Logic In Investment Strategies

By Gnifrus Urquart

I've been trading stocks and forex all my life. One thing I gradually became aware of during this experience was that the strategies which make the most logical sense typically are the ones which work the best.

There are so many strategies I've tried, I have lost count. And there are at least as many which I've let go without trying. There are just too many. I found a quick fire way though which helps disregard the strategies which are useless, so you can trial the ones which are worth trialing. Its logic. Look at the logic of your trading strategy and see if there are holes in it. You'll be amazed by the number of strategies with big logical holes.

Strategies generally make sense. The problem I am talking about is not about making sense, it concerns completeness. When these strategies do not cover all possible scenarios, you can be left in a position where you need to make decisions that are not following the strategy. The amount of judgment you can bring to such forced decisions depends on how close this situation is to others covered by the strategy. In a worse case scenario, it could be a complete guess.

If a trading strategy leaves you guessing, when you make these guesses, you are gambling. A proper trading strategy will leave no contingency for guesswork. It will cover all scenarios taking human error out of the equation. It will be systemised and complete.

This guess work also breaks down the functioning of a trading strategy. If you are guessing parts of it, or making decisions outside the guidance of the strategy, how can you be sure that the strategy is driving your results or your other decisions are? If you can not be sure of this, how can you have confidence in your strategy?

So if someone presents you a trading strategy, go through the logic with a fine tooth comb. See if you can come up with scenarios which may happen in real life, which the strategy deos not cover. If you can think of some, try to get answers for these scenarios before you start trading with real money. Because believe me, if such scenarios exist, as soon as you put money down they will come up. I think 2007 - 2009 taught us all that.

And don't forget to dummy trade before you put any money down. When you are dummy trading you will most likely find a bunch of trading scenarios you never thought about before. Make sure these are covered by the logic of the strategy too. Its much easier to sort this stuff out without money, than when you have money on the line. - 31876

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