Trading Strategy

A systematic trading strategy needs two things defined so clearly that there is no room for judgment in the moment:

1. A clear entry signal.
2. A clearly defined exit signal. And as we saw in the last lesson, the exit has two parts:
   • a target, for when the trade is going in our favour, and
   • a stop loss, for when it is not.

If you have just these things defined, you have a trading strategy. A strategy can be very simple, and it can be very complicated as well. Both count.

Let's talk about how we can define these conditions.

One simple example of an entry condition: I will buy the stock if it has risen for two straight days.

And a matching exit: I will sell the stock if it has fallen for two straight days.

That is a complete strategy. Very simple, but complete.

Let me give another example, this time based on an indicator:

• Entry: I will buy the stock whenever the price closes above its 20-day moving average.
• Exit, in profit: I will sell when the price rises 5% above my buy price. This is the target.
• Exit, in loss: I will sell if the price comes down 2% below my buy price. This is the stop loss.

In the world of trading strategies: