Opening Position
January 2011
If the behavior of the financial markets in 2010 is any indication of what we can expect in 2011, I think it is safe to say that we can put the buy & hold approach on the back burner. Does that mean short-term trading is the way to make any money in the markets right now? There’s no guarantee that trading in the short term will generate acceptable returns, especially since it’s common belief that most short-term traders lose money. We need to find some sort of reliable method in these unstable times.
Unfortunately, there is no one-size-fits-all strategy. So a good strategy would be to have a collection of trading systems, either systematic or discretionary, that you are confident will give you the returns you are looking for. But keep in mind that those systems need to be unique to you. Don’t just blindly follow someone else’s trading system. It is extremely important that you fully understand the system you are trading and, more important, you must backtest it constantly to make sure it is working the way you want it to. The thought of programming trading systems from scratch could turn you off since it may seem so difficult and time-consuming, but given that there are so many trading systems available, creating trading systems is not the most time-consuming part. It is testing and tweaking these systems that will take the most time.
The trading systems presented in Technical Analysis of Stocks & Commodities are tested ones, which you can easily implement into the trading software you use. Even if you choose to copy and paste the code via our Traders’ Tips section (available at our website), I encourage you to understand the system and test it on the securities you wish to trade and the time frame you wish to trade. Only then will you be able to determine if the performance of the system is something you are comfortable with. Further, this is an excellent way to perform an out-of-sample test, since it gives you an opportunity to compare your results with the published ones. If your results aren’t exactly what you would like them to be, it isn’t the end of the world. Think of it as an opportunity to modify the system so it is more in line with your needs. Then test it again, and if you’re still not fully satisfied, modify it again. Repeat this process till you are happy with the way the system performs. This is what will make the system unique to you.
The markets are constantly evolving, and whatever trading system you use should also be in tune with the markets. Using trading systems you are comfortable with will minimize your losses and emotions. And this is what will make a difference in your trading results.
Jayanthi Gopalakrishnan, Editor