A trading
strategy can be executed by a trader manually or automated by computer. Manual
trading requires a great deal of skill and discipline. An automated trading
strategy wraps trading formulas into automated order and execution systems.
Development
A statistical
evaluation of a trading strategy has two main goals. The first is to find out
the optimal account capitalization requited to achieve the maximum rate of
sustainable return. The second is to find out whether the risk-adjusted reward
is equal to, inferior to, or superior to other competing strategies. Without a
statistically reliable measurement of the risk-adjusted reward, it is impossible
to assess whether future performance is in line with historical performance.
When developing
a trading strategy, many things must be considered: return, risk, volatility,
time frame, style, correlation with the markets, and methods.
After developing a strategy, it can be back tested using computer programs.
Although back testing is no guarantee of future performance, it gives
the trader confidence that the strategy has worked in the past. If the strategy
is not over-optimized, data-mined, or based on random coincidences, it might
have a good chance of working in the future.
In finance,
a trading strategy is a fixed plan that is designed to achieve
a profitable return by going long or short in markets.
Strategy trading has a number of significant advantages when compared to
intuition-based trading. Institutional traders have been using trading
strategies for a long time, while private traders had very limited tools to
create trading strategies that work.
