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Reviewed by Jul 26, 2021| Updated on
Trading strategy refers to the strategy adopted while purchasing and selling securities or financial products in the market. The financial markets specify rules for the trading and the settlement of buy and sell trades. A trading strategy is based on various factors, including settlement. For example, delivery segment trades are settled on a T+2 basis, whereas intraday trades are settled daily.
A trading strategy and the investing and trading plan include factors, such as investment objectives, time horizon, risk tolerance, and tax costs involved. An investor should research and determine the best ideas and practices before making an investment. You can also develop various trading methods based on the type of security.
An investment plan helps in defining investment strategy. The investments can be through the placing of trades with a broker or a broker-dealer on your behalf. In India, the trading costs include the broker’s commission and securities transaction tax payable on each taxable trade. Upon execution of the trade, the open positions should be monitored.
Trades can be adjusted, squared up, or rolled over to the next period. The trade position should be communicated to the broker-dealer. The risk and return of the investment should be measured as well. All these factors have an impact on the overall portfolio value. Finally, in settlement of trades, one should provide for the tax effects on the gains or losses.
The different stages in trading are planning, placing the trade order, and execution of the trade. Your trading strategy may be different for each stage and may also differ depending on change in market conditions. In general, trading strategies are based on technical charts or the fundamentals of security.
Trading strategies are necessary to avoid any subjective influences or behavioural issues in trading. A trading strategy should rely on technical and objective data so as to obtain consistent results. One can also carry out stress tests on trading strategies under different market conditions to measure consistency in results. A trader who follows pre-defined rules is less likely to act on behavioural bias and drag trades which lose value.