Trading Strategies – Key Considerations
trading strategies
People looking for trading strategies are often looking for one of two things. Either they are lured into financial trading by the perceived excitement and glamour of untold riches. Or possibly, they are looking for trading strategies that will help them to build real wealth, with managed risk and long term, protected profits.
Day Trading Strategies
Your appetite for risk will influence which trading strategies are right for you. For example, I see short-term trading, such as intraday or day trading as a high risk trading method. Of course it can be hugely profitable where massive resources are applied to make big profits from tiny price movements. The opposite is also true and losses can get out of control quickly. Also, for smaller accounts, the gains might not be worth the time and emotional stress spent watching a price ticker.
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“Bigger Picture” Trading Strategies
Away from the adrenalin and buzz of day trading, there are trading strategies based on medium to long-term wealth building, rather than fast profits, followed by long draw-down periods. If this is a more appropriate method for your style and personality, then look for trading strategies that offer the following:
- The strategy is proven to produce steady growth rather than boom and bust. If you get a chance, do some back testing to see what the gains are over what period.
- The trading strategy includes clear, objective signals to get in and out of trades. The markets are made because two people look at the same data and form different views. Avoid strategies that involve too much judgement. It should be a clear bur or sell.
- The strategy has a medium to long term view – possibly three months to five years.
The Trading Strategy is Only a Small Part of Success
So once you’ve found the right trading strategy, you’re all set to go, right? Not exactly. The fact is, I could give exactly the same successful trading strategy to two different people; one would make money, and the other wouldn’t. How is this possible?
The answers is not in the trading strategies, it’s between your ears. So once you have decided which trading strategy you want to adopt, I would also urge you to address some of the psychological aspects of financial trading. Whilst it may seem unconnected, it is absolutely vital that you understand how your mental world effects your trading decisions, and ultimately your profits.
Tony Robbins once said that success is 20% technique and 80% psychology.
I think this 80/20 principle applies to financial trading more than any other profession. After all, much of what is traded on a daily basis across the globe amounts to nothing more than pieces of paper. The value of a piece of paper comes down to what people think its worth. That’s all about confidence, greed, fear and every other kind of human emotion. Psychology is a huge piece of the puzzle.
Using Trading Strategies to Tame Your Emotions
To take advantage of your own psychology, you would ideally choose trading strategies that give you clear entry and exit signals. This takes away the emotional element that causes even experienced traders to sell too early, or hold on to losers too long. If you have a clear way of entering a trade and then forgetting about it until the exit is triggered (hopefully in profit), you’ll be less likely to sell too early and miss profits. Or worse, hold losers in the hope it could reverse.
Money Management for Survival
You can also tame your emotions by combining your chosen trading strategies with solid money management. This will allow you to determine how much you can afford to lose on each trade, and if done right, means no single trade can totally wipe you out. There are systems and methods for money management, but I would say, keep it simple and appropriate for your account size. The security of knowing that loses are limited by good money management will help in making sober trading decisions.
The last bit of advice on choosing trading strategies is to spread your risk by diversifying your investments across different markets, sectors and instruments.
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