Developing a strategy when you are a new trader is tough. Even after you have been trading for a long time, it is very common to develop a dependency on one niche. You stopped looking at other strategies because what you were doing worked so well, and why waste time and money on stuff that doesn’t work? Then one day you realize that the trade is gone. The trade that was once so dependable now loses money! Now there is nothing to fall back upon. Sound familiar? What is a trader supposed to do?
Well the good news is there are always opportunities, it just takes work to find them. So whether you are a green trader looking to break into the business or a seasoned veteran that needs a fresh perspective, here are my 5 keys to developing your niche.
Keys to Strategy Development
1. The first step is to take a deep breath and clear your head. Approach the search with an open mind. Opportunity exists everywhere in the market but you need to be open to it. Remove anything in your head that says it doesn’t exist or that you can’t exploit it.
2. Start with a very broad perspective. Look at the market and how it responds to positive news, and how it responds to negative news. Notice that the reactions are rarely equal in severity. What is the general sentiment? What kind of stocks are in the news? Maybe you notice that small pharmaceutical stocks with drug approvals normally will trade up for 2 days or even longer following the announcement, maybe this is something to keep an eye on. Maybe you notice that blue chip stocks not in the news follow technical signals to a T for long periods of time. Start thinking about what is moving and if it can actually be predicted with any reliability.
3. Research strategies people have published. It rarely works to simply copy a public strategy robotically, but you may see some adaptations that you can profit from. A great example is how we often use this indicator for trade entries, but only when it meets certain conditions that work for us, and we always use our own exit strategy. The point is to get a boost from what is out there, but adapt it to yourself. In the same vein:
4. If you are experienced you need to understand what you do well and what you don’t. Are you great at being aggressive in fast moving trades, in and out in 10 minutes with a huge profit, or do you read a monthly chart and know that at some point in the next week a stock is going to hit that target? Do you get scared out of positions when you watch them too closely, or are you a master at ignoring the noise? The point is it helps to narrow down the time period that you are analyzing. Some traders place 10 trades a year and win big on 8 of them, other traders place 20 trades a day and win on 6 of them, but both are capable of making money.
5. Consider other ways to profit from movement. Maybe if you often get scared out of trades you won’t mind making small option contract purchases with the opportunity for big upside. A vanilla equity strategy with a very low rate of return after commissions may have huge returns on options when handled correctly.
Remember that you never have to feel like any “type” of trader. Real traders simply find a way to make money, they don’t try to conform to any mold. Always trust yourself more than anyone else, and apply discipline while removing emotion from your trading. Finally never stop evolving, there are always new resources, changes to the market, and new technologies that impact trading. Nothing will work forever, but there will always be opportunity.