Things to Consider When Using Trading Strategies

Things to Consider When Using Trading Strategies

. 6 min read

Trading commodities is not easy. The trade markets are highly volatile, and certain market conditions can suddenly force you to change your approach. Each market has its own set of rules and unique circumstances.

For instance, if you’re trading in currency pairs, you need fast-paced strategies to keep up with the market. The same goes for any other market and commodity, which is why every trader needs an awesome strategy, to begin with.

There are quite a few trading strategies that are ideal for certain market conditions. On the other hand, most traders develop strategies that suit their trading style. Whichever trading strategies you opt for, you should consider a few things.

Understanding trading strategies

Each trading strategy consists of an investment and trading plan. Moreover, they also contain investment objectives, risk tolerance, tax consequences, and many more. Whether you create your trading strategy or use a preexisting one, it’s vital to adjust them to your trading style and your personal goals.

Whether you are buying or selling assets, such as ETFs, cryptos, bonds, shares, and so on, you have to consider how the trade will impact your portfolio. That’s why you should work with a broker to implement best the strategies you have in mind.

Furthermore, it would help if you always considered portfolio diversification when using trading strategies. The main reason is that you must account for risk tolerance. In other words, which percentage of your portfolio are you willing to risk on a trading strategy? Not only that, but you must also set both entry and exit rules. Otherwise, you are at greater risk of losing your investment entirely.

Experienced traders know that it’s vital not to risk everything on a single trade regardless of how effective your trading strategy maybe when it comes to portfolio diversification. In essence, a diverse portfolio means having multiple strategies and investments you can use to mitigate and minimize trading risks.

Should one trade go sideways, you can always break even or cover your losses with another trade or investment. For example, if your stock trade doesn’t turn out the way you’ve expected and you lost a lot of money on that particular trade, you still have real estate property you can rent or sell to break even or turn a profit.

Doing the homework

Information is key to ensuring that a trading strategy is effective and successful. A trading strategy on its own means nothing if you don’t have the information to back it up. As mentioned before, each trading strategy works best if the market conditions are ideal.

Therefore, do your homework and check if your strategy is viable in current market conditions. Should you choose to skip homework for the day, you’re maximizing trading risks instead of minimizing them, and you’re about to make a mistake that can cost you more than you’ve bargained for.

The same goes when you listen to speculations and predictions by other traders. Other traders are not reliable sources of information. The main reason is that traders expect that others will make a mistake so that they can win the trade and earn money in the process.

That’s why they’ll plant a lot of false information to trick the newbies into making a mistake. Therefore, rely only on reputable sources of information, such as your broker or official financial reports.

Developing a trading strategy

As mentioned before, you can use many trading strategies, or you can always develop your own. One thing that trading strategies have in common is that they’re based on, not in small part, technicals, and fundamentals.

In other words, you need quantifiable information to back your trading strategy with accuracy. Therefore, if you create a technical trading strategy, it will be based on technical factors to generate trading signals.

On the other hand, if you create a fundamental trading strategy, it will be based on fundamental indicators, such as revenue growth and profitability, to generate trading opportunities.

Either way, the information, and its accuracy are the key to creating efficient trading strategies. However, there’s also a third possibility called quantitative trading strategy. This strategy is similar to the technical one, and it uses stock information to arrive at the sale or purchase opportunity.

The only difference is that the trader will use multiple data points to arrive at these opportunities. Such data points may include a matrix of factors that involve regression analysis, trading rations, prices, technical data, etc.

That being said, the quantitative trading strategy uses considerably broader data and information than the technical strategy, so you may call it playing it safe through tons of research.

Opportunities for buying and selling

As you may already know, each trading strategy needs to be adequately tested. Some traders do so with a demo account where actual trading is simulated, while others do so in the live trading environment.

If you don’t have a lot of capital to throw around, it’s better to test your strategies in a safe and simulated environment where you can’t lose any real money. When testing strategies, it’s vital to identify opportunities for buying or selling. Here are a few examples.

Deciding what to buy and when

Typically, traders make money by exploiting minute price movements in individual assets ranging from stocks and bonds to currencies, options, and features alike. In most cases, this requires leveraging a large amount of capital. That being said, here are a few things to look out for.

  • Liquidity - This allows you to either enter or exit a stock at a good price. Looking for tight spreads, the difference between the bid and ask price of the asset, as well as low slippage, are good examples of leveraging liquidity to your advantage
  • Volatility - This allows you to measure an asset's expected daily price range. More volatility means more significant losses or profits.
  • Trading volume - This helps you understand how many assets are bought and sold in a given period. A high trading volume means there's a lot of interest in a given asset. High trading volumes usually indicate an increase or decrease in an asset price.

Deciding when to sell

You can exit a winning position in a plethora of ways. The most common ways are trailing stops and profit targets. Profit targets are an ideal exit method that allows you to make a profit at a predetermined level. That said, here are a few profit target strategies to consider.

  • Scalping - This means selling an asset as soon as it becomes profitable. Your profit target is whatever translates to you making an actual profit.
  • Fading - This strategy includes shortening stock after a rapid move upwards. This can mean that someone overbought the asset, and now traders will start taking profits while existing buyers could potentially be scared away. When buyers start stepping in again, that is your opportunity to exit.
  • Daily pivots - This strategy involves leveraging the asset’s daily volatility. You buy when the price is low and sell when the price is high enough to generate a profit.
  • Momentums - This strategy relies on news releases. When the news comes out or a financial report, the price of an asset will start to increase. Traders buy before that happens and ride the momentum until the first sign of reversal, which is when they sell the asset.

As you can see, there are a lot of strategies that will allow you to buy and sell a commodity or an asset. However, a trading strategy doesn’t guarantee success in any way. It only allows you to exploit current market conditions and movement trends in the best way possible.

If you know which trading strategy to leverage at the right time, your chances of winning a trade increase, but that still doesn’t mean that you’ll make the profit target that you wanted.

Special considerations to keep in mind

Each trading strategy is designed to help traders ensure consistent results. Although there is no recipe for success, trading strategies can help traders avoid behavioral finance biases that are quite common. In other words, trading strategies cannot ensure profitability, but they can help you avoid situations like disposition effects.

For example, that would mean holding onto stocks that are losing value and selling stocks that will continue to increase in value. More importantly, traders often become too dependent on trading strategies because they do tend to give you a sense of confidence though it may be a false sense, in the first place.

Most trading strategies are based on previous performance and past market data, but conditions change all the time. What has worked in the past may not necessarily work in the future. That’s why it is crucial to stress test trading strategies before using them.

Closing Words

Trading strategies, although quite reliable, aren’t the only means that will ensure success. A good trader knows how to read the market so that they’ll implement the right trading strategy or adapt it to fit current market conditions.

If you’re about to use any of the trading strategies available to you, you have to make sure that they will, in fact, provide viable results.

More often than not, you have to adjust your strategies the right way or use different ones depending on the circumstances. That’s why it is essential to explore other trading strategies and see how they can benefit your trading style.


Part of the expertEasy writing team, Laura is from the UK and has a keen interest in Business, interior design and decor, home improvement and thriftiness in all things around the house and garden.

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