The Secrets To Long-term Trading Success Regardless of Market Conditions Are A Proven Strategy And A Robust Algorithmic Trading System

Every recipe has ingredients which are essential, and the recipe for consistent, high-performance trading is no different. In fact, my philosophy at Trading Mastery School is that boring trading, algorithmic trading, is profitable trading. Because why mess with a trading formula that’s proven to work?

In this post I’m going to share with you the 12 ingredients for a successful algorithmic trading strategy that I covered in detail in “The 30 Minute Stock Trader”.

1. Objectives. You have your personal objectives to identify, but you also have objectives within your strategy. These are generally driven by your psychological condition, your operational abilities, your personal needs and your investing strategy. Your strategy may be further segmented into a multiple suite of trading strategies (for maximum profit while maintaining low risk).
2. Beliefs. Elite traders know that your objectives are usually built upon your belief system. For example, if you employ trend following strategies, this is very likely premised on the belief that markets mostly trade in a ‘sideways’ pattern. The objective within the trend strategy would be to watch for a trend and then to ride it for substantial profit. You will only participate in say, 25% of the moves, but your objective is larger profits. A completely different example demonstrating the same point would be the trader who shorts the market when investors are panicking because the likelihood of a reversion to the mean during these times rises dramatically. Your beliefs must be based on sound and proven market principles before you can properly define your objectives. After all, you’re not so much trading the markets as you are trading your beliefs.
3. Trading Universe. You can’t be an expert in everything, so it makes sense to narrow your focus to a market that is consistent with your objectives and beliefs. For example, will you trade stocks, bonds, indexes, currencies, commodities? If you’re trading a high-frequency strategy, you’ll probably want a large portfolio. If you’re employing a trend long-only strategy, you’re likely to be able to follow a much smaller basket of equities. Regardless of your strategy and beliefs, identifying your trading universe allows you to get to work gathering the data you need and developing a system that will allow you to quickly backtest and trade.
4. Filters. Your strategy will involve filters that are oriented to your objective and goals. For example, you’ll pay attention to trading volume, minimum price and volatility. Volume is important if you want to trade stocks that are too thinly traded for the institutions, or if you want to only trade stocks with huge volume. Minimum price might be important if you’re looking to trade penny stocks-or avoid them. Volatility is going to be important if you want to eliminate the extreme ends of the spectrum (which I recommend).
5. Setup. It’s critical that you define explicitly the exact rules of movement you want to see in a stock before you enter the trade. For example, maybe you are buy on a trend that is closing about the 200 day moving average. Or, maybe you’re short selling a stock that is highly overbought. Defining these in clear terms that a child (or a computer) could understand is vital. Your setup might define a trend, a pullback or any other set of criteria.
6. Ranking. Your setup strategy will frequently generate more potential trades than your position sizing will allow. Therefore, you need to have a ranking system in place that helps you further filter those suggested trades down to a manageable number. For example, you might trade those with the highest volatility, largest rate of change and which are oversold. Think through the factors which create ideal trades in your mind. Remember, there are plenty of opportunities, we want to pick the very best ones, like a premier home-run hitter who is happy to wait for a pitch.
7. Entry. What are your rules for entering a trade once the setup requirements have been satisfied. Will you enter at the market open? Are you looking for a certain amount or kind of action? Will you enter at a particular price or within a range? If you’re going long, are you looking for further price deterioration? Nothing can be left to chance if you want to enter the stock with well-defined rules.
8. Stop Loss. A critical rule for success is that you must have a predefined exit point. If you were wrong, or your timing was wrong, or the market just moves against you, a stop loss will limit your risk. This helps to protect your portfolio and it allows you to remain detached from the daily performance of your account.
9. Reentry. If you get stopped out of a position because it moved against you, will you reenter the stock? This depends on your overall strategy, of course, but lots of successful traders will see a lower price as an even better opportunity. One friend says, “If I like it at $100, wouldn’t I like it more at $90?” On the other hand, your strategy might lead you to avoid these opportunities. Whatever your rules, define them and follow them.
10. Profit protection. One of the most difficult decisions traders face is when to sell a profitable position that is in retreat. Utilize a trailing stop which will sell the stock once it has lost more than X percent from it’s highest point. This is a simple way to protect your profits if/when the stock begins to pull back.
11. Profit taking. It’s a great idea to have a profit target when you enter the stock. This allows you to avoid the temptation of your ego, or emotion. For example, you may decide that you’ll exit a stock once you have a 20% gain. The number depends on your goals, of course. This is particularly helpful if it’s important to you to have a high winning %.
12. Position sizing. One of the most important ingredients to your successful recipe is position sizing. Whether you’ve got an algorithm or a simple rule, this discipline of money management separates the gamblers from the successful traders. You might even have different rules for each strategy! That’s fine, as long as these rules are designed in accordance with your personality, risk tolerance, goals and the underlying system you’re trading.

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This is a brief introduction to the 12 ingredients necessary for any successful algorithmic trading strategy. For a deeper dive, please review chapter 7 of “The 30 Minute Stock Trader”. If you are interested in working with me as your personal coach to learn algorithmic trading strategies, please click here. You can find even more information at Trading Mastery School.

Laurens Bensdorp
Owner of Trading Mastery School and Tradingsystems.com