As a continuation to the previous post about having an exit strategy, another big mistake new and many veteran traders face is changing your trading strategy or plan when you aren’t trading well.
It is so easy to get distracted by a new strategy or tweaking your existing plan when you are facing a string of losing trades or the market isn’t favoring your style of trading at the moment causing you to under-perform the market.
The key to sticking to your strategy is feeling confident that is will work in the long run. You have to have a reason why it will work because of prior testing of the strategy or proven results that shows it works.
You can’t just pick a random strategy that has never been tested and shows now logic why it should work, and expect it to beat the market just because you think it should. The stock market is very good at weeding out poor traders and rewarding the good ones.
Sometimes you will hear about some guru that beat the market last year because they were long the strongest sector which caused their strategy to do well (like the gold bulls out there now who have been waiting 30years for gold to relieve the glory days of the 1970’s. )
The key is to not be swayed and change but to constantly evaluate your strategy and make sure it is working.
For example, look at someone like Warren Buffett whose strategy is strict value fundamentals which caused him to skip the dotcom bubble. He was criticized for not chasing technology stock when Berkshire Hathaway was underperforming the market, but he stuck to his strategy and got the last laugh.
The key to sticking to your strategy to is follow through up and downs and know that it’s a strategy that has a strong history of proven success.
If you want to implement a new untested strategy then papertrade it for a while to make sure it works because most new strategies are created from using past results and anyone who has followed the market for a while knows that past performance is no guarantee of future success.
The best strategy is based on common sense of why it should work like following a stock trend with support and resistance levels and using volume to indicate the strength of the trend or using a fundamental stock screen with a proven track recoded like Investors Business Daily CANSLIM screening method,etc……..but using some fancy new indicator that has done well for 1-month and with no history is not a smart strategy.
Hope this has helped any struggling trader that got caught up in the recent 2009 rally and missed much of it because they kept changing their strategy or breaking their rules trying to short the never ending rally up (or missed the rally because they kept waiting for a pullback that never came).
Is your current stock trading strategy proven ? Does it make sense why it should outperform the market long term ? Have your strayed from the original strategy because it had a period of under-performance ?