Hey everyone, today I wanted to check what is the most important goal of a trading strategy. The source of the article is: **blog.cleo.finance** for people who would like to read it in more detail.

# Why do I need a trading strategy?

Creating a trading strategy is like plotting a course on a map before setting sail. A trader needs a well-defined trading strategy because it provides a roadmap for decision-making and helps to navigate the complexities of the market.

Without a clear plan or direction, traders may make impulsive or emotional decisions that put their capital at risk.

A well-defined trading strategy allows traders to approach the market with a structured and disciplined approach. This makes it easier to make informed and consistent decisions based on the strategy’s rules and guidelines. This helps traders to:

* Navigate the market effectively
* Increasing their chances of success
* Maximizing their potential profits

Most traders don’t fail at trading because it is hard. They fail because they are not willing to put in the work to create a detailed plan, test the plan, and then follow the plan.

# What is the most important goal of a trading strategy?

The most important goal is to develop a strategy with positive expectancy. In other words, a trading strategy should have a higher probability of making a profit than a loss.

Without a well-researched and tested strategy, trading can feel like gambling, with unpredictable and potentially costly results (looking at you WSB!).

In other words: **You should not enter the competitive world of financial markets unless you have a trading strategy that produces positive expectancy!**

You need to know 3 things to determine if your strategy has a chance to be profitable:

1. **Win rate** – the percentage of trades that are profitable
2. **Risk-reward ratio (RRR)** – the ratio of the average potential profit to the average potential loss on a trade
3. **Transaction costs** – commissions, fees, and other expenses associated with executing a trade

**EXAMPLE:**

* *Trades: 100*
* *Win rate: 50%*
* *RRR: 1:2*
* *Transaction costs in total: 5% of balance for the 100 trades*

***Expectancy = (Win rate x Win Size) – (Loss rate x Loss size) – TC = Expectancy per trade***

***Expectancy = (0,5 x 2) – (0,5 x 1) – 0,05 = 0,45 R per trade***

*Over the course of hundred trades, you would win half of them (50). But because you can win twice as much as you’re risking (1:2 RRR), throughout the 100 trades you would on average win half of what you’re risking (avg. profit of 0,5R). If you deduct the transaction costs, this comes down to 0,45R* of profit for every open position\*.\*

*If you risked 100 USD per trade (R = 100 USD), on average you could expect to win 45 USD for every trade you open.*

The more data you have in hand the better the prediction can be, but these three data points should be enough to tell if the trading strategy is likely to be profitable over the long term or not.

The confidence gained from knowing your trading strategy has a positive expectancy is why you’re spending hours building and testing it. You don’t have to decide on the spot, you just mechanically execute what your system tells you.


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