Trading strategy
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In finance, a trading strategy (see also trading system) is a predefined set of rules to apply.
Usually, this refers to a means used to replicate an option in order to give it an arbitrage free value in the sense that the cost of buying some financial assets to give the same pay off at maturity should give the fair price of the option.
A trading strategy wraps trading formulas into automated order and execution systems. Advanced computer modeling techniques, combined with electronic access to world market data and information, enable traders using a trading strategy to have a unique market vantage point. Traders, investment firms and fund managers use a trading strategy to help make wiser investment decisions and help eliminate the emotional aspect of trading. A trading strategy can automate all or part of your investment portfolio. Computer trading models can be adjusted for either conservative or aggressive trading styles.
A trading strategy is governed by a set of rules that do not deviate based on anything other than market action. Emotional bias is eliminated because the systems operate within the parameters known by the trader. The parameters can be trusted based on historical analysis and real world market studies, so that the trader who is familiar with the trading strategy and its operating characteristics can have confidence in a pre-determined trading strategy.
There are programming languages and trading strategy development platforms that allow on to create their own custom systems.
[edit] Example strategies
We should distinguish between: - static trading strategies: one only needs to trade at the beginning and at the end to ensure the payoff. - dynamic trading strategies: between the start and the maturity of the derivative, one needs to trade more than once to ensure the payoff at maturity. A good example is the constant proportion portfolio insurance (CPPI), but options with intermediary observation dates or digital features checked on a regular basis also fall into this category.
- Buy low/sell high
