|  Thomas Stridsman is a senior editor for Active Trader , a magazine devoted to helping the short- term trader on the American stock market. Between 1997 and 1999 he was associate editor of Futures magazine, specializing in technical analysis, rule-based trading, and advanced money management techniques. While at Futures he also appeared as a speaker at industry seminars and conferences. Before moving to Chicago in 1997, Stridsman operated his own web-based trading advisory service in Sweden and was chair of the Swedish Technical Analysts Federation. Books Trading Systems that Work , Irwin, 2000 Building and trading a rule-based strategy -
It's not the goal that's important, it's how you get there. Take your time, do your research, and make sure you feel good about yourself while doing it. Analyzing and trading the markets should be fun, and if you don't have fun, you're likely to become sloppy and make mistakes. Also, if you don't have the means to take certain risks, stay away from them, as taking too much risk will make you feel bad and act in panic, resulting in bad decisions and losses you couldn't afford in the first place. -
Garbage in, garbage out. When working on a trading strategy, make sure you have good data to work with that are suitable for your purposes and goals. If your strategy is for the stock market, make sure it's correctly adjusted for splits , dividends , etc. If it is for the futures market, make sure your time series are put together correctly depending on what type of calculations you would like to perform. Comparisons between different markets and time frames always require percentage-based calculations. -
One tool, one purpose. Just as you wouldn't try to build a house with just a screwdriver, don't expect your strategy to work in every market condition or trade. If you're trying to ride the trend, use analysis tools suitable for that purpose. If you're trying to pick tops and bottoms within the trend, use tools suitable for that. Because each trading tool won't work equally as well all the time, you need to have an arsenal of tools working for you simultaneously . -
Learn from the past, don't dwell in it. When putting together a trading strategy using historical data, avoid indulging in too much "woulda, coulda, shoulda" . How much you could have made in the past is not interesting. What you need to do is to use the data to build robust strategies on sound principles and statistically significant results. To do this you need to do all your analysis work based on percentages instead of dollars or points. -
A well-working strategy is better than a profitable strategy. A well-working strategy is a strategy that works equally well on several different markets over several periods, measured in percentage terms. However, just because a strategy works well on a specific market it doesn't have to be profitable as long as the costs associated with trading it are not too high. Therefore, first make sure each strategy is well working, then make it profitable by only using it on suitable markets. -
Compare the apples with the oranges. Because a well-working trading model should work equally well - on average and over time - on several different markets, you have to assume that there are no significant differences in market behavior between any markets. Whether this is a fact or not is open to argument, but this is what you have to assume to build a robust trading strategy and trade it with sophisticated money management. And again, to achieve this you need to work with percentages. -
Strive for mediocrity . Know what your average trade looks like and strive to repeat it. Each time you deviate from it you, put yourself in unfamiliar territory that might result in bad decisions. If you don't know why your strategy is producing results that are better than expected, that very reason, or its inverse, might be what ruins you in the end, as you have no way to prepare for a market condition that you could see coming but foolishly ignored. -
Diversify away the risks, not the profits. When using a fixed fractional money management strategy, the fraction of your capital that you risk per trade equals your worst expected outcome. Therefore, risking more does not necessarily increase the growth rate of your capital, but will increase your risk. Furthermore, proper money management will speed up equity growth, provided that the markets traded are as low correlated with each other as possible. This means that even a losing market can add to the bottom line. -
Your worst drawdown doesn't have to be in front of you. For a portfolio traded with proper money management, the whole will be greater than its parts . Just because two markets are likely to be profitable when traded by themselves they don't have to be profitable when traded together. Therefore, the markets need to be picked so that when one market zigs the other market zags. Not to know which markets to trade and the optimal amount to risk, is to trade with a blindfold, balancing the drawdown precipice. -
Optisize instead of optimize. Every trading strategy has a constant optimal amount to risk relative to your equity. For a correctly built strategy, there is no way to predict the outcome of the next trade. The only amount you can predict is how much to risk. Therefore, you're much better off optisizing that amount, rather than optimizing the exact entry point. Optisizing means to make the most out of each trade in relation to your available equity, your overall strategy and other trading alternatives. www.activetradermag.com 'Silver is the world's money of last resort. Should a severe economic collapse occur, leaving paper assets worthless, silver will be primary currency for purchase of goods and services. Thus, every investor should own some physical silver.' ”David Morgan |  |
