Trading Strategy - Some Quick Facts


The term trading strategies in finance may be defined as the set of laws used for taking decision in trading shares or stocks. It generally consists of a set of laws which cannot be ignored. It has to be followed. These set of rules are followed by firms who deal in investments as well as persons who are involved in buying or selling of stocks be it online trading or through a broker.

There is no room for emotional bias in trading strategies. The system has to function according to the factors that are known to the trader. There are two methods of testing - back testing and forward testing. Backtesting is based on the analysis of data over the past few years. Forward testing involves the analysis of the market in the real world.  The trader can depend on these two kinds of testing to decide the strategy and the nature of operation.

A lot of things have to be kept in mind at the time of designing trading strategies. These factors include risk, timeframe, style, return, volatility, methods and correlation with the market. Otherwise, the strategy may not work. The trader may be confident of the strategy as it has worked before by the analyzing the data of the previous years. But there is no assurance in backtesting while developing new trading strategies. The strategy needs to be minutely optimized, based on chances and the data has to be carefully studied for making the strategy successful.

Now, trading strategy may be of two types as manual trading and automated or online trading strategy. The trader can use either of these processes of trading while running trading strategies. Automated trading is done with the help of a computer and internet. For manual trading immense discipline and ability is required. Diversion from the original strategy may result in a huge loss.

Trading is done in an automated order and the systems are run with the help of advanced techniques using computer in automated trading. The traders get to know of the market by accessing data and information electronically. So the trader gains a point of advantage above others. These models can be altered for both aggressive and conservative style of trading.

There are various styles of trading as fundamental analysis, technical analysis, quantitative trading, mean reversion, volatility and trend following.

Several timeframes are there as day trading, swing trading, intraday and long term trading. Each of them has separate trading strategies to follow so as to be successful in the field of trading.