This post is the first in a series on building a strategy entirely from scratch. We will discuss:
- Identifying patterns that will form the basis of the strategy
- Changing observations into a strategy
- Testing the strategy concept on historical data
- In what market conditions is my strategy likely to fail?
- Manual versus Automated Trading
- Reveal a complete strategy for trading forex or other trending markets

The average trader is an emotional wreck. Most people identify with the situation below:



Pfizer breaks through support at $20.75 with a strong downward close. The trader enters short on a potential breakout, only to watch the market creep to resistance at $21.10. Resistance holds, but he scares himself into thinking that he will get caught on the wrong side of a large up-move. He closes the trade for a loss.

The next day, the market gaps down $0.50 and turns profitable. Oops.

Trading is all about informed confidence. If you know that 40% of your trades will earn $2 for every $1 lost, who cares if you lose on three trades in a row? That’s $80 earned for every $60 lost over time.

A trader must firmly believe that the strategy will eventually return a profit. Otherwise, he might abandon winning trades too early like in the example above. Mistakes mean that he keeps all of the losers and gives away some of the winners. This should sound familiar to 90% of traders.

How do I build my confidence?

The first step is consistently trade for the same reason. Ask yourself the following questions:
- Do you have a strategy? Do you trade consistently for the same reason?
- Do you trade ranging or trending markets?
- What indicators do you study?
- What is your appetite for risk?

Newer traders usually feel a little intimidated at this point. This is normal. Respond to these questions on the forum for a little expert guidance.

My answer is:
I like to trade historically trending currencies using RSI. My stops are relatively close to the entry point because I prefer low risk trades. The probability of success is low, but the returns are high when the trade succeeds.

The next blog will discuss my observations of RSI behavior in trending markets. The series will cover how to transform these types of observations into a comprehensive trading plan. Understanding your strategy helps avoid mistakes like the one above, plus it teaches how to improve it for enhanced performance.