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    HAHA2

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    of 6

    In 

    finance, a trading strategy is a fixed plan that is designed to achieve a profitable


    return by going long or short in markets. The main reasons that a properly researched
    trading strategy helps are its verifiability, quantifiability, consistency, and objectivity.
    For every trading strategy one needs to define assets to trade, entry/exit points and
    money management rules. Bad money management can make a potentially profitable
    strategy unprofitable.[1]
    Trading strategies are based on fundamental or technical analysis, or both. They are
    usually verified by backtesting, where the process should follow the scientific method,
    and by forward testing (a.k.a. 'paper trading') where they are tested in a simulated
    trading environment.[2]

    Types of trading strategies[edit]


    The term trading strategy can in brief be used by any fixed plan of trading a financial
    instrument, but the general use of the term is within computer assisted trading, where a
    trading strategy is implemented as computer program for automated trading. Technical
    strategies can be broadly divided into the mean-reversion and momentum groups.[3]

     Long/short equity. A long short strategy consists of selecting a universe of


    equities and ranking them according to a combined alpha factor. Given the
    rankings we long the top percentile and short the bottom percentile of
    securities once every rebalancing period.
     Pairs trade. A pairs trading strategy consists of identifying similar pairs of
    stocks and taking a linear combination of their price so that the result is
    a stationary time-series. We can then compute z-scores for the stationary
    signal and trade on the spread assuming mean reversion: short the top asset
    and long the bottom asset.
     Swing trading strategy; Swing traders buy or sell as that price volatility sets in
    and trades are usually held for more than a day.
     Scalping (trading); Scalping is a method to making dozens or hundreds of
    trades per day, to get a small profit from each trade by exploiting the bid/ask
    spread.
     Day Trading; The Day trading is done by professional traders; the day trading
    is the method of buying or selling within the same day. Positions are closed
    out within the same day they are taken, and no position is held overnight.
     Trading the news; The news is an essential skill for astute portfolio
    management, and long term performance is the technique of making a profit
    by trading financial instruments (stock, currency...) just in time and in
    accordance to the occurrence of events.
     Trading Signals; Trading signal is simply a method to buy signals from
    signals provider.[4]
     Social trading; using other peoples trading behaviour and activity to drive a
    trading strategy.
    All these trading strategies are basically speculative. In the moral context speculative
    activities are considered negatively and to be avoided by each individual.[5][6] who
    conversely should maintain a long-term horizon avoiding any types of short term
    speculation.

    Development[edit]
    The trading strategy is developed by the following methods:

     Automated trading; by programming or by visual development.


     Trading Plan Creation; by creating a detailed and defined set of rules that
    guide the trader into and through the trading process with entry and exit
    techniques clearly outlined and risk, reward parameters established from the
    outset.
    The development and application of a trading strategy preferably follows eight steps:
    [7]
     (1) Formulation, (2) Specification in computer-testable form, (3) Preliminary testing, (4)
    Optimization, (5) Evaluation of performance and robustness,[8] (6) Trading of the
    strategy, (7) Monitoring of trading performance, (8) Refinement and evolution.

    Performance measurement[edit]
    Usually the performance of a trading strategy is measured on the risk-adjusted basis.
    Probably the best-known risk-adjusted performance measure is the Sharpe ratio.
    However, in practice one usually compares the expected return against the volatility of
    returns or the maximum drawdown. Normally, higher expected return implies higher
    volatility and drawdown. The choice of the risk-reward trade-off strongly depends on
    trader's risk preferences. Often the performance is measured against a benchmark, the
    most common one is an Exchange-traded fund on a stock index. In the long term a
    strategy that acts according to Kelly criterion beats any other strategy. However, Kelly's
    approach was heavily criticized by Paul Samuelson.[9]

    Executing strategies[edit]
    A trading strategy can be executed by a trader (Discretionary Trading) or automated
    (Automated Trading). Discretionary Trading requires a great deal of skill and discipline.
    It is tempting for the trader to deviate from the strategy, which usually reduces its
    performance.
    An automated trading strategy wraps trading formulas into automated order and
    execution systems. Advanced computer modeling techniques, combined with electronic
    access to world market data and information, enable traders using a trading strategy to
    have a unique market vantage point. A trading strategy can automate all or part of your
    investment portfolio. Computer trading models can be adjusted for either conservative
    or aggressive trading styles.

    See also[edit]
     Alpha (finance)
     Do-it-yourself investing
     Empirical research
     Falsifiability
     Forex Signal
     Investment strategy
     Statistical inference

    References[edit]
    1. ^ Nekrasov, V. Knowledge rather than Hope: A Book for Retail Investors and Mathematical
    Finance Students. 2014,  pages 24-26. ISBN 978-3000465208
    2. ^ "Day Trading Strategies: 4 Timeless Approach". DayTradeTheWorld. 8 November 2021.
    3. ^ "Master One Strategy Before Learning Others".  www.thebalance.com.
    4. ^ Low, R.K.Y.; Tan, E. (2016).  "The Role of Analysts' Forecasts in the Momentum
    Effect"  (PDF). International Review of Financial Analysis. 48: 67–
    84.  doi:10.1016/j.irfa.2016.09.007.
    5. ^ Ryan, John A (1902). "The Ethics of Speculation". International Journal of Ethics.  12  (3):
    335–347. doi:10.1086/intejethi.12.3.2376347.  JSTOR  2376347.  S2CID 143227107.
    6. ^ "CATHOLIC ENCYCLOPEDIA: Speculation".  www.newadvent.org.
    7. ^ Pardo, R. The Evaluation and Optimization of Trading Strategies. J. Wiley & Sons, 2008,
    page 18. ISBN 978-0-470-12801-5
    8. ^ "R&D BLOG - Oxfordstrat". Oxfordstrat.
    9. ^ Samuelson, P. (1971). The "fallacy" of maximizing the geometric mean in long sequences of
    investing or gambling. Proceedings of the National Academy of Sciences, 68(10):2493–2496

    External links[edit]
     Example of Trading Strategy Design Methodology at AlgorithmicTrading.net
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     This page was last edited on 16 February 2023, at 07:31 (UTC).
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