Trading Strategy

A trading strategy is the formal codification of a trader's edge - the specific conditions under which the historical evidence suggests that a trade has a positive expectancy. Without a defined strategy, traders make ad-hoc decisions that cannot be reviewed, improved, or distinguished from random speculation.

Strategies are typically characterised by their time horizon. Scalping strategies target 5–15 pip moves on 1-minute or 5-minute charts and rely on extremely tight spreads and fast execution. Day trading strategies target intraday ranges (50–150 pips on majors) and close all positions before the daily session ends. Swing trading strategies hold positions for 2–10 days, targeting larger technical moves while tolerating overnight swap costs. Position trading strategies hold for weeks to months, driven by fundamental themes such as interest rate divergence.

All robust strategies share a common structure. The signal generator defines the trigger conditions - for example, a moving average crossover combined with an RSI below 40 at a defined support level. The entry rule specifies exactly how to enter (market order on close of signal candle, or limit order at the signal level). The risk rule defines the stop-loss placement and position size. The exit rule defines the profit target (fixed pip target, trailing stop, or indicator-based exit). The universe of markets and time frames to which the rules apply rounds out the complete specification.

A strategy's historical performance metrics - expectancy, maximum drawdown, Sharpe ratio, and average holding period - guide the decision of whether to trade it live and at what position size. Strategies should be reviewed periodically and retired or adapted when their core edge appears to have degraded in forward performance.