A trading strategy is a fixed set of rules or principles that governs a trader's decisions in a market. A complete strategy specifies the instruments traded, the condition or signal that prompts an entry, the conditions for exit, the position size, limits on loss, and the way orders are placed. A strategy may be discretionary, relying on the trader's judgement within a framework, or systematic, with every rule defined precisely enough to be run by a computer.
Most strategies belong to a few families. Trend following and momentum strategies trade in the direction of recent price movement. Mean reversion strategies trade against it. Arbitrage and relative-value strategies exploit price differences between related instruments, and others are built on fundamentals, events or options volatility. A systematic strategy is assessed by backtesting on historical data before use. Past results do not ensure future ones, since market conditions change and costs can erase a small edge.