How to create your own Trading Strategy (7 simple steps)!
Hey, everybody out there, this is Dirk from the "PrimeXBT Trading Academy", and today I have something very, very special planned for you. I want to show you in seven simple steps how you can create your own trading system and adapt it to your personal time, budget and risk appetite. So stay tuned. It's going to be an exciting show! See you in 20 seconds. Hey, good to see you again.
Welcome to today's episode of "That Crypto Show!". I want to show you how you can create your own trading strategy in seven simple steps. Step number one is that we need to get our technical set up ready and that we need to open a brokerage account.
We are going to create a simple strategy today that it's based on technical analysis. So of course, we need some software that is able to display charts, indicators and so on and so forth. And you can do this very easy wit one mouse click actually by opening a primexbt.com trading account.
You'll find a link to open an account down here in the description of the video and in the comments. So maybe just pause the video for a while to open that account quickly. It's free, of course, and then you come back so you can work with me while watching the video and recreate everything I'm doing here also for yourself. Ready? Great! In terms of technical setups and by technical setup, I mean also hardware, a lot of things are possible.
Basically, you just need a laptop or a smartphone, or maybe you are even, you know, aiming there for very professional setups where you have like four or five or six monitors. But for a start to just create a strategy and tested it and trade it a little bit, you really just need a smartphone or laptop or a tablet. I highly recommend for creating a strategy to use a solution like a laptop because it makes things a little bit easier. Later on when you have defined and tested your strategy you can, of course, also trade it on the go with your smartphone and the "PrimeXBT" iOS app, for example. OK, we have now created our account and we have actually added some funds to our account. But this, of course, is optional for the beginning.
We now want to go here to "analysis". So this is the the charting functionality we are going to work with today. I'm going to base everything I'm doing today in terms of development on the bitcoin against U.S. dollar trading pair. But of course, you can choose the trading pair of your choice.
So if you are more into trading, for example, Cardano or more into Dogecoin, everything I'm doing here, you can also apply to the trading pair of your choice. However, it's time now to make a very important choice, and for this, you need to determine your personal time budget. What do I mean by this? If you are somebody that is working a job, for example, nine to five or maybe even longer ou cannot be in front of your laptop. You cannot be on your smartphone for too long.
Maybe then you need to create a strategy based on daily charts so you would start here, for example, with the timeframe of one day. If you are somebody with a lot of time on your hands, you have several hours, or maybe even the whole day that you can spend in front of your monitor or in front of your smartphone then you could also go to lower timeframes to try to find a trading strategy there. For example, five minutes, 15 minutes and so on and so forth. Although I highly recommend to start with the higher timeframes as 4 hours, 2 hours or one hour. Once you are successful there, then you work your way down to the lower timeframes. Step number three, contrarian or trend follower? Now this sounds kind of mysterious, right? But when it comes to trading, there are generally speaking 2 schools of trading you can follow for finding your trade entries.
First one is contrarian. Contrarian means that you want to sell when everybody else is buying and you want to buy, when everybody else is selling. This is more simple than it actually sounds, because it means you are trying to find those tops and bottoms on a market where the market might reverse into a new direction again.
And this is called contrarian because at a time where everybody else or most market participants are doing one thing, for example, buying you want to do the other thing, you want to sell and try to catch the tops and bottoms of a market. If you are a trend follower, you are going to try to do exactly the opposite of a contrarian. You are going to try to find setups where you can trade with the trend.
So, for example, if you identify that the market here is an up move or here or here and a in a down move, you will try to find entries into the position of the general market direction. Now which one is better? There's no real simple answer to that honestly speaking. In general, most beginner traders aim on being a contrarian trader because it kind of feels better when the market is high that you try to time the top while the market goes down again. However, a trend following strategy usually is a strategy that is more relaxed because you are following the general herd of traders, which for 70 percent of the time, usually is right during a movement.
However, you have to determine that for yourself. Today, we are going to focus on finding a contrarian strategy, but everything I show you here, of course, you can apply to a trend following strategy. Set up your charts. So we need to create a chart of our chosen asset, in this case bitcoin vs U.S. dollar and present it in a way to our own eye that we find suitable. And the first choice we really have to make here is what type of chart do we want to work with? So the basic three charts out there that most people work with are line charts where every dot here on the line chart represents, in this case, a closing price of bitcoin.
