What are the components of a good trading strategy

 The biggest difference between investing in stocks and trading stocks is that while investing is a long term process where you buy the shares of the company and wait for that company to grow, in intraday trading, you buy and sell stocks within the same day to generate profits. Compared to mutual funds, trading with the help of intraday trading strategies is much less risky, which is the reason why it has been gaining such momentum in the past few years.

According to statistics, nearly 40% of all trades that happen on the National Stock Exchange (NSE) are a result of automated trading. The reason why this phenomenon has grown so quickly within such a short span of time is that automated trading removes human error and bias from the picture – which are two of the biggest factors responsible for the losses incurred in the trading market.

Unlike humans, computers do not get tired, do not miss even the minutest of details and do not succumb to emotional impulses like fear and greed. They give you buying and selling indicators based on trade algorithms that have been designed keeping in mind the previous data and have been backtested rigorously to ensure that they perform in the real world scenarios. Now that we know the importance of algo trading strategies, let us discuss their components.

Components of algo trading strategies

It doesn’t matter whether you’re an advanced trader or an amateur, there are certain components that you would need to include in your strategies to make sure that you derive hefty profits from the market while avoiding losses. Basically, there are three main components that every trading strategy needs:

Liquidity – This is essential for you to quickly enter and exit trades at an attractive and stable price. For example, liquid commodity strategies will focus on gold, crude oil and natural gas.

Volatility – Volatility determines the range of profit or loss that you can make – higher the volatility, higher the chances of profit or loss. This means that if you have a risk-bearing capability, you could consider trading in highly volatile markets, for example, crypto-currency market.

Volume – The volume of a stock or asset is the number of times that stock or asset has been traded within a given time period. In intraday trading, this is also sometimes referred to as the ‘average daily trading volume.’ If an asset has a high volume, it means a number of people have shown interest in that asset. Any increase in the volume is an indicator of an oncoming rise or fall in the value of the asset.

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