Time and time again, one of the most common questions asked by new traders is, “What is the best trading strategy and what is the best market or instrument to trade?”
This is a tough question without an easy answer and unfortunately there are hordes of people willing to tell you and sell you the best strategy and they will often throw in for free the best market if you sign up for their course today!
Let’s start with the spoiler alert first so no one is furious that they wasted 10 precious minutes of their life reading this post and didn’t receive the holy grail of trading strategies at the end. There is no one best strategy or best market, what strategy to trade and which markets to trade really depend on a number of factors specific to you.
Perhaps the best way to answer this question is to start off discussing what strategies not to choose and what markets not to trade, because as we will discover this quest is really a process of winnowing down.
Once we eliminate the bad, then it really doesn’t matter which strategy you choose. As trading success is about mastery of a strategy grounded in fundamental market principles not discovering the super- secret best-ever failproof trading strategy of the smart money.
Trading strategies to avoid:
Let us start by eliminating the obvious first. Black box strategies by any name. These are the worse. Avoid them and the individuals who promote them.
In case you don’t know a Black box strategy is a trading strategy in which buy and sell signals are generated by proprietary software. You as the end user don’t really know what indicator or mix of indicators is generating the signals and often the marketers of this proprietary software don’t want you to know.
You might be wondering at this point, “whats the problem with that? It sounds great to me!”
Well the problem is twofold. One, from a capitalist and comparative standpoint the premise/price equation doesn’t make a lot of sense:
Premise = We have an automated system that will consistently make you money.
Price = Some dollar amount retail traders can afford. Often under $1,000
Wall street firms worth billions of dollars spend untold amounts of money developing automated strategies, their ranks are filled with seasoned and successful traders and they hire mathematical and computer science PhDs from the finest universities to work hand and hand with their traders to develop trading systems. Meanwhile, you have ABC Trading Company selling you their proprietary trading software for a one time upfront payment of $899 or twelve each installments of $99 a month.
Now ask yourself what is the capitalist’s case for selling an automated trading system that can successfully and consistently generate positive returns? Why won’t these developers utilize the system in-house and raise capital from investors to finance this money printing machine or sell this trading system for millions of dollars? To date I have not heard anyone articulate a good rationale for this and frankly I don’t believe there is one.
The second issue with a black box strategy is that it does not allow for the development of trading skills. You as a trader can never become a better black box system trader because there are no skills to learn and improve because you don’t really know or understand what is triggering the buy or sell signals.
If you believe in the proposition that trading is a skill and the market offers financial rewards for those highly skilled in trading, then avoid black box trading systems. If you happen to be so lucky to find one that actually works, then invest your money with them and go off and enjoy your life. There is no need for you to sit in front of the computer. An automated entry and exit will be much more consistent then you. Be an investor not a trader.
Another type of system to avoid is basically any system where the promoter promises to teach you a secret. This could be a secret pattern or a secret indicator or a secret known only to the smart money. Avoid these people and their systems.
There is no secret anything that will make you a skilled and successful trader because skilled is a prerequisite to successful in the realm of the financial markets. No supersecret indicator or pattern is going to make you skilled and hence neither has the ability to make you a successful trader.
Ok, now we have eliminated some of the systems you should avoid so now let’s talk about what you should look for in a trading system.
Some Trading Strategies to Consider
The bad news first, there is no perfect system that will guarantee you trading success.
Now for the good news, there are almost countless trading strategies that have been by successful traders. These strategies are time tested and have proven track records.
Before I begin list various trading strategies you might explore let me give a note of clarification. Throughout this article I have been using strategy, system and style almost interchangeably, I may dig deeper into these distinctions at a later time, but and for the purposes of this article strategy, system or style all mean the same thing.
What you do need to understand is that trading favors specialization so traders tend to focus on one particular aspect of the market or way of looking at the market and then develop styles of trading based on this and from there choose indicators that support that market view.
A trader could choose their trading strategy based on market state. Here the trader decides what market state they prefer to trade, either trending or ranging and then pick style of trading that suits their preferred market state and indicators that assist in finding trade opportunities in that market state.
