Reviewed by Aug 27, 2020| 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.
Understanding Trading Strategies
- A trading strategy and the investing and trading plan include factors such as investing 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 broker’s commission and securities transaction tax payable on each taxable trade. Upon execution of trade, the open positions should be monitored.
- Trades can be adjusted or 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 the factors have an impact on the overall portfolio value. Finally, in the 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 a security.
Trading strategies are necessary to avoid any subjective influences or behavioural issues in trading. A trading strategy should rely on technicals 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.