Stock Trading
Strategy - Critical Considerations
At the core of a trading business is the stock
trading strategy, so before choosing a stock trading plan or
system, some questions must be asked and answered. Since the
strategy drives the selection of the plan and system, it must
satisfy certain criteria in order to achieve the objectives of
the business. 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. In order
to achieve the optimum strategy and plan, this article examines
these considerations and questions to be asked.
The trader's available time is a
key factor in deciding which stock trading strategy to pursue.
This goes hand-in-hand with the desired level of involvement in
the activity of trading. Time considerations include both how
many hours can be set aside for trading plus when and from what
those hours will be taken. If a person has a full-time job, a
spouse and kids, then it probably wouldn't be suitable to
pursue day trading.
Capital turnover time is another critical consideration. How
long it takes from entry to exit is the capital turnover time,
as this is how much time it takes to turn the capital over and
have it again available for trading. The greater the capital
turnover time, the fewer the number of trades can be placed for
a given account size over a given period of time. The second
result of the capital turnover time is that of per-trade ROI
versus annual account ROI. The lower the turnover time, the
higher potential annual ROI, even with the same per-trade
profit. While it sounds favorable to pursue a shorter turnover
time, there is much more work and involvement required. With
regards to stock trading strategy, it is a critical business
decision to find the desired balance. 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.
To ensure that the chosen stock
trading strategy and stock trading plan suit the trader, they
must work with the trader's comfort zones. Following the system
and rules should be reasonably easy for the trader . Good
trading is quite difficult when emotions come into play and
affect the trader's decision-making. Contributing to this
problem is a strategy or system with aspects that are too far
outside the comfort zones of the trader.
Certain attributes of a stock
trading strategy should be aligned with the comfort zones of
the trader. A certain percentage of losing trades are inherent
to any system, and a reasonable winning percentage is necessary
so that the traders confidence can be maintained and not lost
from too many losing trades. A tolerable maximum drawdown goes
hand-in-hand here and 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.
To achieve a consistently
profitable and reliable trading business, one must have a
well-reasoned stock trading strategy before selecting a system.
Once a system is chosen, it must be backtested, analyzed and
measured so that the aspects are within the trader's comfort
zones and have a realistic potential to fulfill the profit
objectives. 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.
"Simple, effective and easy to
use" is how many traders describe the Trading Performance
Analyzer & Profit-Potential Calculator, a powerful tool for
confirming the feasibility and profitability of your stock
trading strategy. Get it at http://insideouttrading.com/tpa
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It is a
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