Creating a trading strategy

As you step into trading, you should start by thinking about a trading strategy.

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Discover more about:

  • Factors to help determine your readiness to trade
  • The importance and benefits of having a trading strategy
  • Trading strategies that may work for you

Investing & trading—a key difference

Before you start trading, it's important to first understand a key difference between investing and trading, and that's time.

  • Investing is geared toward longer-term goals that may be years away, like saving for retirement. These goals can be achievable through ongoing investments, a proper investment mix, and compounding returns.
  • Trading typically focuses on a shorter-term strategy for goals that may be short or long-term—for example, frequent buying and selling of stocks to potentially outperform the market. To do this, and do it successfully, you must have the time to develop a strategy and the conviction to follow through on it.

Trading—how much to start with?

If you are interested in actively trading, you should also think strategically about how much of your portfolio you're comfortable trading. As an investor, you may not want to actively trade with all or most of your investment funds.

Instead, you may want to consider first building a diversified portfolio that aligns with your objectives, constraints, and risk tolerance. Then if you’re comfortable, having a plan will help you determine what percentage of your funds you believe is appropriate to use to trade.

Why is a trading strategy important?

Trading strategies are critical to being a competent trader whether you are trading stocks, ETFs, or other types of investments.

Having a strategy can help you to:

  • Define rules to bring discipline to your trading
  • Understand your risk
  • Align your goals over different time horizons

How do you create a trading strategy?

Successful traders know that their greatest enemy can be their own minds. Often, emotions and loss aversion can get in the way of making good trading decisions.

Here are some points you should consider when crafting your strategy:

  • Set realistic profit targets: Start small and track your performance
  • Set a risk level for your portfolio: Evaluate if it's worth the risk you're taking
  • Be informed: Know what you're trading and why you're trading it
  • Take notes: Track your progress and review at the end of each trading session

Key takeaways

  • Learn to be an investor first, and then set aside a portion of your account to trade.
  • A trading strategy can help you to bring discipline to your trading, understand your risk, and align goals over different time horizons.
  • When creating a strategy consider setting realistic profit targets, set a risk level, stay informed, and monitor your progress.
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