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