{"id":666328,"date":"2025-09-05T14:33:12","date_gmt":"2025-09-05T12:33:12","guid":{"rendered":"https:\/\/ftmo.com\/?p=666328"},"modified":"2025-09-05T16:12:56","modified_gmt":"2025-09-05T14:12:56","slug":"10-steps-to-building-a-trading-strategy","status":"publish","type":"post","link":"https:\/\/ftmo.com\/en\/10-steps-to-building-a-trading-strategy\/","title":{"rendered":"10 Steps to Building a Trading Strategy"},"content":{"rendered":"
Trading on financial markets requires more than just knowledge of charts and indicators<\/strong>. Without a clear system, even good ideas can turn into losses. That is why it is essential to have a well-thought-out plan that defines when to enter the market, when to exit, and how to manage risk. This ten-step process will help you create a strategy<\/strong> that is clear, testable, and sustainable in the long term.<\/em><\/p>\n Selecting an instrument is not only about volatility or spreads. It also helps to have a certain \u201ctrading affinity\u201d with it. This means knowledge, experience, and ideally, a genuine interest in that market.<\/p>\n If you live in the USA and follow the domestic economy, it will be easier for you to trade the S&P 500 or Nasdaq. You understand the local news, you know the companies in the index, and you can anticipate the impact of US macroeconomic data.<\/p>\n Similarly, if you follow international trade or monetary policy, the US dollar may be a natural choice. Combined with the euro, it forms the most liquid currency pair in the world. At the same time, it reacts to the very events you may already be monitoring.<\/p>\n When you trade a market you know, fewer reactions will surprise you. You can process news faster, understand the \u201ccharacter\u201d of price movements, and trade with greater confidence.<\/p>\n Choose indicators that measure different aspects of the market. Keep them simple, easy to read, and based on varied principles. Two indicators with the same mathematical basis rarely add value. For example, using two types of moving averages usually just repeats the same signal. A suitable combination might be:<\/p>\n \u2022 RSI (Relative Strength Index):<\/strong> Shows overbought and oversold zones and helps identify reversals.’ RSI<\/a> reacts to short-term price extremes, while MACD<\/a> monitors the broader trend. Together, they give you a balanced market perspective.<\/p>\n Default settings are tempting but often suboptimal. Each market has its own rhythm, volatility, and reaction to news. Indicators need to be fine-tuned so they fit your chosen instrument and timeframe.<\/p>\n Dedicate time to modifying parameters. For instance, adjust RSI sensitivity to reduce false signals in low volatility. Or change MACD settings to better capture medium-term trends.<\/p>\n Also, test indicators across several timeframes. A signal on H1 can behave completely differently on M15 or D1.<\/p>\n 1. Select several parameter variants for your indicators (e.g., RSI periods 14, 21, and 7; MACD with different EMA settings). The goal is to find settings that provide a balanced ratio between trade success rate, RRR (risk-reward ratio), and stability of results<\/strong> across different market conditions.<\/p>\n Clearly defined entry and exit rules are the key to discipline and consistency in trading. The less room you leave for improvisation and \u201cgut-feeling\u201d decisions, the easier it will be to stick to your strategy and avoid impulsive trades.<\/p>\n \u2022 RSI rising from the oversold zone (value increases from <30 upwards). \u2022 RSI falling from the overbought zone (value decreases from >70 downwards). \u2022 Primary exit:<\/strong> achievement of a predefined take profit (TP) according to RRR \u2013 for example, with a risk of -500 USD (SL), TP is +1,000 USD with RRR 2:1 (another option is RRR 3:1). When RSI and MACD confirm at the same moment, the probability is higher that the market is truly changing direction or trend strength. If signals diverge, it often indicates market uncertainty and increases the risk of a false entry.<\/p>\n Risk management is the cornerstone of successful trading; without it, even a profitable strategy can end in losses. Within the FTMO Challenge<\/strong>, the rules are clearly defined. For example, in a 100,000 Challenge:<\/p>\n \u2022 Maximum daily loss:<\/strong> 5% of the account \u2192 for a 100,000 USD account, that is 5,000 USD<\/strong>. This means that if you risk too much per trade, you could breach the rules after only a few losing positions.<\/p>\n The recommended standard is to risk 0.25\u20131% of the account per trade<\/strong>.<\/p>\n \u2022 Advantages of this approach: Ability to respect FTMO limits even during tougher periods.