Why Follow a Trading Strategy?
When you are trading any type of financial instrument, paying close attention to two factors is crucial to ensure consistent profitability. These two factors include excellent money management and a sound trading strategy. Cross-betting that is chaotic is a trading styledoomed to fail. Adequately tested and systematic trading strategies are crucial for surviving the intense competition in the financial markets.
Advantages of having a clear cut trading strategy
Systematic trading is fundamental to long-term success because of these reasons:
- Retain focus: Adopting tried and tested trading strategy enables you to retain your focus in the face of an overwhelming influx of economic data and news. Without a plan, the huge volumes of data can seriously impede the process of analysis. Besides, novice traders may lack profound knowledge of asset pricing characteristics. With a predetermined trading strategy, you can be assured of profit irrespective of the flow of incoming news.
- Improve performance: The trading strategy improves your performance because it is measurable. With chaotic trading devoid of a sound trading plan there is no opportunity to carry out an assessment of your performance, as there is no constant basis or reference point for comparison.
- Create a database: Adopting a trading strategy for a prolonged duration facilitates the creation of a statistical database. Such a database can help you evaluate performance and post the evaluation, steps can be taken to improve the same. Modification of some parameters and comparison of new results with historical data will enable you to gauge the success of the upgrade.
- Control emotions. An evidence-based trading strategy will help reign in emotions. Emotions are the most challenging aspects to overcome, particularly when there is a prospect of losing hard-earned money. At times, novice traders who have had a streak of bad or good trades are vulnerable to fear or greed. Both greed and fear can give rise to irrational decisions. When greed takes over, novices may bet excessively for each position, open more positions and double the bets if the option is ‘in the money.’ Fear can lead to becoming overcautious where the trader tends to bet much lesser money than optimal and avoids foraying into good positions and ends up missing out on possible profits. A sound trading strategy helps traders disregard volatility, controls emotions and retain focus on long-term success.
- Avoid frenzies: Over trading can be detrimental to traders. A defined trading strategy clearly spells out exit and entry rules preventing traders from slipping into the trap of over trading.