We want to beat the casino bank. Hundreds of trading robots promise these kinds of results. Nevertheless everyone knows that these systems or methods are far from being perfect and that it is illusory to believe that there would exist a winning magic program for sure. Losses are part of trading. Without going to extremes, it is quite plausible to establish a strategy that is viable and that gives good performance over the long term.
1 – Find your market
Thinking that a strategy can be applied to any market is unreasonable. Each market has its specificity. Each asset class has its own properties. Within the same market there may be different products. For example the stock market is very vast. There are several sectors, several company sizes, several regions of the world, etc. A trading strategy must target a specific market. This allows you to focus on a market where you know the supply and demand, where you can specialize and become an expert. We are talking about market fundamentals here. Similarly, a strategy based on technical analysis is not going to work in all markets. It is therefore necessary to be able to determine the one on which you feel the most comfortable and where the strategy is particularly adapted.
2 – Use volatility
The basic principle of trading is as follows: buy (respectively sell) a product at a given price and resell (buy back) it at a higher (lower) price. In order to satisfy this definition there must be a difference between these buying and selling prices. This necessarily involves volatility. This is an essential part of trading. Without volatility nothing happens, the market does not move and it is all the more difficult to base a strategy on this type of market. We will therefore seek above all a market whose prices fluctuate a minimum. That said, volatility is not constant and even less permanent. A strategy must therefore be applied according to current market conditions .
3 – Test the strategy
If you want to build a trading method that can be replicated over and over again, it must first work in the past. We will therefore seek to test the strategy on historical curves and prices. This past simulation is very important in order to have an idea of the performance that can be expected in the future. Of course, certainty does not exist, but poor results with historical records do not bode well for the future. Moreover, the tests do not stop there. It is often necessary to simulate the strategy in virtual but on current prices. Over several weeks or months, a trading system will be tested in order to confront the reality of the target market, all without any risk.
4 – Know how to manage risks
A process is nothing without rigorous trading account management . We talk about risk management, money management , etc. A strategy must necessarily include these elements. This is even the most important point. The method must determine when to enter and exit a position but also what volume to put on these trades and where to place the stop-losses. This is the only way to last and have a viable performance over time. Knowing the risks, knowing how to manage the exposure and the correlations of your portfolio are among the key success factors of a winning method over the long term. Without it, even the best technique of all time is absolutely useless.
5 – Know how to adapt
As mentioned above, market conditions, such as volatility or volumes traded, can change over time, even in a well-targeted market. This is why a strategy that would consistently work is nearly impossible to find. Ideally it would be an adaptable method or process, taking into account all market factors. This can quickly become complex and impractical in practice. On the other hand, nothing prevents to establish the outline of a technique by leaving the possibility of modifying parameters according to the state of the market. It would then be a less precise process but which would make it possible to absorb market changes in a sustainable manner.
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Once these main principles are taken into account, you considerably increase the chances that a strategy will be effective and sustainable. Nevertheless, it should be kept in mind that the search for such a miracle solution can sometimes be very long.
Shouldn’t we rather keep a cool head and remain humble in the face of the market, admitting that it is an indomitable beast and relying more on our own instincts?