The term trading strategy can in brief be used by any fixed plan of trading a financial instrument, but the general use of the term is within computer assisted trading, where a trading strategy is implemented as computer program for automated trading.
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Technical strategies can be broadly divided into the mean-reversion and momentum groups. All these trading strategies are speculative. In the moral context speculative activities are considered negatively and to be avoided by each individual.
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The development and application of a trading strategy preferably follows eight steps: [7] 1 Formulation, 2 Specification in computer-testable form, 3 Preliminary testing, 4 Optimization, 5 Evaluation of performance and robustness, [8] 6 Trading of the strategy, 7 Monitoring of trading performance, 8 Refinement and evolution. Usually the performance of a trading strategy is measured on the risk-adjusted basis.
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Probably the best-known risk-adjusted performance measure is the Sharpe ratio. However, in practice one usually compares the expected return against the volatility of returns or the maximum drawdown. Normally, higher expected return implies higher volatility and drawdown. The choice of the risk-reward trade-off strongly depends on trader's risk preferences. Often the performance is measured against a benchmark, the most common one is an Exchange-traded fund on a stock index.
In the long term a strategy that acts according to Kelly criterion beats any other strategy.
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However, Kelly's approach was heavily criticized by Paul Samuelson. A trading strategy can be executed by a trader Discretionary Trading or automated Automated Trading. Discretionary Trading requires a great deal of skill and discipline. It is tempting for the trader to deviate from the strategy, which usually reduces its performance.
An automated 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. A trading strategy can automate all or part of your investment portfolio.
Learn how to establish appropriate position sizes, factor in risk, discover different models and understand the importance of position sizing within your trading objectives. Top traders know that no successful trading system lasts forever.
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