What is a strategy?

A recipe for trading

A strategy is a set of rules you write down before you trade. Think of a pancake recipe. If you follow it every time, you learn what it makes. If you throw in random stuff each morning, you never know which change made the pancakes good or burnt.

Trading without rules is the burnt-pancake method. People buy because they feel excited and sell because they feel scared. Rules take the feelings out of the kitchen.

Five questions every strategy answers

1. What and when? Which market, which timeframe, and what time of day.
2. Where do I get in? This is the entry.
3. Where do I get out if I'm wrong? This is the stop loss.
4. Where do I take my profit? This is the target.
5. How much? The size of the trade, so one loss never hurts much. Level 7 is all about this.

If an idea can't answer all five, it isn't a strategy yet. It's just a hunch.

A tiny example

Here is a made-up strategy, only to see the shape:

• Use the daily chart, and only trade when price is in an uptrend.
• Get in when price closes above yesterday's high.
• Put the stop loss just under the most recent low.
• Take profit when price has gone twice as far as the stop distance.
• Risk the same small amount on every trade.

Say the entry is $50 and the stop is $48. You risk $2 per share. Twice that is $4, so the target is $54. A win makes $4, a loss costs $2. You could lose more often than you win and still come out ahead.

Why there are so many strategies

Markets act in different ways. Sometimes they trend, sometimes they go sideways, sometimes news makes them jump. Each lesson in this level is a tool for one kind of market. A hammer is great for nails and useless for screws.

That also means no strategy works all the time, and one that worked for years can stop working.

An edge, and how you find out

A good strategy has an edge: a small advantage that only shows up over many trades, never on one. You can't feel an edge. You find it by testing.

First you backtest the rules on old charts (Level 8 shows how). Then you try them with pretend money or very tiny trades. Most beginners lose money, and skipping this step is one big reason why.

Remember

• A strategy is written rules: what, entry, stop, target and size.
• The rules come before the trade, not in the middle of it.
• No strategy works in every market or forever.
• Test any rule on past charts first. Level 8 covers backtesting.