This article provides a look at the risks of conventional investment beliefs along with suggestions for alternative, more efficient trading strategies.
The present financial environment calls for unconventional trading strategies to successfully exploit market inefficiencies. In other words, it requires free thinking and ingenuity.
Mainstream Stock Trading Beliefs and Inherent Risks
Historical finance has divulged that more often than not crowd mentality promotes losing expectancies. By the time a particular scheme has become conventional it has long lost the competitiveness, or from another perspective, statistical edge.
Still popular to this date among financial advisors and newbie traders, “trend following” asserts the concept of taking a ride on the existing directional bias and hoping for its persistence. This scheme does not always offer optimal performance, as stock price movements have historically exhibited quasi mean-reverting behavior.
Low winning rates via trend-following strategies offer a couple of points. It implies that these entries do not perform much better than random guessing, and there exists an underlying rationale that the losing entries often simply serve as liquidity for the shrewd winning traders.
Many novice traders embrace the expression “Cut the losses, and let the winners run.” Closing invested positions based on arbitrary paper losses and having absolutely no profit extraction plan could lead to devastating failure. Trends change, sometimes violently.
Example Financial Trading Novelties
As one of few certainties held by the markets, existing price trends inevitably change. Large holders may decide to dump massive quantities and break an upswing painfully, while the little guys could gap up via little public expectation. Adapting a new perspective toward the market where one EXPECTS change in the existing price movement could trigger new discoveries and concepts.
A stop order for loss cutting does not have to present the only method of an exit strategy. Many alternatives exist, and it simply requires an open mind and diligence in research. Signals with an oscillator, a sentiment indicator, volume, or volatility measurement function as just a few of many potential tools for an adequate plan of both profit taking and loss limiting.
As financial institutions usually perform better than the general crowd, a study of institutional traders and associated strategies could provide further enlightenment. Profiting off the markets does not always involve directional betting. With the growth of information technology today, arbitrage and market neutral trading schemes have become available to the retail traders.
The Learning Curve and Role of Statistics
The learning curve of market behavior remains steep; a massive amount of data lies within. Successful trading plans require profound understanding. A basic grasp of statistics helps speed up the process significantly. Once the fundamental knowledge is in place, associated creativity becomes easy to cultivate.
