In finance

Finance

"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...

, a trading strategy (see also trading system) is a predefined set of rules for making trading decisions.

Traders, investment firms and fund managers use a trading strategy to help make wiser investment decisions and help eliminate the emotional aspect of trading. A trading strategy is governed by a set of rules that do not deviate. Emotional bias is eliminated because the systems operate within the parameters known by the trader. The parameters can be trusted based on historical analysis (backtesting

Backtesting

Backtesting is the process of evaluating a strategy, theory, or model by applying it to historical data. Backtesting can be used in situations like studying how a trading method would have performed in past stock markets or how a model of climate and weather patterns would have matched past...

) and real world market studies (forward testing), so that the trader can have confidence in the strategy and its operating characteristics.

Development

When developing a trading strategy, many things must be considered: return, risk, volatility, timeframe, style, correlation with the markets, methods, etc. After developing a strategy, it can be backtested using computer programs. Although backtesting

Backtesting

Backtesting is the process of evaluating a strategy, theory, or model by applying it to historical data. Backtesting can be used in situations like studying how a trading method would have performed in past stock markets or how a model of climate and weather patterns would have matched past...

 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.

Executing strategies

A trading strategy can be executed by a trader (manually) or automated (by computer). Manual trading requires a great deal of skill and discipline. It is tempting for the trader to deviate from the strategy, which usually reduces its performance.

An automated trading strategy wraps trading formulas into automated order and execution systems. Advanced computer modeling techniques, combined with electronic access to world market data and information, enable traders using a trading strategy to have a unique market vantage point. A trading strategy can automate all or part of your investment portfolio. Computer trading models can be adjusted for either conservative or aggressive trading styles.

The publication of Trading Strategy Indices as investable indices that implement a range of trading strategies has become a growing business for many of the major Investment banks.

Styles

• Mirror trading
  Mirror trading
  The mirror trading method allows traders in financial markets to select a trading strategy and to automatically “mirror” the trades executed by the selected strategies in the trader's brokerage account....
  
  
• Technical analysis
  Technical analysis
  In finance, technical analysis is security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis incorporate technical analysis, which being an aspect of active management stands...
  
  
• Fundamental analysis
  Fundamental analysis
  Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and...
  
  
• Quantitative trading
• Trend following
  Trend following
  Trend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The strategy aims to work on the market trend mechanism and take benefit from both sides of the market, enjoying the profits from the ups and downs of the stock or...
  
  
• Mean reversion
  Mean reversion
  Mean reversion is a mathematical concept sometimes used for stock investing, but it can be applied to other assets. In general terms, the essence of the concept is the assumption that both a stock's high and low prices are temporary and that a stock's price will tend to move to the average price...
  
  
• Volatility (finance)
  Volatility (finance)
  In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
  
  
• TradingLevels
• Price action trading
  Price action trading
  The concept of price action trading embodies the analysis of basic price movement as a methodology for financial speculation, as used by many retail traders and often institutionally where algorithmic trading is not employed, and at its most simplistic, it attempts to describe the human thought...
  
  

Timeframes

• Intraday
• High-frequency
  High-frequency trading
  High-frequency trading is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features:...
  
  
• Scalping (trading)
  Scalping (trading)
  Scalping, when used in reference to trading in securities, commodities and foreign exchange, may refer to# a fraudulent form of market manipulation# a legitimate method of arbitrage of small price gaps created by the bid-ask spread....
  
  
• Shaving (trading) - a round trip trade (a buy and sell) in as little as one second.
• Momentum (finance)
  Momentum (finance)
  In finance, momentum is the empirically observed tendency for rising asset prices to rise further, and falling prices to keep falling. For instance, it was shown that stocks with strong past performance continue to outperform stocks with poor past performance in the next period with an average...
  
  
• Day trading
  Day trading
  Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions are usually closed before the market close for the trading day...
  
  
• Trend following
  Trend following
  Trend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The strategy aims to work on the market trend mechanism and take benefit from both sides of the market, enjoying the profits from the ups and downs of the stock or...
  
  
• Gorilla Trading - Buying near the closing bell and selling the next morning (holding a position overnight)
• Long term trading
• Short term trading
• Trading Strategy Index

External links

• Swing Trading Stock News