Trading strategy
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In finance, a trading strategy (see also trading system) is a predefined set of rules to apply.
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.
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[edit] Styles
Technical analysis
Fundamental analysis
Quantitative trading
Trend following
Countertrend
Volatility (finance)
[edit] Timeframes
Intraday
Day trading
swing trading
Long term trading
[edit] Development
When developing a trading strategy, many things must be considered. Most importantly, a trader must choose or create a strategy that fits himself. Many things must be considered: risk-tolerance, skill, experience, interests, etc. Once a trading strategy is chosen, it can be developed on numerous software platforms.
[edit] Backtesting
After developing a strategy, it can be backtested using computer programs. Although backtesting is no guarantee of future performance, it gives the trader confidence that the strategy has worked in the past. If the strategy is not over-optimized, data-mined, or based on random coincidences, it probably has a good chance of working in the future.
[edit] Forward testing
Forward testing a strategy give the trader a much better picture of how it will work in the future. Forward testing, or out-of-sample results, are the best measurements of a strategy.
[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.
