Scribd Logo
Upload

Welcome to Scribd!

  • 2 views

    Trading Strategy Meaning

    Uploaded by

    riyamatthew1122

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Trading Strategy Meaning

    Uploaded by

    riyamatthew1122
    2 views5 pages

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    2 views5 pages

    Trading Strategy Meaning

    Uploaded by

    riyamatthew1122

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Trading strategy

    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 difference between short trading and long-term investing is in the opposite approach and
    principles. Going short trading would mean to research and pick stocks for future fast trading
    activity on one's accounts with a rather speculative attitude.[1][2] While going into long-term
    investing would mean contrasting activity to short one. Low turnover, principles of time-tested
    investment approaches, returns with risk-adjusted actions, and diversification are the key
    features of investing in a long-term manner.[3]

    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.[4]

    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.[5]

    Types of trading strategies

    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.[6]

    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.[1][2]

    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.[7]

    Social trading; using other peoples trading behaviour and activity to drive a trading strategy.[2]

    All these trading strategies are basically speculative. In the moral context speculative activities
    are considered negatively and to be avoided by each individual.[8][9] Who conversely should
    maintain a long-term horizon avoiding any types of short term speculation.[2]

    Development

    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:[10] (1)
    Formulation, (2) Specification in computer-testable form, (3) Preliminary testing, (4) Optimization,
    (5) Evaluation of performance and robustness,[11] (6) Trading of the strategy, (7) Monitoring of
    trading performance, (8) Refinement and evolution.

    Performance measurement

    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.[12]
    Executing strategies

    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 while the price variation is favorable or
    aggressive trading styles e.g. Scalping is considered a form of trading in financial markets with a
    very short-term approach that is why it is associated with aggressive style.[13][14]

    Trading activity boost and development is connected with the era of internet inception. First
    online related trading activity and rapid growth of electronic commerce started in 1997–98.[15]

    See also

    Alpha (finance)

    Alternative trading system

    Do-it-yourself investing

    Electronic trading platform

    Empirical research

    Falsifiability

    Forex Signal

    Investment strategy

    Statistical inference

    Quantitative investing

    References

    1. "Yale Champions Social Investing (Whatever That Is)" (https://www.bloomberg.com/view/ar


    ticles/2018-10-19/yale-champions-social-investing-whatever-that-is) . Bloomberg.com.
    2018-10-19. Retrieved 2023-12-02.
    2. Hill, John (2020). Environmental, social, and governance (ESG) investing: a balanced analysis
    of the theory and practice of a sustainable portfolio. London: Academic Press, an imprint of
    Elsevier. ISBN 978-0-12-818693-0.

    3. Proctor, Clint. "Trading and investing are two approaches to playing the stock market that
    bring their own benefits and risks" (https://www.businessinsider.com/personal-finance/tradi
    ng-vs-investing) . Business Insider. Retrieved 2023-12-02.

    4. Nekrasov, V. Knowledge rather than Hope: A Book for Retail Investors and Mathematical
    Finance Students. 2014, pages 24-26 (http://www.yetanotherquant.com/teaser.pdf) .
    ISBN 978-3000465208

    5. "Day Trading Strategies: 4 Timeless Approach" (https://www.daytradetheworld.com/trading-


    blog/4-timeless-day-trading-strategies-you-should-know/) . DayTradeTheWorld. 8
    November 2021.

    6. "Master One Strategy Before Learning Others" (https://www.thebalance.com/traders-master


    -one-strategy-before-learning-others-1030881) . www.thebalance.com.

    7. Low, R.K.Y.; Tan, E. (2016). "The Role of Analysts' Forecasts in the Momentum Effect" (http://
    espace.library.uq.edu.au/view/UQ:406166/UQ406166_OA.pdf) (PDF). International Review
    of Financial Analysis. 48: 67–84. doi:10.1016/j.irfa.2016.09.007 (https://doi.org/10.1016%2
    Fj.irfa.2016.09.007) .

    8. Ryan, John A (1902). "The Ethics of Speculation". International Journal of Ethics. 12 (3):
    335–347. doi:10.1086/intejethi.12.3.2376347 (https://doi.org/10.1086%2Fintejethi.12.3.237
    6347) . JSTOR 2376347 (https://www.jstor.org/stable/2376347) . S2CID 143227107 (http
    s://api.semanticscholar.org/CorpusID:143227107) .

    9. "CATHOLIC ENCYCLOPEDIA: Speculation" (http://www.newadvent.org/cathen/14211a.ht


    m) . www.newadvent.org.

    10. Pardo, R. The Evaluation and Optimization of Trading Strategies. J. Wiley & Sons, 2008, page
    18. ISBN 978-0-470-12801-5

    11. "R&D BLOG - Oxfordstrat" (http://www.oxfordstrat.com/rd-blog/) . Oxfordstrat.

    12. 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

    13. "Passive Order. Definition and Meaning" (https://capital.com/passive-order-definition) .


    capital.com. Retrieved 2023-05-21.

    14. "What is Scalping" (https://capital.com/scalping-definition) . capital.com. Retrieved


    2023-05-21.
    15. Wu, Jennifer; Siegel, Michael; Manion, Joshua (June 1999). "Online Trading: An Internet
    Revolution" (https://web.mit.edu/smadnick/www/wp2/2000-02-SWP%234104.pdf) (PDF).
    Sloan School of Management. Massachusetts Institute of Technology.

    You might also like