Feb. 19, 2021

Designing a successful stock trading strategy has about the same objectives as developing your own money printing machine. That you trade on a discretionary basis or use some elaborate trading program to execute your trades does not guarantee you to win at this game, but you can easily put the odds in your favor of doing so.

In reality, the problem is very simple: you buy some stock (whatever the reason) and resell it later at a profit. You do it often. That is it. That is all the game. You do not need much to understand the mechanics until you do more than a few hundred trades. Then, you get to realize that the “game” is a little bit more “complicated”.

Out of the hundreds or tens of thousands of trades, you will definitely “notice” that you did not win all of them. It was not your trading logic or perception of the market that did this. It was the market that did not behave the way you thought it would. And indirectly, you found out that the market simply does not care about you or how you trade, whatever reasons you might have had. A nice way to say that you were wrong a lot of times on those thousands of trades, and technically, maybe by some or no fault of your own. The concepts you were taught to determine the stock's immediate price appreciation might have been somehow flawed. At a minimum, they were simply probabilistic. Making you unsure and uncertain of what would be the outcome of the next trade, no matter what you imagined would be the driving force behind the price move.

Due to the sheer number of trades, you had to talk in terms of averages, the Law of large numbers, diminishing returns, probabilities, and price movement expectations. You had the choice to be predictive and outguess what was coming your way or/and maybe simply “define” a trend in some way and follow its direction.

Whichever way you might want to trade might be applicable. No one is going to stop you except you for not respecting the math of the game. The following HTML file tries to deal with the underlying math of the game. It does show that the game is very simple since, in the end, only two numbers need to be taken care of, and one of them is just a counter. Mostly, it says that what you need is to find some explicable price movement phenomena that are repeatable a large number of times.

Read HTML file.

Related articles:

The related articles below deal with a freely available trading strategy that applies the math given in the HTML file above.

Winning The Automated Stock Trading Game

Stock Portfolio Backtesting

The In and Out Stock Trading Strategy


Feb. 19, 2021, © Guy R. Fleury. All rights reserved.