It is connected to the next one to form a line. The advantage of this one is that it's very easy to the eye, gives you a very good indication in what direction the market is heading at the moment. If we are in a downtrend at the moment or in a uptrend on in a sideways trend. Next one is a bar chart. Bar charts were used back in the days, you rarely find them nowadays in trading strategies because another form of charting called, for example, candle sticks is just like the bar charts but generally more appealing to the eye. Now, candlesticks already have more information on each day than a simple line chart can do.
Remember on a line chart for each closing price of a day you just get a dot, which is connected to the next closing price of a day, then resulting in a line. On a candlestick chart you have more information. You always can see where the market opened, where the market closed, where the high was and where the low was. So if we take this candle, for example, and we see that the candle is red, that gives us the information that the market closed under the opening price that was up here. Closing price was down here.
The low of the market was this wick on the candle down here, the high was the wick up here. We have four times more information already than we would have from any line chart. Now, of course, there are other possibilities of charting as well.
You will find "Heikin Ashin" charts here. You will find "areas charts", "baseline charts", "hollow candles" and so on and so forth. I know a lot of people also like to trade with "Renko charts" but my suggestion to you, if you are doing this for the first time, is to try to keep the development of a trading strategy always in the beginning as simple as possible. You can always get more complicated later on or try your determined strategy then on different types of charts.
Now that we've set up our charts and made the choice which type of chart we want to use, the next thing we need to do is to add something that helps us to determine in what condition the market is at the moment. If you see that the market is down here at the moment, what does it say about the market? Is it going up from here again? It's the possibility that if the trend continues downwards given here? Is that more likely to happen? One thing we can do so in terms of technical analysis is to add indicators. If you if you click on indicators and you scroll through this, you will see already there pre-built and a lot of different indicators that you can use. Once you've become a little bit accustomed with chartig, I really highly recommend that you try out for yourself which ones work for you, which ones give you information that you need in order to process what the price at the moment is doing and where it's probably going.
For now, I'll show you some simple ones that I personally like to work with. And one of them is the Bollinger Bands. Bollinger Bands were invented to measure a kind of standard deviation of the market. Before that, let me make this a little bit more appealing to the eye here so we can see more. I'm just going to change the colors here a little bit.
I think the preset is a little bit too dark here, but with white, maybe. Yup. So what we can see here is that the price always oscillates between the upper Bollinger Band and the lower Bollinger Band. And then you kind of have a line here in the middle, which is a basic moving average. The theory of the Bollinger Bands says whenever the Bollinger Bands touches the upper line, you should go short and maybe take a profit at the yellow line here.
When it touches the lower line, you should go long. As you can see that sometimes works quite well. So if we, for example, look at areas like this here we can definitely see that it tends to work well. Or down here a pretty good indication of the upward move.
However, what you can also see is that you have like areas like this, all, for example, like this even worse, where according to Bollinger Band theory, you should have bought the market. But the market went against you. You can always face this, of course, by setting a stop loss underneath here that makes sure you get out of the market.
However, why not add more information to a chart in order to help to maybe filter those signals? For that we are going to chose also a very common indicator called the Relative Strength Index, which is, by the way, one of the most popular indicators out there. And it is for a reason! This Relative Strengh Index or short RSI, is a tool that helps you to measure the momentum of the market and the magnitude of price swings. It oscillates between zero and 100. When the RSI is below below 30 it means that the market is sort of oversold and probably a correction into the other direction should be coming. On the opposite side if the RSI is above 70, by default, it means that the market is overbought and a correction to the downside should be coming.
What you can see here also is that sometimes it tends to work very well. If we have a look, for example, at a sector like this , the RSI dove below 30, so you pretty much were able to to time the bottom here, although to the upside, there was not so much potential then. If we look for example, here RSI was over over 70.
Yeah, pretty nice trade. The thing is, if you look at ttimes like this where it headed over 70: In this case the trend was just becoming very, very strong. So again, as a sole tool for trading, this is not going to help us very much.
