The Importance of Developing Successful Trading Strategy
One of the first steps to becoming a successful trader is to develop a successful trading strategy. This is true whether you’re trading stocks, options, commodities or foreign currencies.
Investopedia defines trading strategy as: http://www.investopedia.com/terms/t/trading-strategy.asp#ixzz1nxky8CsF
A set of objective rules designating the conditions that must be met for trade entries and exits to occur. A trading strategy includes specifications for trade entries, including trade filters and triggers, as well as rules for trade exits, money management, timeframes, order types, etc.[...]
An overall trading strategy can and should include a variety of subordinate trading strategies for different parts of your portfolio. For example, you might decide that the stock portion of your portfolio should:
- have a mix of 60% long-term growth and income,
- 35% growth and
- 5% highly speculative stocks.
You would likely have a somewhat different trading strategy for each class.
An important part of creating a strategy is to examine your own goals, needs, personality and interests. Are you investing for a specific purpose in a relatively short period of time or for a retirement that’s 40 years away? What is your risk appetite:
- are you looking for excitement as part of your investing activities?
- are your interested in investments and want to be active, or
- would you rather not spend much time on your portfolio?
- markets (stocks, options, forex, etc.),
- time frame,
- type of assets within a market (blue chips, microcap, some combination, etc.?),
- amounts of your money to be committed, and
- whether this money will be committed lump sum or in regular additions.
These types of factors will influence your choice of investments and the trading strategy you choose.
Then you should research various trading strategies and find successful strategies that meet your goals, needs and personality. For most people, it’s normally better and more efficient to choose a strategy that’s already proven to be a successful trading strategy. And after you create your strategy, research of companies, industries, various assets classes, etc. should be an important part of your ongoing trading strategy.
There are many books and online resources to help you with your research. There also online tools such as stock screeners to help you identify potential investments, alerts to help keep you abreast of company or industry news and other services to help you manage your portfolio.
Every overall trading strategy should be long term, even if it has extremely short-term components such as minute-to-minute day trading.
Overall, parts of every trading strategy should include decisions on such things as :
Then you need to drill down and set rules for when you buy and sell, and how much for each trade. Once you set up your trading rules, it’s critical that you follow them. You can in the future decide to change your strategy and related rules, but until then don’t get caught up and act based on emotions and panic.
Not every investment will be successful, but as long as it’s part of a strategy that’s successful overall you shouldn’t deem any single investment a bad trade. It’s just an inevitable part of the process. Also the markets will go up and down over time, and a company that will be successful over the long term will go through a rough patch. Many investors consider these periods of low prices as buying opportunities rather than a time of panic and depression. As one very successful investor has been quoted about staying disciplined and not being moved by short-term trends, he was “willing to look dumb in the short term in order to look pretty darn smart in the long.”
So to be a successful investor, you must develop a successful trading strategy unless you happen to get lucky. In this article we have not gone into much detail because of the number of markets and asset classes. As noted above, there are numerous resources available to help you along.
NOTICE: This article was based on research of stock market information and other sources of information, found both online and in print media. Neither StockTips.com nor any of its owners, contributors, officers, directors, consultants, or employees take responsibility for the accuracy of the information contained in this article or the accuracy of the information on which this article was based. StockTips.com was not compensated by any of the companies mentioned in this article for the preparation of this material, nor were the materials approved by the companies which were mentioned.