Sure Shot Long-term Trading Strategy
Traders usually won't hold a single security for longer than four months
. That doesn't mean there's no traders who look toward maximizing profits over the long run. Traders who objective at maximum returns are called "absolute returns" traders, in contrast to "benchmark" traders who objective at hitting a positive positive return rate over a financial quarter or year. Longer-term traders often have significant draw-downs (reductions in the size of their accounts), but they objective to compensate by huge growth measured over the years.
Edge
In the book "Trend Following," Sam Mathew argues that the persistent "edge" (the advantage) of a trader can be calculated in terms of winning and losing trades and the amount lost and won on each trade: E = (percentage wins * average wins) - (percentage losses *average losses). E stands for "edge," "percentage wins" stands for percentage wins, "average wins" stands for average wins, "percentage losses" stands for percentage losses and "average losses" stands for average losses. The trader who sustains a positive edge over the long run will earn consistent returns. Any trader seeking to make money over the long run must develop a system that creates an edge.
Elements of a Trading System
Traders who want to earn money in the long run have to be disciplined. The greater the number of judgment calls that a trader must make to sustain performance, the greater the chance that he will become overwhelmed and experience a decline in overall performance. The key of any successful trading system are as follows--it must determine when to enter a trade and under what circumstances to exit it, and also he must know how much to risk on any single position. If there is no system, it becomes more difficult to quantify its edge.
Creating Discipline
Creating a functional system and sticking to it are crucial to maintaining trading success. Some systems will work only during specific periods of history. For example, a strategy of buying technology stocks and selling them after they go up in price by 1,000 percent would have been a winning system from 1995 to 1999 during the technology boom. From 2000 to 2009, that "system" would likely only experience catastrophic losses. The most resilient systems are applicable to multiple asset classes over any era in history. This is why traders who primarily use technical analysis, which encourages decision-making based entirely on the heuristic of price, also tend to be systems traders.
Systems Trading
The most challenging aspect of systems trading after developing the system is actually sticking to it. The most beneficial trading systems are mathematically back-tested to historical trading conditions to ensure that it gives an edge over the long term. Diverting from a tested, functional system with discretionary trading may have catastrophic effects. To make your long-term trading success, a systems trader must remain within the bounds of his system, even if he has feelings and intuitions that spur him to make trading decisions counter to what the system tells him to do.
by: Sam Mathew.
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