But what would happen if maybe we combine both of these indicators to give us a more broader picture about the market in terms of standard deviation by the Bollinger Bands and momentum by the RSI? We could do so by, for example, formulating a theory that says that we want to go short in bitcoin every time we have an RSI of 70 and above, and the price is touching the upper Bollinger Bands. This leads us already to step number six of our list of seven things we have to do to create a trading strategy. All right.
So now we think we found something that tells us better than just the plain chart in what situation the market is at the moment. Now we have to go the next step. The next step is that we have to define, on what condition do we enter and exit the market? As I said already, it seems like there's something going on when we see that the RSI is above 70 or below 30 and the market touches the upper bands of the Bollinger Bands. Let's really put this to a test to kind of have a look if maybe we are onto something nice.
At the moment, of course, it is just working theory. We'll start just here: The last time we saw that the RSI was above 70 was in this area. So we saw here, here, here, and we also saw there that the market price touched the Bollinger Bands. It seems like this is pretty solid. It seems like we got a little bit of a local top here. Of course, if you entered the market here it would have been not as great as entering the market here.
If you waited a little bit longer, you could have caught really the top there, but overall, not too bad. The next time we were over 70 was here. OK, the market didn't touch the upper band. Or here: also didn't touch the upper band. We also saw the price here touch the upper band and again, if we had like four days following of downward moves.
So yeah, it seems like we are on to something there. We had this candle here, OK? We could have caught a little bit of downward move, but it was a very strong uptrend nonetheless already. Pretty amazing that we could timed a local top with this and so on and so forth. But what we also can see is that sometimes, for example, if we see here this candle touching the upper Bollinger Bands here and by our definition of our strategy now, we should have shorted the market there we would have fallen into a trap because the market continued upwards. Yeah, after that, it slammed down. So we still would have gotten out of a trade with a solid profit.
So as you can see, the first indication of a simple strategy like this seems to be working quite well. Now we we can add more indicators to this or we can play a little bit with the settings here. Nobody of course, says that we need to take, for example, an RSI that has the length of 14. We can make this one shorter. So let's go here just with a 7.
You see, the frequency of signals is becoming higher in this case now. So in this example, we would have gotten a great signal today at night, at least midnight where I live. We would have timed the market pretty awesome here to buy the market around the area of 46 700. So what do I mean by this? You need to play a little bit here with a setting. You need to find a setting which produces an amount of signals that is that you feel comfortable with.
Again, here traders can deviate. One is comfortable with just having one signal per day or per week or even per month. But this is a super signal with a high level of confidence.
Other people want like 10, 20, 100 or 200 signals per day. That is a choice you have to make for yourself. So now that we've roughly defined our strategy, it's time to put our strategy to the test. We actually have a number of options how we can do that. First option would be if you are, for example, proficient with Python and its libraries you could code your trading robot to back test.
Back test based on historical data. Some chart modules out there also offer something like this, but it usually ends up with the necessity of you needing to code. Now, we are not yet at a stage really where probably we would trade our trading system already with real money because we need to test it still. I think a fun way to do so is by participating in the "PrimeXBT Trading Contests". There's always a weekly one.
There's a longer term one and so on and so forth. You will get a demo trading account with 30000 U.S. dollar tokens in it that you can use for trading and for testing your strategy.
You can participate in a contest, you can test your strategy in a real market environment without needing to risk your own money. If your strategy performs well in comparison to other traders, you also have always the chance of winning up to 50000 U.S. dollar tokens. I think this is a great and fun way to kind of test your work in a real market environment. If everything works out, you also have the chance of winning your starting money.
All you need to do again is sign up for a free "PrimeXBT" trading account. You will find the links in the description of this video and in the comments and take it from here. Now a grain of salt here, guys. Of course what I've shown you today in terms of trading strategy: Please don't copy it one to one.
You know, it was something I improvised. I didn't come up with this trading strategy beforehand. What I wanted to show you here with this video today is how easy it is to create a strategy and adapt the strategy to your personal risk reward appetite and time budget and then test for strategy under real market environments without the necessity to really risk your herd earned money in the beginning. I hope you liked this video. If so, why not give us a like and subscribe to the channel?! I'm going to see you again on the next episode of "That Crypto Show!" Take care.
Bye bye.
2021-12-12 06:08
