What a strategy actually is

Ask a room of traders for their strategy and you will hear “I use RSI”, “I trade breakouts” or “I follow a signals channel”. None of those is a strategy. A strategy says in advance what makes you buy, where you are wrong, where you exit and how much you risk.

Four decisions, made in advance

Trend pullbackBreakoutRange fade

1 Setup2 Trigger3 Stop4 ExitAll

A trend pullback on EUR/USD as four decisions. Tap 1 to 4 to see each layer, or switch to the breakout and fade versions. Illustrative prices.

A strategy answers four questions before you enter:

• Setup: the market condition that must be true. Here, a trend of higher highs and higher lows has made a pullback into old resistance that may now act as support.
• Trigger: the exact event that says “enter now”. A bullish engulfing candle closes back above the zone, at 1.0858.
• Stop: where the idea is proven wrong. The stop-loss sits at 1.0830, below the zone.
• Exit: the take-profit and how you manage the trade. Here, 1.0918, just under the last swing high.

A fifth decision sits on top: your position size, worked out from the money you have chosen to risk per trade, not from how sure you feel.

An indicator, a pattern or a tip can be one part of a strategy. RSI might be a trigger; a support level might be a setup. On its own, each answers one question out of five.

What an edge is

An edge is a repeatable reason a strategy makes more than it loses, after costs. You measure it with expectancy: the average result per trade, in R, where 1R is the amount you risk.

Expectancy only means something over many trades. A good plan can lose its next trade, and a bad plan can win it. Suppose 100 trades of the pullback plan above won 35 times, at 2.14R each: 35 × 2.14R − 65 × 1R = +10R, or +0.10R per trade. A 1-pip spread on a 28-pip stop costs about 0.04R every time, leaving roughly +0.06R. Thin, but positive. These are made-up numbers to show the sum, not a result to expect.

Even a genuine edge can finish 20 trades in the red. It typically takes a hundred or more trades before a result tells you much, which is why lesson 10 covers testing.

No method suits every market

Which method suits which market?

Good fitMixedPoor fit

Fit of seven trading methods to four market conditions. Use the method buttons to see details.

Method	TrendingTrend	RangingRange	Volatile / newsNews	QuietQuiet
Trend followingTrend following	Good	Poor	Mixed	Poor
Pullback tradingPullback	Good	Poor	Poor	Mixed
Breakout tradingBreakout	Mixed	Poor	Good	Mixed
Range / mean reversionRange	Poor	Good	Poor	Good
Price action at levelsPrice action	Good	Good	Mixed	Poor
Momentum indicatorsMomentum	Mixed	Good	Poor	Mixed
News tradingNews	Poor	Poor	Mixed	Poor

Trend following

Join a move that is already under way and stay in until the trend shows clear signs of ending.

When it works

Long, persistent moves, often driven by a shift in interest-rate expectations.

How it fails

Choppy, sideways markets: a run of small losses as each "new trend" reverses.

Typical profile

Often wins only 30–45% of trades; winners are typically several times the size of losers.

Holding time

Days to weeks, sometimes months.

Read the lesson: Trend following →

A preview of the seven methods in this course and the markets each typically suits. Tap a method for its idea, how it fails and a link to its lesson. Illustrative: every market and setting differs.

Every method makes an assumption about the market. Trend following assumes moves continue; it often wins fewer than half its trades, with winners several times larger than its losers. Mean reversion, such as range trading, assumes price returns to the middle; it often wins more than half, with smaller winners. In the wrong market, each assumption breaks.

Lesson 2 matches trading styles to your time. Lessons 3 to 9 take one method each: the idea, when it tends to work, how it fails, a worked trade and the usual mistake. Lessons 10 and 11 show you how to test a strategy and write your own.

Try it

Is this a strategy?

Four traders describe how they trade EUR/USD. Which one has an actual strategy?

Buy when RSI drops below 30Copy a signals channel that was right 8 of its last 10 callsBuy because the ECB looks likely to raise ratesIn a 4-hour uptrend, wait for a pullback to old resistance, buy on a bullish engulfing close, stop below the zone, target the last swing high, risk 1%

Notice how only the complete rule set can be tested: the others cannot even tell you what a loss looks like.

Quick check

Quick check

1. Question 1 of 5

   A trader says: 'I buy when price bounces off support.' What is still missing?

   AThe stop, the exit and the position sizeBNothing: that is a complete strategyCThe setup

Go deeper: How to write a trading plan · Trading expectancy: the number that says if a strategy works · Risk-reward ratio explained