A trading strategy is an execution plan defined by the trader based on past behavior analysis of a trading instrument. With a trading system in place, traders are able to increase their probability in winning trades and gaining profits. Trading strategies ensure that traders enter and exit trades at the right points, and also define specific actions to take based on the behavior of the instrument traded.
How does trading strategy work with an automated trading system?
It is common knowledge that many traders fail because they do not follow the trading strategies they have developed. They may be skillful in identifying chart patterns and stock indicators, but they fail to execute trades according to their trading strategy. Much of this occurs as a result of their emotions negatively affecting the trading process.
One of the advantages of an automated trading system is its ability to leave the emotional factor out of trading. Rules are followed to the word, and there is no margin for compromises. Just like a robot, orders and actions are executed as defined by system parameters, and the human element is no longer involved.
Through this, the trading system is less likely to make mistakes, thus increasing the odds for winning trades, just like what has historically been back-tested. Stop loss and profit points are also predefined so that elements such as greed and fear do not take over.
Creating a Trading Strategy
Trading strategies are usually developed or fine-tuned by a trader on his own in order to suit personal preferences in trading. Some traders purchase trading strategies that has been proven to be effective from other traders, and apply their own constraints and strategies before trading.
However, the rule of thumb is that trading strategies should be back-tested with each financial instrument or stock before they can be executed. This way, the trader would then be familiar with the behavior of a stock before he enters into a trade. He would also gain confidence in the process as he knows the probability of being right or wrong of a trading strategy used. This way, he is less likely to doubt himself while in an actual trade.
Finally, the most important element in executing trading strategies is still ultimately the discipline of a trader. This is usually acquired through trading experience over the years. Of course, the gut feel of a trader is also another element that can be acquired. Otherwise, using an automated trading system to control the variables defined in a trading strategy would be the next best option.
Strategies represent the rules governing a traders’ behaviour in the market, by following a set strategy a trader can eliminate the emotional pitfalls associated with greed or regret, can use these strategies to test and monitor performance and rely on their rules based approach to earn themselves a substantial income.
Is there Only One Trading or Investing Strategy that Works?
The overwhelming answer is NO! There are many ways to make money in the markets. My own experience and reality proves that this is the case. When you look across the investment landscape you see successful buy and holders like Warren Buffet, day traders and short term traders like Steven Schonfeld, day trading statistical arbitrageurs like Jim Simons, Long Term Trend Followers like John Henry, multi-strategy managers like Steven Cohen, Bruce Kovner, and Louis Bacon, and everything else in between. The key is to find a strategy that fits your personality.
For some that means systematic trading, for others that means discretionary trading, or maybe a combination of both. To be a successful trader or investor it comes down to two things, having a strategy and money management. Without either one of those key elements you are dead in the water.
What I like to tell people is that there are a hundred ways to make money in the markets and a million ways to lose money in the markets. My point is that it is much easier to lose money than it is to make money trading and investing. Anyone that says trading is simple and easy, has never traded, is a liar, and a snake oil salesman trying to sell you something you don’t want. If it was so easy they would post their real track record, to prove how easy it is. On top of that, everyone would do it and we’d all be multimillionaires many times over.
Don’t fret, it is possible to make money in the markets but only with hard work, a valid strategy, and prudent money management.