Trading Rules for a Successful Transition To Trade A New Market or Trade Set Up

When a trader is looking for more trades, it can feel like there are so many trades out there, but they are just out of reach. I have some specific rules that I follow when I’m adding a new trade set up or new stock to my watch list. Here is how to know where to begin to add a new trade set up to your existing trade choices:

It is either or…not both

I believe that experimenting with a new strategy and trying out a new market should be treated separately. In order to accurately understand whether it is worthwhile to try something new,  I test the strategy and market separately. New trade set ups should be tested in stocks that you are already familiar with and existing trade set ups can be tested in new stocks but not both new stocks and new trades at the same time. If you combine both a new strategy and a new market you might have trouble identifying which one of the new elements are the most helpful for you.

For example, when testing out a sell strangle trade setup, I needed to focus on finding the elements I was going to use for this trade set up. I had to test the variables to make sure I was optimizing the set up. After all, as any good trader would tell you, a trade is made when the right elements line up with the right strategy. It isn’t as easy as learning a strategy like ‘selling a straddle’ and then applying it in a market at any given point. The strategy will only be successful when the variables are present that will optimize the potential and increase the probability of success of the trade set up. Detail the rules you have for both a new strategy and a new market and test each separately. For example, when I tested the hypothesis that there is still premium in stocks after large moves that I can trade, I set out to find stocks after earnings and monitored the premium that decayed after the news event. When I’m testing the strategy out I need to find many examples of stocks that have had big moves, then look to see what they are doing 3-5 days after the move. While I’m in the research phase of testing a strategy I want to look for the evidence in stocks I am familiar with. 

Track One Strategy Over Another

We all know how to trade many strategies, but knowing how to trade many strategies wont necessarily mean that all of the strategies will make the same amount of money.  While I’m testing a new strategy, I will analyse a stock with at least two trading strategies at a time. Going back to my previous example of testing the idea of selling premium after news events like earnings, while I examined the stocks to see how they behaved, I also want to compare how much money I could make with the purchase of a call vs. selling premium. Of the 10 stocks that I will review to determine how price is behaving after a big move, I also want to compare strategies to see if the new set up will make more money than an existing strategy. This process is where I will compare two strategies and see which one will make me more money. As a trader you want to know which set up will make you more while working out most often.

Common Elements in Many Trading Instruments

Once you have data about how a common amount of stocks are behaving with the new trade set up, now I want to find common elements between those stocks. I will then begin to use the tools like how price behaved on a daily chart when it got close to any support and resistance. This final step of testing a new trade strategy will be where I want to start comparing stocks to find out what are the stocks that I can be most successful in with this strategy.

Testing a new trade set up can be exciting, many traders will jump to a new trade set up with the hopes of thinking that it will always make money. While a trader has the ability to trade many trade set ups, understanding when and why to place a trade at the right time will make a trader the most money. This three step process of testing a new trade set up can really help you understand when it is best to place different types of trades and in which stocks. From this kind of trading analysis, you will get to the route of trade set ups that can provide you the most potential in the markets.

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