STARING at a blank page, chewing on your pencil and trying to work out a trading strategy can be a daunting task. There are plenty of guide books out there to aid you, of course. But is there any merit in taking an off-the-shelf trading strategy devised by an experienced trader and using it yourself – tweaking it to suit your needs?
By taking an existing plan, you are adopting a strategy which has been developed and tested. Also, the key to a good strategy lies as much in when to exit a trade as when to enter into it. Declan Fallon is senior market technician for Zignals.com. He points to the many advantages when looking for an off-the-shelf plan: “with a pre-existing strategy, you can filter during the selection process to screen for strategies by stock, sector, risk, initial stop, trade frequency, percentage winners and more.”
Social trading platform eToro has a simple way of adopting another trader’s strategy via their “copytrader” function. Much like following somebody on Twitter, you can copy an expert trader by simply clicking on a follow button in their profile, and selecting how much money you want to invest in their performance. You can look at an expert trader’s profits, trading style, portfolio strategy and risk level.
Though looking at existing trading strategies can set you off on your way, traders should bear in mind that these should only be used as a guide, and you shouldn’t unquestioningly take on a third party’s strategy. Erik Voges, chief operating officer of Autochartist, advises caution when simply taking the trading strategy developed by a professional trader and using it yourself. He points out that the advantage of building your own strategy is that you will have a much better fundamental understanding of the attributes and idiosyncrasies of your system.
“As with all important designs, simplicity invariably ends up winning the prizes,” says Voges. “However, this does not necessarily mean that it’s easy to develop. Simplicity is what you want to have as an end-result.” Voges adds: “During the process of formulating your trading system, you will develop a multitude of tiny little theorems, that will each be tested and, if they hold up, somehow weaved into your masterpiece.”
Voges advises that there are three things to keep in mind when considering an off-the-shelf strategy. Firstly, you should never trade a system you don’t understand. Secondly, the process of building a trading system automatically creates tacit knowledge with the developer, and adapting or tweaking a system without having that tacit knowledge is a bit like searching in the dark.