That sounds super complicated so let’s look at some over simplified examples.
One trader might prefer trading trending market state so this trader would adopt a trend trading strategy, a momentum trading strategy or a pullback trading strategy and might use indicators such as Fibonacci, moving averages, ADX, MACD, or OBV, which tend to be favored by traders who are active in trending markets.
Conversely another trader might prefer trading a ranging market state. This trader might employ a mean reversion trading strategy and utilize indicators such as oscillators, RSI, CCI and Bollinger Bands, which tend to be favored by traders who are active in ranging markets.
Still another trader might focus their energy on the market state where an established trend end and a new and opposite trend begins and adopt a counter trend trading strategy and use Elliot wave theory and indicators that support this strategy.
Other traders might not focus entirely on either a trending or ranging market state, but utilize price action and candle stick patterns and support and resistance levels. These traders might not use any indicators.
Still others swear by volume profile or Ichimoku cloud.
And we haven’t even discussed the time frame any of these strategies would be used on, scalping, day, swing or position!
Of course in practice its much more complicated than these simplified examples. A given trader might use a combination of these strategies and indicators.
The bigger point is that there is a cornucopia of choices when it comes to choosing a trading strategy and although there are die hards who swear their strategy or system is the only true strategy there are traders who have been successful using all these styles.
I keep repeating this point and it bears repeating again. Its not the system or strategy it’s the mastery of that system or strategy which will determine if you become a profitable trader.
What to look for in the perfect trading strategy for you
Ok now your head is swimming with strategies and indicators and you have no idea where to begin. Information overload is real. But don’t despair.
If you are new to trading the process I would recommend to choose a trading strategy would be highly analogous to purpose driven dating.
Initially, you should meet as many trading strategies as possible. Your initial research should consist of reading a few articles, watching a couple of videos, maybe setting up a chart on your trading platform and playing with it in SIM.
During this phase you are just learning a bit about each strategy, are you initially attracted to it, does it intuitively make sense to you are you interested in it intrinsically? This is not a deep dive, rather it’s an initial attempt to decide which strategy do you want to get to know at a deeper level.
This is speed dating, a drink at the bar, you are not even committing to dinner. No paid courses or financial commitments. Most new traders are great at this phase of the process. The problem is moving to the next phase- commitment.
At some point one or two strategies will naturally appeal to you just a little bit more than the others. Pick this strategy. Which strategy you pick really isn’t that important at this point. What is important is committing to learning a strategy in great detail and depth for at least six months.
Better to pick a strategy, any strategy and master it rather than jumping from strategy to strategy
This is one of the biggest failings of new traders and something I have been guilty of as well. We all know how this goes. You are eager to make loads of money and while searching the internet or social media you come across a trader who claims to make boatloads of money trading the XZY strategy.
You immediately dive into this strategy certain of you impending riches only to become frustrated with this strategy after a couple of losses. Back to the internet, back to searching for the fail safe strategy.
Rinse and repeat. Fast forward a year, 3 years or 5 years. You are still searching for the “perfect” strategy. You have a surface understanding of a host of trading strategies, but mastery of none. Unsurprisingly, your trading account is as empty as your knowledge base.
Don’t go down this path of being a jack of all trades, but master of none. If you are a new trader or a seasoned but unsuccessful trader the best thing you can do for your future trading self is to pick a trading strategy, and almost any strategy will due, and commit to that strategy for at least 6 months.
Once you have chosen a strategy, do not look at other strategies or be tempted by the great trade someone made on Instagram using ABC strategy.
Instead, focus all your energy on mastering this particular strategy. Commit to these 6 months no matter how frustrating you may become or how poor you results may be or how great the guy in your trading forum is supposedly doing.
It may be the case that 6 months later you had no luck with this strategy and make no money, BUT, and this is an important but, what you will have gained is focus, discipline and a deep knowledge base about some aspect of trading. Whether you ultimately stick with this strategy or move to another strategy this deep dive will serve you well going forward in your trading journey as you will be surprised how much this deep dive of acquired trading knowledge will translate to whatever trading strategy you ultimately choose.
