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What makes a good Trading Strategy?

Ask most NEW traders, and they will tell you about some moving average or combination of indicators or a chart pattern that they use. This is, as the more experienced trader knows, an entry point and not a strategy.

Any trader who is more experienced will say a strategy should also include money management, risk control, perhaps stop losses and of course, an exit point. They might also say that you must let your profits run and cut your losses short. A well-read trader will also tell you that your strategy should fit with your trading personality.

BUT there is one other vital ingredient that many traders forget - and that is to fully understand the "personality" of what you trade. Some traders specialise in say, gold or Brent crude or currencies or they might specialise in a particular index such as the FTSE 100 or the Dow but many traders choose to trade shares. Indeed some traders dabble in a bit of everything. I think this is the area that causes many traders to fail or at least not reach their full potential.

In my view: You absolutely MUST specialise.

I am sure that on the surface most people would say that sounds sensible but here is why it is a MUST!

Superficially, many charts look the same. I bet if you had not seen the charts for some time and someone where to show you a chart of Brent Crude over 6 months and then a chart of Barclays PLC over the same 6 months you would be hard pushed to say which was which purely on the look of the chart.

However, I bet that if you found a trader who trades ONLY Barclays day in and day out and also found someone who trades ONLY Brent Crude day in and day out, both of them would easily identify which was which. WHY?

Because every share, index or commodity has it�s own "personality".

Some will be volatile intra-day, some will follow their sector or the main index (market followers), some will do their own thing, some will spike up and down regularly, some will stop at key moving averages and some will just plough through. Some will move by 5% on average before they retrace and some by 2%. Some will gap up or down regularly, some will not. You get the idea!

Therefore, no matter how good you are at analysing indicators, moving averages, trends and patterns, the same strategy WILL NOT work for everything. I would go so far as to say that a strategy that works well for Bovis Homes, for example, is likely NOT to work for BT Group - they have very different "personalities".

So let�s return to our question: What makes a good trading strategy? Let me answer with a series of ten questions that you need to find answers to, in order to build a REALLY GOOD strategy.

1. What do you want to trade (share, index, commodity, currency, etc)? If your answer is shares (plural) I would urge you to pick one typical share at this stage to really specialise. You can add more later.
2. What "personality" does that share, index etc have?
3. What entry system is the most reliable for that share?
4. What stop loss system is the most effective for that share?
5. What average risk will a typical trade carry?
6. What exit system works well for that share?
7. What is your trading personality (attitude to risk, losses, discipline, how much do you worry etc) and can you trade that strategy without overriding it?
8. What timescale do you want to trade? (Using intra-day or end of day data)
9. How much data do you keep on past trades to help identify strategy weaknesses?
10. How does all this fit with your trading objectives?

Once you have an answer to each question you need to do one final thing. Make sure all those things fit together and complement each other. For example, if the ideal stop loss position represents a big average risk and conflicts with your own attitude to risk, you need to start again. If you will override your exit point because greed makes you hang in for more, you need to think again. Perhaps you shouldn�t trade that stock in the first place - look for one with a different "personality" which will lead to a strategy you can trade comfortably.

It is a long and sometimes painful iterative journey. You might need to go round and round in ever decreasing circles over a long time. Testing and refining, testing and refining before you can truly have a reliable and repeatable strategy that REALLY WORKS for you.

THEN, you can look for other things to trade that have the same "personality" as your specialist stock, index, commodity or currency.

But if it were easy, everyone would be doing it right?

Good luck and enjoy your trading.

David Graeme-Smith
Short Swing Trading
http://www.shortswingtrading.com/

Some Quick Forex Information

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Economic factors and indicators are released by the government or by private organizations that can look in depth at economic performances. These indicators can be used to analyse economic performances from any country. The economic reports measure a country's economic health, in addition to government policies and current events.

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What will this mean for the currency trading market?

