What Makes
a Good Trading Strategy?
by David Graeme-Smith of ShortSwingTrading.com
Ask most NEW traders, and they will tell you about some
moving average or combination of indicators or a chart pattern
that they use. This is, as the more experienced trader knows,
an entry point and not a strategy.
Any trader who is more experienced will say a strategy
should also include money management, risk control, perhaps
stop losses and of course, an exit point. They might also
say that you must let your profits run and cut your losses
short. A well-read trader will also tell you that your strategy
should fit with your trading personality.
BUT there is one other vital ingredient that many traders
forget - and that is to fully understand the "personality"
of what you trade. Some traders specialise in say, gold
or Brent crude or currencies or they might specialise in
a particular index such as the FTSE 100 or the Dow but many
traders choose to trade shares. Indeed some traders dabble
in a bit of everything. I think this is the area that causes
many traders to fail or at least not reach their full potential.
In my view: You absolutely MUST
specialise.
I am sure that on the surface most people would say that
sounds sensible but here is why it is a MUST!
Superficially, many charts look the same. I bet if you
had not seen the charts for some time and someone where
to show you a chart of Brent Crude over 6 months and then
a chart of Barclays PLC over the same 6 months you would
be hard pushed to say which was which purely on the look
of the chart.
However, I bet that if you found a trader who trades ONLY
Barclays day in and day out and also found someone who trades
ONLY Brent Crude day in and day out, both of them would
easily identify which was which. WHY?
Because every share, index or commodity has it's own
"personality".
Some will be volatile intra-day, some will follow their
sector or the main index (market followers), some will do
their own thing, some will spike up and down regularly,
some will stop at key moving averages and some will just
plough through. Some will move by 5% on average before they
retrace and some by 2%. Some will gap up or down regularly,
some will not. You get the idea!
Therefore, no matter how good you are at analysing indicators,
moving averages, trends and patterns, the same strategy
WILL NOT work for everything. I would go so far as to say
that a strategy that works well for Bovis Homes, for example,
is likely NOT to work for BT Group - they have very different
"personalities".
So let's return to our question: What makes a good trading
strategy? Let me answer with a series of ten questions that
you need to find answers to, in order to build a REALLY
GOOD strategy.
- What do you want to trade (share, index, commodity,
currency, etc)? If your answer is shares (plural) I would
urge you to pick one typical share at this stage to really
specialise. You can add more later.
- What "personality" does that share, index
etc have?
- What entry system is the most reliable for that share?
- What stop loss system is the most effective for that
share?
- What average risk will a typical trade carry?
- What exit system works well for that share?
- What is your trading personality (attitude to risk,
losses, discipline, how much do you worry etc) and can
you trade that strategy without overriding it?
- What timescale do you want to trade? (Using intra-day
or end of day data)
- How much data do you keep on past trades to help identify
strategy weaknesses?
- How does all this fit with your trading objectives?
Once you have an answer to each question you need to do one
final thing. Make sure all those things fit together and complement
each other. For example, if the ideal stop loss position represents
a big average risk and conflicts with your own attitude to
risk, you need to start again. If you will override your exit
point because greed makes you hang in for more, you need to
think again. Perhaps you shouldn't trade that stock in the
first place - look for one with a different "personality"
which will lead to a strategy you can trade comfortably.
It is a long and sometimes painful iterative journey. You
might need to go round and round in ever decreasing circles
over a long time. Testing and refining, testing and refining
before you can truly have a reliable and repeatable strategy
that REALLY WORKS for you.
THEN, you can look for other things to trade that have
the same "personality" as your specialist stock,
index, commodity or currency.
But if it were easy, everyone would be doing it right?
Good luck and enjoy your trading.
David Graeme-Smith, author of Short
Swing Trading: A Complete Swing Trading Strategy, a
comprehensive and complete trading system with low risk.
Find out more about it at www.shortswingtrading.com.
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