In finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistency, and objectivity. The development and application of a trading strategy follows eight steps:Formulation, Specification in computer-testable form, Preliminary testing, Optimization, Evaluation of performance and robustness, Trading of the strategy, Monitoring of trading performance, Refinement and evolution.
For every trading strategy one needs to define assets to trade, entry/exit points and money management rules. Bad money management can make a potentially profitable strategy unprofitable.
Trading strategies are based on fundamental or technical analysis, or engage them both. Technical strategies can be broadly divided into the mean-reversion and momentum groups. There are also specific strategies, like "Sell in May and go away but remember to get back in September". Trading strategies are usually verified by backtesting where the process should follow the scientific method.
Types of trading strategies
The term trading strategy can in brief be used by any fixed plan of trading a financial instrument, but the general use of the term is within computer assisted trading, where a trading strategy is implemented as computer program for automated trading.
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