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TREND TRADING: Accumulation and Distribution
Forex market like any other market works in a very simple way. It accumulates in a certain area for awhile, and once the accumulation is over, it advances to a certain distance until distribution starts, and accumulation happens again and advances to a certain distance again, and repeat and repeat. Day trading may not yield the best results while the accumulation and distribution work out itself, being double-murdered by zig-zag moves, while the market starts advancing out of accumulation area, day trading is a sure way of cutting profit short. In general, day trading is not the best form of yielding the most profits in my experience contrary to what some writers who never made real money in this game try to say. The safe and better way in making some money must be wait to for "accumulation" to be over and ride the whole length of advance until "distribution" starts and reverse as the market dictates as a short-term trade for 2-10 days, as the case may be.

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Each Forex Trading cycle is different from the last one and that is the beauty of the market. It is extremely important to look at the big picture from the distance rather than studying the minute and hourly charts with a microscope. And repeat the whole show again and again ?til it shows the sign of turning in daily or weekly chart. And flip. Good trades to you.
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European Morning Update 24th April 2008

Thu, 24 Apr 2008 01:21:33 -0400
Dollar slightly firmer in Asian trading

Releases from Japan:
Forecast Actual
February All Industry Activity Index (MoM) - 0.5% - 1.4%
March Corporate Service Price (YoY) +0.7% +0.4%

Japan’s All Industry Activity Index inevitably followed the poor showing in the Tertiary Index earlier in the week with a -1.4% decline in February. Rather surprisingly it has been the weakness in the services sector that has provided the drag with lower spending on financial and insurance services.

However, given the breakdown of the services sector it is clear that the consumer has been limiting spending on services such as retailing, dining and travel which have been hit by loss of confidence and higher energy prices.

However, on the brighter side corporate service prices rose less than forecast. It was the 20th consecutive monthly rise but saw transportation costs rising by less – mainly linked to the higher value of the Yen.

Still, there were price rises going through at the beginning of April and this should maintain the upward pressure over the coming months.

The following economic releases are due today:

March
U.K. Retail Sales (MoM) - 0.3%
U.K. Retail Sales (YoY) +4.3%
U.S. Durable Goods Orders (MoM) +0.1%
U.S. Durable Goods Orders ex transp (MoM) +0.5%
U.S. New Home Sales (MoM) - 1.0%
U.S. New Home Sales 584K

April
French Business Confidence Indicator 108.0
French Production Outlook Indicator - 13.0
Italian Consumer Confidence Index 99.6
German IFO: Business Climate 104.3
German IFO: Current Assessment 111.0
German IFO: Business Climate 98.0
U.K. CBI Quarterly Industrial Trends
U.S. Initial Jobless Claims (19th) 375K
U.S. Continuing Claims (12th) 2960K

Hmmm, no follow-through for the Euro above 1.6018 yesterday and a pullback instead. In normal circumstances I may just feel more confident of having seen the top. However, the rally from the 1.5510 low has been anything but normal and until I see a stronger reversal signal I’d prefer to take the middle road.

The market does still seem to have its bit between the teeth in condemning the Dollar but frankly it really hasn’t performed that badly against the Swissie and Yen. It’s not a one way market by any means just yet at the moment. And the overall technical signals remain with the beginnings of bullish Dollar cycles which should last for the rest of the year…

So it does seem to come down to whether the Euro has satisfied its lust having had its way with 1.60 or whether it’ll go back for one more gloat.

Elsewhere The Pound dropped nicely back towards the 1.9744 low – and may well get there before a small pullback. However I feel there is room for 1.5690-1.5720 before a larger pullback – and if any correlation does return with the Euro then that may be where the latter may attempt to surmount 1.60 again.

And the other pair to watch to provide clues on the Euro is Euro-Yen. That 164.96 resistance held perfectly yesterday from where we have seen initial losses. I’m not sure it will accelerate too much just yet and while I do expect some minor losses at least I still can’t rule out further broad consolidation. However, this should eventually break lower and I suspect on the back of the Euro first. However, I suspect we’ve seen the top here.

Note important support and resistance areas:

USDJPY EURUSD USDCHF GBPUSD
Res: 104.63-90 1.5985-18 1.0249-82 1.9944-72
Res: 104.18-25 1.5914-26 1.0192-20 1.9830-70

Spt: 103.01-21 1.5814-32 1.0103-29 1.9741-70
Spt: 102.32-66 1.5710-65 1.0020-60 1.9690-16