This article is not a recommendation to trade any specific commodity.
So what’s our trading strategy?
In this next series of posts, we’re going to look at a few trading strategies that traders use for share and CFD trading alike.
What’s a strategy?
A strategy is a set of rules written or is even a full on coded system where you can backtest results and find islands of optimization, it all can refer to a CFD trading strategy where the rules of a trading system are defined.
If it’s backtestable, then it is by definition a “mechanical” system based on technical analysis and indicators, and chart price action, for those traders who prefer not to live by the seat of their pants and decide on a trade by discretion or ‘experience’ especially if they have little. However future performance may and will be different.
OK, some people do criticise mechanical systems in that after a while their experience may tell them, or suggest to them that they should do something different because of rules outside the strategy for trading. But for now, let’s assume that you do follow a system.
So you backtest a system and see results.
And you adjust it til there is robustness, consistency and avoidance of overoptomisation if this is possible.
Then you trade the strategy.
And the results?
It depends on timing…
Equity curves go up and down but hopefully mostly up, but in never a perfect staircase fashion.
Some systems can go down for 4 months before going up for 8, some go down for a few weeks before going up. It depends on the strategy and where in the equity curve you start the trading.
So lesson one is that depending on the smoothness of the equity curve of the strategy, you may be only able to judge the system or strategy over a time frame of weeks than days, or even months than weeks. If your system takes 6 trades a year, then it takes a while to see results. If it takes 3 a week, then you can gauge results sooner.
So the first thing you must know about your strategy as basics are:
1. What are the strategy characteristic: how many trades it takes, and the typical win loss and profit loss ratios
2. How do you know it’s on track: it depends on the above and you watching your performance carefully
3. Time scale: some prefer many trades a week, some prefer less
4. Trading something mechanical or discretionary
5. Trading something that is back tested or forward tested – both is ideal
And by the way this applies for forex, index, share and commodity trading as well not just for contracts for difference. So have these sorted out in your mid before the next post where we’ll go into more detail about different system and CFD strategy types.