will see in case your trading skills will let you train the discretion to obtain an edge in trading. If not, it's essential to practise using the strategy in demo or simulation mode till you might be assured to trade the strategy with discretion.