<\/p>\n Practical example for a 100,000 USD account:<\/strong><\/p>\n \u2022 Risk per trade:<\/strong> 0.5% of capital = 500 USD<\/strong>. This method allows you to calculate position size for any instrument. If SL is wider (e.g., 100 points), you must reduce position size so that risk remains 500 USD.<\/p>\n At 0.5% risk per trade \u2192 10 consecutive losses = 5% account loss \u2192 still within the rules. Even with a losing streak, you avoid immediate rule violation, which is key for success in the Challenge.<\/p>\n Backtesting shows how your strategy would have performed in the past. It is not a one-time task. You must test until the strategy works over a long period and in various conditions.<\/p>\n Why it matters: Recommended approach:<\/strong><\/p>\n 1. Define goals<\/strong> (e.g., max drawdown 10%, win rate \u226555%, RRR \u22651:2).<\/p>\n 2. Select at least 6 months of historical data<\/strong>, ideally 12\u201324 months.<\/p>\n 3. Test the strategy<\/strong> with current settings.<\/p>\n 4. If results fail, adjust parameters<\/strong> or timeframes<\/strong> and retest.<\/p>\n 5. Repeat until the strategy performs consistently<\/strong>.<\/p>\n Remember:<\/strong> Backtesting is not about creating a \u201cperfect past strategy\u201d. It\u2019s about proving resilience and stability in different markets.<\/p>\n Before risking real money (or challenge capital), you must test the strategy in live market conditions without financial risk<\/strong>. A free trial<\/a> is the ideal environment because it allows you to:<\/p>\n \u2022 Observe how the strategy reacts to current market activity. \u2022 Use the same capital size as your FTMO account (e.g., 100,000 USD). The aim is not only to verify profitability but also to confirm that you can mechanically adhere to your strategy without unnecessary deviations.<\/p>\n1. Choose your trading instrument<\/h2>\n
Why does this matter?<\/h3>\n
2. Select technical indicators<\/h2>\n
\n\u2022 MACD (Moving Average Convergence Divergence):<\/strong> Tracks trend direction and strength, highlighting momentum changes.<\/p>\n3. Set the parameters of your indicators<\/h2>\n
How can you optimise your indicators?<\/h3>\n
\n2. Test them across different timeframes (M15, H1, D1).
\n3. Run each combination through backtesting<\/a> \u2013 see step 6.<\/p>\n<\/a><\/p>\n
4. Define entry and exit rules<\/h2>\n
Entry rules (long positions):<\/h3>\n
\n\u2022 MACD main line crossing the signal line upwards.
\n\u2022 Both signals should occur as close together as possible \u2013 ideally on the same candle or within 1\u20132 candles, confirming signal strength.<\/p>\nEntry rules (short positions):<\/h3>\n
\n\u2022 MACD main line crossing the signal line downwards.
\n\u2022 As with long positions, signals should be synchronised; otherwise, the risk of a false entry is higher.<\/p>\nExit rules:<\/h3>\n
\n\u2022 Alternative exit:<\/strong> appearance of an opposite MACD signal \u2013 the line crosses the signal line in the opposite direction to the original entry.
\n\u2022 Safety rule:<\/strong> if the signal is lost or weakens before TP is reached, the position may be closed manually, but only in line with the plan (e.g., in the event of a clear market reversal).<\/p>\nWhy synchronise signals?<\/h3>\n
What are the results after 10 trades with RRR 2:1 and 3:1?<\/h3>\n
<\/strong><\/h3>\n
5. Determine risk per trade<\/h2>\n
\n\u2022 Maximum overall loss:<\/strong> 10% of the account \u2192 10,000 USD<\/strong>.<\/p>\nWhy risk only a small percentage?<\/h3>\n
\n\u2022 Greater resilience during losing streaks.
\n\u2022 Psychological comfort \u2013 losses are relatively small and easier to accept.<\/p>\n
\n\u2022 Stop-loss (SL):<\/strong> for example, 50 points.
\n\u2022 Value per point:<\/strong> 10 USD (at 1 lot position size).
\n\u2022 Calculation:<\/strong> 50 points \u00d7 10 USD = 500 USD = exactly 0.5% of the account.<\/p>\nCompliance check with FTMO limits<\/h3>\n
<\/a><\/h2>\n
6. Carry out backtesting<\/h2>\n
\n<\/strong>A system may look great on a small sample. But when tested over 1\u20132 years of data, weaknesses often emerge.<\/p>\n7. Validate your strategy<\/h2>\n
\n\u2022 Verify that you can follow your money and risk management in practice.
\n\u2022 Test technical aspects \u2013 execution speed, platform settings, and potential order-entry errors.<\/p>\nTips for effective free trial trading:<\/h3>\n
\n\u2022 Apply the same position size, SL, and TP as planned in live trading.
\n\u2022 Follow the same limit rules (max daily loss, max loss per trade).
\n\u2022 Keep a trading journal \u2013 after each trade, record the entry reason, exit reason, result, and emotional notes.<\/p>\n8. Start trading on a live account<\/h2>\n