subject: Understand Anatomy Of Trading Strategies [print this page] There are limitless systems for trading stocks, but all systems need similar strategies. Whether a trader is scalping for small but quick profits, trading short-term or taking a long-term approach, every trading process needs to incorporate several characteristics to be successful. Without these strategies in place, a trading process will under-perform, or, worse, it will lose an brilliant amount of money.
Pick Appropriate Trading Style
A trading method needs to be appropriate for the trader's character. If a trader likes trading for fast short-term profits then a scalping method would be appropriate. If this trader implements a strategy that holds stocks for days or weeks, they will become impatient & will most likely deviate from the strategy causing the method to under-perform. Likewise, if a trader's style leans toward accumulating slow & steady profits, they are going to be miserable trading a strategy that has him entering & exiting positions quickly whole day.
Confirm Method with Back Testing
Before implementing a trading method the trader must confirm if the method has the potential to be profitable. This is accomplished by back-testing the method. Back-testing makes use of the buy & sell rules of the trading method to run a historical simulation to select the potential of the trading method. The results of the back-test permit the trader to confirm in the event that they has a believable trading method. Back-testing also gives a trader the chance to fine-tune the method to make it more effective.
Most brokerage firms offer their clients robust back-testing systems. These online systems are simple to make use of & provide a wealth of information that allows the trader to analyze his trading method.
Limit Losses
Even the best trading systems encounter losing trades & periods of under performance. It is imperative that all trading strategies incorporate safeguards to limit losses. For example, a trading strategy can have a rule that sells a stock automatically if it declines by a positive percentage. It is best to make these rules automatic, so that it takes the emotion out of selling a losing trade.
Protect Profits
Defending your profits is as important as limiting your loses while trading. All trading systems require to sell rules that lock in profits. This can be accomplished by setting a stop-loss after a stock has made a gain. For example, a rule can be set for a stock that has appreciated by over 5 percent. The rule would state that it is necessary to sell the stock if it declines by 2 percent. This will lock in a gain of about 3 percent if the stock falls; however, it will let you hold the stock & make more profit if the stock continues to rise.
Review Performance
It is vital to periodically review a trading method after it's been implemented. Reviewing all of your trades can be a time consuming method, but it will let you pinpoint aspects of the method that can be adjusted to produce more profit. Reviewing your trades will also let you see the way you can limit losses in the future. As market conditions modify over time, most trading systems
