Trading Strategy

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Last update: 2018-02-24 03:28:59

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Last update: 2018-02-24 03:28:59

Trading Strategy

Trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistency, and objectivity.

Trading strategy has two main goals. The first is to find out the optimal account capitalization required to achieve the maximum rate of sustainable return. The second is to find out whether the risk-adjusted reward is equal to, inferior to, or superior to other competing strategies. The cost of trading a strategy is primarily defined by risk, and without a statistically reliable measure of risk, portfolio management is impossible.

When developing a trading strategy, many things must be considered: return, risk, volatility, time frame, style, correlation with the markets, methods, etc. After developing a strategy, it can be back tested using computer programs. Although backtesting is no guarantee of future performance, it gives the trader confidence that the strategy has worked in the past. If the strategy is not over-optimized, data-mined, or based on random coincidences, it might have a good chance of working in the future.

Trading Strategy Index

Entry Strategies

Certain stocks are ideal candidates for trading. A typical trader looks for two things in a stock: liquidity and volatility. Liquidity allows you to enter and exit a stock at a good price. Volatility is simply a measure of the expected daily price range - the range in which a day trader operates. More volatility means greater profit or loss.

Finding targets

Identifying a price target will depend largely on your trading style. Here is a brief overview of some common day trading strategies:

  1. Scalping is one of the most popular strategies, which involve selling almost immediately after a trade become profitable. Price target is obviously just after profitability is attained.
  2. Fading involves shorting stocks after rapid move upwards. This is based on the assumption that, (1) they are overbought, (2) early buyers are ready to begin taking profit dan (3) existing buyers may be scared out.
  3. Daily Pivot. This strategy involves profiting from a daily volatility. This is done by attempting to buy at the low of the day and sell at the high of the day.
  4. Momentum. This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. Here the price target is when volume begin to decrease and bearish candle start appearing

Determining a Stop-Loss

This strategy is common used when you trade on margin because you are far more vulnerable to sharp price movements than regular traders. Therefore, using stop-loses is crucial when trading. Retail traders usually also have another rule: set a maximum loss per day that you can afford (both financially and mentally) to withstand. Whenever you hit this point, take the rest of the day off. Inexperienced traders often feel the need to make up losses before the day is over and end up taking unnecessary risks as a result.

This strategy is to set two stop losses:

  1. A physical stop-loss order placed at a certain price level that suits your risk tolerance. Essentially, this is the most you want to lose.
  2. A mental stop-loss set at the point where your entry criteria are violated. This means that if the trade makes an unexpected turn, you'll immediately exit your position.