Developing Your Own Trading Strategy (For South African Traders)

Being a trader, you must know the importance of having a strategy when trading the financial markets. trading randomly is not a sustainable approach, which hardly generates consistent and stable profits in the longer run. Trading is a business where capital and your efforts, both are invested.

When you make a trading strategy that means you will have the predefined set of rules and conditions to help you navigate even the worse situations while trading financial markets. A well-crafted trading strategy helps make traders make rational decisions and refrains them from being carried away in the dynamic markets.

Factors to Consider When Creating Your Own Trading Strategy

Here are some important considerations to keep in mind when developing your own trading strategy.

1. Pick a timeframe

One of the most important aspects of a trading strategy is defining the timeframe you will be using to trade. This determines your availability to trade throughout the day.

If you are someone with a busy schedule, you might consider a long-term strategy shown in Figure 1, or one that is mostly or fully automated.

Figure 1

If you do have a few hours a day, you have flexibility to choose the time of trading during the day. You can choose scalping strategy to do multiple trades a day.

Market Timing: Some markets are more active during specific hours (e.g., US markets open in the morning, which aligns with European afternoons).

Precisely, decide how long you can and are willing to be in front of the screen trading. From there, decide the best approach and what you prefer.

2. Decide on a product

The global markets include thousands of products spread around different asset classes. You can trade Stocks & Forex pairs, Commodities, Indices, and ETFs.

Some traders and investors prefer trading stocks as they are easy to track and understand while others may look to buy Indices and ETFs, shown in Figure 2, to gain broad market exposure. Volatile products work well for short-term trading; long-term traders focus less on daily price changes.

Figure 2

The selection of one or more suitable products for your strategy depends on the first factor which is how much time you can spend in front of the screen trading. For those who are looking at a long-term approach, short-term volatility will not make a difference to their trading.

On the other hand, a trader looking to day trade may be interested in a volatile asset such as crude oil. All markets tend to experience volatility, but some are on the higher side.

3. Identify the trend

The easiest way to approach the market and increase your odds of success is by determining the current direction of a trading product.

Moving Averages: For identifying short- or long-term trends.

MACD: For measuring momentum and direction.

Price Action: Looking for higher highs/ higher lows or lower highs/lower lows.

Figure 3

Whichever method you decide to use, make sure that defining the trend becomes part of your trading strategy as it will help improve the performance of your trades.

4. Determine your risk

Define how much risk you are willing to take. No matter how experienced an investor is, unexpected geopolitical tension could entirely change the direction of markets, so it is best to have a predefined risk management plan. After you figure out your trading style and time horizon, the next step would be determining your risk appetite.

If you believe you need bigger stop-losses because the instrument you are trading can be volatile, even when you are approaching the market from a long-term perspective, then it’s best not to take higher leverage yourself to protect your investment from potential losses.

For those who are trading short-term strategies, bigger positions may be acceptable if stop losses are in place and the risks are defined.

5. Entries

Let’s focus on when to enter the market for optimal risk to reward positioning.
While long-term trading does not necessarily need extra specific entries, putting some effort into timing could help lower risk and improve the potential reward. For example, if you are trading the daily charts and your strategy is highlighting a potential trade, a smarter approach would be to look at a lower timeframe chart such as 4 hours or 1 hour which could help you find a pullback that could provide a better risk to reward for the upcoming trade.

Some people may go as far as dropping further to 30 minutes or 15 minutes charts for an even more specific entry and while this could make a difference, it might be too nerve-wracking and unnecessary.

On the other hand, short-term traders would need to find optimal entries as it would make a major difference in whether a system is profitable or not. This does not necessarily mean looking at smaller timeframes as some traders are already looking at very fast charts, but it

could mean using a combination of factors to find the most optimal location for a trade, even if it means missing some in favor of only trading the best.

Applying your system to a timeframe that is smaller than your intended and original timeframe could provide you with a signal that may give a better and more optimal entry.

6. Exits

The final step of any trading system is your exit strategy. Some traders may choose a set number of points or percentages along with their risk tolerance without making any changes to it. This works given the systematic nature but if the market dynamics change this strategy could fail in the long term.

Some may use a trailing stop which moves according to the direction of the trade. The drawback is that the market may take out the position and move in the direction of trade. This approach is better when thew trend is upwards. Sometimes traders may take out some of their position at a predetermined level to earn some profits.

There is no right or wrong in how you want to exit trades. As a standard, short term traders have fixed targets to maintain a stable risk/reward ratio. On the other hand, long-term traders should be a little more flexible while exiting trades according to the volatility and trends of the underlying asset.

7. Write down your steps

It is a good approach to write ideas for your trading plan.

- You can jot down your daily approach to the market and all the steps needed to help you build your analysis.

- Add in the trade and its outcome (profitable or not)

This will help you understand the loopholes and how to avoid them in the upcoming trades.

Adapting Trading Strategies to the South African Market

When trading in South Africa, it's important to tailor your strategy to the local economic conditions such as inflation, interest rates and GDP can have a significant influence on asset prices. For example, rising interest rates may increase the value of South African Rand (ZAR) but could also have negative impact on equity markets due to higher borrowing costs for companies. Similarly, high unemployment and slow GDP growth could indicate economic challenges, affecting stock performance.

Traders should closely follow local financial news and understand how specific sectors, such as mining or banking, are performing. A locally adapted strategy will help you stay resilient in volatile conditions on South African market.