How To Decide Which Trading Strategy Is Right
A common trait among beginning and unsuccessful traders is the fickle abandonment of trading strategies that delivered a string of losses. And I am absolutely guilty for as long as I can remember. The underlying motivation is sound. You want to improve your results and not trade a system that does not work in the long run. So which trading strategy is right?
All Strategies Suck
It’s inherent to all systems to deliver strings of winners and losers. In that sense all strategies suck. That makes finding something that fits your personality both harder and easier. Why? If they all suck it means you have to decide for yourself how to approach the markets. And there lies the crux. If you have the confidence to decide and persist with your decision chances are you will eventually make that approach profitable. Lesson? Make a choice and stick with it. And I don’t mean to religiously stick with the tactical parameters of your approach and now fine-tune them. But stick to your paradigm of choice.
So here’s the deal for myself. I am drawn to a trend following approach to the markets, it is my choice. I like it, I am too dumb to interpret fundamental data better than others. It’s an easy traffic-light-type style indication for the market, up down or sideways. Trend following allows me to trade the markets without any knowledge about fundamentals whatsoever. If sound, I will be trading on the side of the insiders and experts who anticipate the trends. And there is strong empirical evidence that trend following works. For details I refer you to Michael Covel’s book Trend Following on Amazon. Get the book and blow your mind with what’s possible.
So the point is, how do you decide which approach is right for you? The question to ask yourself is very basic.
Say you are looking at trend following. The central question to answer would be: Do trends exist?
Say you want to trade fundamental macro. Ask yourself if macro data determines market prices?
Likewise with any other approach. If you can put a check mark behind that basic question of validity then for god’s sake stick with that approach and make it work for you. Force it to work for you.