If we’re looking for answers, and the prices don’t seem to make any sense – most traders turn to a strategy. This can give clear signals – based on price action, without factoring all the will-they, won’t-they worries that we really can’t predict.
The right trading strategy – be it one you’ve created yourself or one that’s bought off the shelf – is viewed by many as the financial equivalent of manna from heaven.
We love them. We lap them up.
Each new strategy looks like it’ll be the path to untold wealth, and a new way of life.
But, let’s be blunt here – too often they leave us feeling out of pocket, and let down.
Today I’d like to take a look at why strategies may have left you disappointed – and what we can do to fix that.
Choosing the right trading strategy
Obviously, the first thing we need to be sure of is that we’ve picked a good strategy.
But I’m going to assume here that you’ve bought something that’s been recommended, is from a reputable seller, and has a decent track record.
So, why is it not performing as you’ve expected?
The next question to ask yourself is whether this is the right strategy for the current market conditions?
Testing the market
Trading strategies fall into two very broad camps. If you pick the right one for the right market conditions, you’ll have every chance of success. If you pick the wrong one – however great a system it is – you’re going to have an uphill struggle.
1. The two basic types are these: Breakout strategies, which look for signs of momentum and follow the continuation of a trend.
2. Reversal strategies, which look for signs that the price is reaching a top or bottom and will change direction.
Now look at the market you’re going to be trading…
In the most general sense, the first type of strategy will do best in a trending market and the second type will do best in a choppy market.
If the market is trending in one direction, and your momentum strategy jumps on board that move – you’ve a good chance of success.
And if the market is moving up and down regularly – a strategy that benefits from those changes in direction should do well.
However, it’s not quite as straightforward as that.
Scaling the market
You also need to consider the size of the movements you’re chasing with your strategy – and the size of the movements the market is making. (This may be something you can adapt yourself to match market conditions.)
If you have a market that’s chopping about sideways in a very small, stagnant range, and your reversal strategy is looking to pick up 100 point moves each day – you’re going to struggle.
Likewise, if you’ve a market trending upwards with a very gentle, steady gradient, you may be able to earn more points by playing the short-term ups and downs, rather than following that trend.
What we’ve seen in recent weeks across many markets is choppy conditions suited to a reversal strategy, but with big moves that would be sufficient to sustain a short-term momentum strategy.
Okay, so we’ve matched our system to the market conditions … what final piece of the jigsaw do we need to make sure that it works as it should?
Are you up to scratch?
The last question we need to ask ourselves is whether we’re applying the strategy correctly…
- Am I being disciplined?
- Am I practising sound money management?
- Do I ever ignore the rules of my system?
- Have I let a losing trade run too far to avoid accepting a loss?
These kind of questions are much more significant than worrying about whether an exponential moving average is better than a simple one, or whether your trend lines are a couple of points off.