Wednesday, April 2, 2008

Profitable Stock Trading Scheme Design

Trading stocks for consistent profit takes serious business planning and execution. The same goes for investing as it is simply trading with longer time frames. This post includes some of the very important areas to cover.

Trading Tactic of Little/No Competition

If your trading strategy came off some website or book widely available to the public, it probably does not perform well. Statistical edges, market inefficiencies exist and evolve with respect to general investor crowd behavior; therefore it does not help if you play as a part of the publicly uninformed.

Do the homework, learn statistics, probability related theories, arbitrage theorems, and maybe look into derivatives. The answers lie where the crowd overlooks, obviously.

Keep It to Yourself

As mentioned above, if the crowd adapts existing market inefficiencies may corrode away. It is the same concept as copycats try to compete with other business industry leaders (mentioned here), once a trade secret becomes publicly known. With that, it pays to stay discreet.

Price Based Stop-Loss Scheme Hurts Performance

A popular mainstream concept of a contingency exit strategy yet provides little value. It takes thinking outside the box to get around this. I have written about some creative entry/exit tactics just to show that many possibilities exist besides the publicly pushed ideas.

Preservation of Capital

The risk management must function in the manner that even in the worst case scenario, where anything that could go wrong does go wrong, you would still survive. Better to live and fight another day than to blow up due to some emotional whim.

How is this possible? Just put most of your money in a low-risk interest collecting investment (e.g. bank bonds, short term treasury bills, etc.), and make it so that your net income off interest will exceed trading capital. This way, even if you blow the trading account, you would still end the period with a net profit (before inflation).

(I will discuss this capital management scheme in detail at another post.)


Discipline promotes flawless execution. Though it may seem hard at first, if you truly understand how your strategy “works”, then it becomes smooth sailing. Perhaps sometimes a little bit of patience could help, but the anxiety goes away once you get the nature of financial markets.

Thinking Openly

You must learn to think in terms of probabilities, possibilities, instead of absolute certainty. A different way of thinking often leads to novel thoughts, ideas, and creative designs.

It all helps.

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