5 Ideas To Improve Your Active Stock Trading Strategy
Smart Auto-trading provides a reasonably small set of parameters to build effective trading strategies. It is generally easy to get started but many users have asked: "what is the best strategy one can use?". This article addresses that question using real data from successful traders on the Stock Circles trading platform. Here is what we found:
Day Trading vs. Continuous Trading
Lets start with what is glamorized as a great strategy on the Internet; 'Day Trading'. On Stock Circles, 'Day Trading' strategies are the ones that historically make the least amount of money on the platform. Here is why:
By definition, 'Day Trading' means that you are exiting your positions everyday before market close. The problem with this strategy is that most stocks need more than one day to appreciate in value. Historically in this bull market, the average drawdown on the platform is 3 days. So statistically speaking, it does not make much sense to exit your positions everyday.
Given the above evidence, a more appropriate strategy would be to keep your stocks in-market after hours. 'Continuous Trading' as it is called, means that you leave your stocks in-market overnight to allow for your positions to appreciate in value over time.
Avoid large drawdown periods
When your stocks are not selling quick enough, it is called a drawdown. Since time is money, you want to, if at all possible, prevent large drawdown periods. Setting your 'stop-loss' appropriately will ensure that you maintain velocity in your account while preventing large losses.
Statistically, our data shows that you are better off with a balanced 'stop-loss' than a large one. Here is why:
- It takes an 11% gain to recover a 10% loss. Not a problem.
- It takes a 25% gain to recover a 20% loss. Harder.
- It takes a 43% gain to recover a 30% loss. Problem.
- It takes a 67% gain to recover a 40% loss. Big problem.
- It takes a 100% gain to recover a 50% loss. Devastating.
- It takes a 300% gain to recover a 75% loss. Catastrophic.
If you are not too concerned about velocity of trades in your account and don't mind keeping your stocks for the longer term, you may elect to keep a large 'stop-loss'. Just be aware that it may take a longer for your positions to appreciate and that you may experience larger losses.
Setting your 'stop-loss' higher than 10% will also ensure that you do not exit too often without taking a profit.
Historically, our data shows that some stocks can oscillate wildly in price. This is called volatility. Volatility is good for trading because it allows for large price swings. To take advantage of these large swings however you need to let this natural oscillation occur by setting your 'stop-loss' looser than you might have thought.
This year we have seen a great example of this happening with $NVDA, a highly volatile stock, who, on and off, oscillated by more than 30% in a month. A higher stop-loss in that context would produce a preventable loss as it would allow the stock to swing back into action.
Given that each stock has its own volatility factor called 'beta', it might be a good idea to create a custom trading roster with stocks that have similar 'beta' so that you can correctly assess your 'stop-loss'. To do so, you can get the 'beta' values from popular finance sites such as Google Finance or Yahoo Finance.
Once you have a list of stocks with similar 'beta', you can build the list in your 'Favorites' and auto-trade that list with a higher confidence that your 'stop-loss' will be appropriate.
To prevent putting your eggs in the same basket, it is important to diversify your trading strategy. This will protect you when specific industries are hit by negative sentiment and subsequently by downward price movements.
You can elect to trade with specific industries such as the NASDAQ 100 which is made of technology stocks but be aware that doing so puts you at the mercy of the ups and downs of that specific industry. Historically, trading the S&P provides some degree of protection against industry specific downturns.
On Stock Circles, we have made the conscious decision to trade the S&P and we offer this 'Stock Universe' to auto-trade by default. The reason behind this decision is two folds;
For one, the S&P is made of elite stocks that are widely traded. Widely traded stocks are by nature more liquid than thinly traded stocks. There is never a problem with trade execution.
The second reason lays in appropriate diversification of assets. From the get go, the S&P is built with the best stocks from each segment of our industries. Trading the S&P provided therefore a built-in diversification, an insurance policy against industry specific risks.
Smart Auto-Trading trades on sentiment. So far, historical data showed that even in mixed markets, the technology is able to identify profitable trades. Since 2016, time of the first trade made by Smart Auto-Trading, we have been in a bull market and have tested 'long' strategies.
Since the market tend to follow a cycle, it is expected that we will eventually experience a sustained period where stocks will go down in price.
To hedge potential losses on your mainly 'long' strategy, it might be a good idea to allocate a part of your budget to buy 'short' positions. Doing so may help protect your hard earned money while the market corrects itself.
Last but not least, you can use Smart Auto-Trading to reinvest your profits. Once you successfully accumulated enough money in your account, reinvesting your profits will enable trade momentum to take place. This important investment practice is one of the most powerful instrument you have to grow your account.
Adding back your profits to your existing trading capital will allow your strategy to buy more shares, shortening the time it takes to achieve the same profit target. Added momentum means that you stay in-market for a shorter period of time, allowing the system to buy fresh stock stories while protecting you against long drawdown periods.
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