The stock trading strategy is at the core of one’s trading business, and care must be taken before choosing a stock trading system. Several criteria must be met in order to satisfactorily achieve the objectives of the investor, and the strategy determines the system used. In order to end up with a system and plan that can be traded well, it must suit one’s personality, so the criteria includes a number of specific considerations. This article will examine several key questions that need to be asked in order to have the optimum system.
In defining a stock trading strategy, one of the most important fundamental questions is regarding the trader’s time available for trading. The desired level of involvement as a trader in the trading activity goes right along with time available. The consideration of time doesn’t just mean how much time can be made for trading, but how much is desired and when. For the person that has a family, a job and a busy life, full-time day trading would likely not be suitable.
Next comes the matter of capital turnover time. Turnover time is how long capital is tied up in a trade, or the time before it is available again for another trade. The longer term trades will have a greater capital turnover time and thus fewer opportunities can be seized during a given time period. Another aspect of capitla turnover time is that of annual account ROI vs. per-trade profit. Even with the same profit per trade, the higher annual ROI can be realized with a lower capital turnover time. The trade off is that shorter term trades require much more work and involvement than those with a greater turnover time. Finding the desired balance is a critical decision for the business in terms of stock trading strategy. An overall determining factor is the desired annual ROI. One may choose an aggressive or conservative approach depending on the objectives for income and wealth-building.
A chosen stock trading strategy and stock trading plan must also work within the trader’s comfort zones, to ensure a good fit with one’s personality. The system and rules should be such that the trader can follow them with reasonable ease . Good trading is quite difficult when emotions come into play and affect the trader’s decision-making. A strategy or system with aspects that are too far outside the trader’s comfort zones often contributes to this problem.
There are several specific aspects of a stock trading strategy and chosen system which need to align with the trader’s comfort zones. A reasonable winning percentage is necessary so that confidence is not lost through losing trades that occur too frequently, yet are inherent to the system. Right along with this is a tolerable maximum drawdown, for the same reason. A system should not be too limited regarding market conditions and should be fairly robust. The financial goals must be attainable, so the stock trading strategy and system must have a sufficient profit-potential – this is one of the most important facets.
The stock trading strategy must be thought-through and well supported for the result to be a reliable and consistently profitable business. To confirm that the system is aligned with the trader’s comfort zones and has a realistic potential of fulfilling the objectives, the system should be backtested, analyzed and measured. Prior to any money being risked in the markets, backtesting and review of the metrics should be conducted so that the confirmation is completed without risk.
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