The inability to dive deep into a strategy is what is usually the cause of a strategy not “working” too many traders assume that it is sufficient to learn a technique, when what is really required is the mastery of a skill. The two are not the same.
Your favorite sports star could show you their technique for throwing a football, kicking a soccer ball or shooting a basketball, but do you assume that because you have been shown a successful technique that you would instantly become as skilled in utilizing that technique under pressure?
Of course not, we accept that excellence in a sport requires masterly gained over time and focused practice, but when it comes to trading, traders suddenly assume that if only they knew the secret technique they would instantly become a profitable trader?!?!?
What you need to realize is there are many different trading strategies that you can use and have success with in the market, but there is no strategy that will give you success in the market without mastery of that system. Being skilled in a strategy or system is much more important than which strategy or system you use. This is the key point too many new (and not so new) traders miss.
Like any other profession that offers up disproportionate compensation, be it a surgeon, an athlete, a lawyer or a salesman, the strategies don’t matter as much as mastery of the strategy. Your favorite sport may have 10 or more individuals who are considered the elite of that sport and yet these ten individuals many all have wildly varying approaches to playing the same game.
Trading is very similar. Ten individuals could all be highly successful and profitable traders and trade totally different strategies and have totally different philosophies about the market. What is important is not the strategy, it’s the mastery of the strategy.
Stop looking for the perfect strategy and instead focus on mastering a strategy.
Adopting this philosophy will put you in a much better place for long term success as a trader. What you learn from digging deep into a strategy far exceeds whatever, you learn from skimming the surface of a bunch of different strategies.
The market rewards depth of knowledge over breath of knowledge. A trader with a single specific set up, who know with great exactness when to trade this set up and as importantly when not to trade this single specific set up is in a position be wildly successful and profitable.
Whereas the trader with a cursory or basic understanding of ten or fifteen trade set ups is in a position to see many opportunities and yet fail to capitalize on any of them. This trader has no market advantage. There may be 10 or 15 different opportunities the trader knows a little bit about, but in each specific instance the trader’s knowledge and skill is just average. In almost every instance he may know more than the other trader, but in one particular instance the focused trader will know more, the focused specific trader will know enough to extract profit from the market while the jack of all trades trader will know a little about a lot, but never enough about anything in particular and so will consistently fail to extract profits out of the market.
Better to pick a market and learn it intimately than to jump from market to market
Notice how these things are interrelated and build on each other. Just as you would do well to pick a single strategy and commit to learning that strategy for at least 6 months you should also pick a single instrument or market to trade and learn that market like the back of your hand.
But sadly this is not how it generally works.
When we first start all the markets look promising and we tend to think, “The more the better. If I can make money trading one market than I can make three times as much trading three market!”
Or as soon as you have a couple bad trades, instead of analysis your trading errors, it’s on to the next market, where there are less stop runs or shady brokers or whatever your excuse is.
Or you hear how someone make a great trade on Gold so you run to that market and lose, but your buddy just had a huge win with the British pound so you jump into that market, and lose, then someone on the trading forum swears by bitcoin, so you jump in that market, and lose. And this nonsense continues on and on until you either run out of money, give up trading or get smart.
I recommend you choose to get smart
Save yourself a lot of time and money and pick a market. There is no market that rewards uneducated traders. Each market will take your money equally well if you don’t know what you are doing.
Instead, depending on where you live and what hours you trade pick any major liquid instrument and focus on learning the ins and outs of that instrument. There is no benefit to trading some exotic currency pair or obscure metal or agricultural product. Trade, a major index, Crude, Gold, or one of the major currency pairs or whatever market is active during your trading hours.
What you need is liquidity, buyers and sellers and enough price movement for your trading style. Make this part of your trading journey simple, pick one and commit to learning it. Just because someone else won big or wins consistently in a particular market does not mean you will as well. There is literally zero correlation between how someone else does in a market and how you will do. None. Again stop chasing and instead focus on developing a deep understanding of a particular market.
I want to end here where I began. My tip for incremental excellence is this: There is no perfect strategy or market, there is only the time and effort you dedicate to making a strategy work for you in a given market.