What is a 'Trading Strategy'

A set of objective rules defining the conditions that must be met for a trade entry and exit to occur. Trading strategies include specifications for trade entries, including trade filters and triggers, as well as rules for trade exits, money management, timeframes, order types, and other relevant information. A trading strategy, if based on quantifiably specifications, can be analyzed based on historical data to project future performance.

BREAKING DOWN 'Trading Strategy'

A trading strategy outlines the specifications for making trades, including rules for trade entries, trade exits, and money management. When properly researched and executed, a trading strategy can provide a mathematical expectation for the specified rules, which helps trades and investors determine if a trading idea is potentially profitable. Investors should generally consider using a systemized trading strategy, but be aware of its many limitations. Trading strategies aren’t a guarantee for success, but they may be effective in increasing risk-adjusted returns.

Pros and Cons of a Trading Strategy

Trading strategies are a great way to avoid behavioral finance biases and ensure consistent results over time. For example, traders with a specific set of rules governing when to exit a trade will be less likely to succumb to the disposition effect, which causes investors to hold on to stocks that have lost value and sell those that rise in value. Trading strategies can also be stress tested under many different market conditions to ensure consistency.

The downside is that profitable trading strategies are difficult to develop and it’s easy to become overly reliant on the strategy. For instance, a trader may curve fit a trading strategy to specific back testing data, which can generate a false sense of confidence. The strategy may have performed great based on the past data, but that’s no guarantee that it will perform just as well using live market data since the conditions may be different.

Developing a Trading Strategy

There are many different types of trading strategies for investors and traders to consider, but they can be generally broken down into technical and fundamental trading strategies. The common thread between these two types of strategies is that they both rely on quantifiable information that can be back tested for accuracy.

Technical trading strategies rely on technical indicators to generate trading signals. For example, a simple trading strategy may be a moving average crossover whereby a short-term moving average crosses above or below a long-term moving average.

Fundamental trading strategies take fundamental factors into account. For instance, an investor may have a specific set of screening criteria to generate a list of opportunities. These criteria may look at things like revenue growth or profitability.

Investors and traders should find the strategy that works best for them through experimentation, back testing, and paper trading. For more, see How to Practice Day Trading. 


  1. Equity Curve

    An equity curve is a graphical representation of the change in ...
  2. Active Trading

    Active trading is the buying and selling of securities with the ...
  3. Entry Point

    Entry point is the price at which an investor buys an investment.
  4. 2% Rule

    The 2% rule is a money management strategy where an investor ...
  5. Trading Plan

    A trading plan is a systematic method for identifying and trading ...
  6. Investment Strategy

    Investment strategy is what guides an investor's decisions based ...
Related Articles
  1. Trading

    Day trading strategies for beginners

    This day trading tutorial covers general principles, deciding when to buy and sell, common day trading strategies and how to limit losses.
  2. Trading

    No Forex Strategy Of Your Own? Try Mirror Trading

    There are many advantages to trading a mirror strategy, yet markets are dynamic, and regardless there is always a risk of losses.
  3. Trading

    Top 10 Rules For Successful Trading

    Whether you're a novice or an expert, these 10 rules should be the backbone of your trading career.
  4. Trading

    Technical Analysis Strategies for Beginners

    Technical analysis helps traders and investors navigate the gap between intrinsic value and market price by leveraging certain techniques.
  5. Trading

    Effective Risk Control With Scaling Trading Strategies

    Scaling strategies allow for greater risk control than simple entries or exits, letting traders seek the most advantageous prices available.
  6. Trading

    Only Take a Trade If It Passes This 5-Step Test

    Not every moment is a good trading opportunity. Put each trade through this five-step test.
  7. Managing Wealth

    4 Steps To Creating A Better Investment Strategy

    Make your trading safer and more streamlined by following these simple guidelines.
  1. What are common trading strategies used in a bull market?

    Discover four commonly used trading strategies by investors and analysts to make profits from a prolonged bull market, including ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center