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7 Reasons For Creating Your Own Trading Strategy

7 Reasons For Creating Your Own Trading Strategy

There are many ways to make money in the markets, such as buying reliable dividend stocks or investing in higher-risk pharmaceutical or tech firms. Certain investment strategies are paying off for some people and it can be tempting to copy their efforts. Yet it's prudent to establish your own trading strategy. Here's why.

1. Any one strategy is limited. No investor or hedge fund possesses a monopoly on the truth, therefore, any single perspective is going to be limited. Certain paradigms contain biases that may not be effective in future investing conditions. So it’s best to broaden your own knowledge of the marketplace before committing to any particular strategy.

2. What worked in the past may not work in the future. We’ve heard about amazing historical returns of the S&P 500 index, but that’s not necessarily a guarantee of future performance. Real estate prices have risen steadily and (almost) predictably for the past several decades, but that doesn’t mean such a trend will continue under different circumstances. People's trading strategies can become obsolete.

3. Each individual has different goals.Assume, for a moment, that another person’s investment strategy will work for you the same way it worked for them. But even in this best-case scenario, it’s unlikely you’ll see the same benefit given that each individual usually has different goals.

4. You might fall prey to survivorship bias. Survivorship bias kicks in when you only view the most successful people who have pursued a specific course of action. But in the world of finance, people often disclose their successes while withholding information regarding their failures. No one wants to destroy their own reputation. So when you only hear success stories with a given strategy, it hardly guarantees success. Find out what you're not being told, and don't fall for sales talk.

5. Great investors aren’t always great teachers. If you’re learning from a particular individual, be wary because great investors don’t always make great teachers. They may know, almost instinctively, what makes a good investment in a given field, but they may not be able to articulate the message clearly or accurately. Miscommunication or misunderstanding could lead to financial losses.

6. You’ll always need room to adapt because circumstances are always changing. Your income level could change or your risk tolerance could move higher or lower. Markets, consumer habits and investing trends also change. If you want to be successful in the long-term, you’ll need to constantly adapt your trading strategy. ROI is a moving target.

7. Knowledge comes first. Almost any investment strategy has the potential to be successful. But what matters is whether you understand what you’re investing in. For example, trading in real estate can be more profitable than investing in stocks. But only if you know what you're doing in the real estate business. Unless you know exactly what you're investing in, you probably aren’t going to be successful.

So you don't have to copy another person’s strategy. Yet that shouldn’t stop you from learning either. Listen carefully about why advisors are bullish or bearish on certain stocks. Learn why certain investments are profitable under current market conditions. The key is to learn from other investors' successes rather than blindly following their methods.

Posted-In: Education General


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