How to develop a sustainable trading strategy
The secret dream of any trader is surely to develop a long-term winning strategy that works on any market. Such a strategy is called a martingale.
You want to beat the bank. Hundreds of trading robots promise to achieve that sort of performance. However, their systems or techniques are obviously far from perfect and you know that no magic programme can realistically win every time. Losses are inherent to trading. Without looking for perfection it is possible to develop a valid strategy to reach good results in the long term.
1 - Find your market
You cannot expect a given strategy to work in every market. Each market is distinct and each type of asset has its own specific features. More than one type of product can be available on a given market. For example, the stock market is huge, involving a wide range of economic sectors, companies sizes, parts of the world, etc. A trading strategy needs to target a specific market, and this allows you to focus on markets where supply and demand are known factors, where you can specialize and become an expert. The elements involved are called market fundamentals. Likewise, a strategy based on technical analysis will not work on every market. Thus, you must choose the market which suits you best and where your strategy will best perform.
2 - Turn volatility to your advantage
Trading is based on the following principle: you buy (or sell) a product at a given price and sell it on (buy it back) at a higher (lower) price. For this to happen there must be a difference between the purchase and selling prices, which implies market volatility, a key element in any trade. Without volatility no transaction will take place, the market will be flat, and it will be even more difficult to develop a strategy for this type of market. The first thing to look for in a market is at least some price fluctuation. But volatility is neither consistent nor permanent. Hence, you must adapt your strategy to existing market conditions.
3 - Test your strategy
If you are looking for a trading technique which can be used over and over again, you must start by checking that it worked in the past. You need to test your strategy on historical graphs and prices. This type of past simulation is key to understanding potential future performance. Nothing is ever set in stone of course but bad results with historical data do not augur well for the future. Remember as well that testing must go beyond the past as virtual simulations of the strategy with current prices is often key. Testing a trading strategy can take weeks or months in order to assess the real conditions of a target market before taking a risk.
4 - Manage risk
Any trading process requires disciplined account management. This can be called risk management, or money management, etc. Any strategy must include this type of management, this is indeed the key point to remember. A strategy must set a time for opening and closing a position, as well as determine the volume of each trade and the placing of stop-loss limits. Indeed, observing these rules is the only way you can last and achieve a sustainable performance in the long run. Assessing the risk, managing your portfolio exposure and correlations, these are key factors in the success of any long-term winning strategy. Otherwise the best-ever technique is worthless.
5 - Know when to adapt
As mentioned earlier, market conditions, volatility, and volume of trade can change over time, even on a well-targeted market. So a perfectly sustainable strategy does not exist. Ideally you need an adaptable technique or process which takes all the market factors into account. In practical terms this is bound to quickly become complex and unmanageable. At the same time, you can easily map out the outline of a strategy whilst ensuring parameters can be modified as the market changes. This, less detailed, process would allow you to adapt to market conditions in the long term.
If you take these broad principles into account you will greatly improve the odds that your strategy will perform sustainably. However, please bear in mind that finding such a miracle solution may take a long time.
It would be best to stay level-headed and humble when trading, and to understand that markets are impossible to control and that the safest strategy may be to trust your own instincts.
Last Update on 05/06/18