Knowledge of successful profitable traders are concentrated around probability theory, statistics, technical analysis and programming. Novice trader should know the above points. He must also know arithmetic and have logical rational thinking, like a novice investor.
Probability theory and statistics
Experienced successful traders make money by shifting the odds in their favor. The trader does not know whether one particular trade will make a profit. However, he knows that a collection of hundreds and thousands of trades will bring the total profit.
Of course, if a trader uses a carefully tested profitable trading strategy, strictly following its rules. Even better – if he trading with several trading strategies at once, effectively diversifying risks.
Profitability and reliability of trading strategies is measured by various statistical metrics and tests, where all trades are taken into account, not part of them. A trader may have only 30% of profitable trades, but he can still make a profit due to the high “profit/loss” ratio per trade.
Traders earn on price fluctuations, so fundamental analysis is practically not needed for them. In trading, it is important to statistically predict the future movement of prices based on past/historical.
This is done in different ways. Starting from scientifically based, such as statistics, probability theory, time series analysis, forward analysis and ending absurd – based on the phases of motion of the Moon, Elliott waves, Gann angles, etc.
The final product of technical analysis is a profitable trading strategy. By the type of decision-making, trading strategies are divided into two groups.
In mechanical trading strategies, there are objective trade rules that prevent the trader from making subjective decisions. Mechanical strategies can trade almost any trader, including beginners.
If you give such a strategy to a professional and novice trader, then they will have practically the same results. Provided that both clearly follow the rules of the trading strategy, sending orders manually or automatically using trading robots.
This is the advantage of such strategies. The most successful traders are systematic traders who trade exclusively using mechanical trading strategies, excluding their own emotions and a subjective view of the situation from the trading process.
Discretionary strategies are subjective, unstable and traded entirely by hand. Any strategy that cannot be programmed and tested at past prices is subjective and non-formalized.
By trading intuitively, a trader may take losses in several trades in a row and will be afraid to enter into the next trade, which would bring greater profits, having beaten back the losses from previous trades. Emotions and subjective vision strongly interfere with trading.
The situation may reach the point of absurdity, when two traders who trade the same discretionary trading strategy may have completely different results. Looking at the same chart, the first will see the opportunity to buy an asset, and the second – for a short sale. One trader will have a set of trades with a total profit, and another with a total loss.
Technical analysis programs
To create ready-made profitable reliable trading strategies, you need to analyze and process a large amount of past price data. Finding patterns and market inefficiencies is necessary to create trading strategies. The easiest way to do this is with the help of technical analysis programs specially created for this purpose. These programs allow the following:
- Download the required historical prices and save them in a database;
- Build and analyze price charts visually;
- Create technical indicators based on any formulas;
- Create, test and optimize mechanical trading strategies;
- Automatically trade ready-made strategies in conjunction with a brokerage-trading platform.
The list of technical analysis programs is considerable and the trader can easily select the necessary program for his own requirements. Many traders can use several similar programs at once, because one program may be best suited for testing strategies, and another for automated trading. A sample list of popular technical analysis programs:
A trader needs to be able to program in any way. Technical analysis programs use their own highly specialized languages, with the help of which trading ideas, indicators, strategies, etc. are written.
Programming in these programs is necessary, but it will be easier than programming in a general-purpose programming language. In the programs of technical analysis all the main functionality has already been written and the trader will use ready-made solutions, he will not have to write everything from scratch. The trader will focus on programming trading ideas and strategies, rather than writing a backtester and other components.
In rare cases, the technical analysis program does not have enough capabilities and you have to write your own testers and analyzers. This happens when analyzing specific data and trading non-traditional trading strategies. In this case, general-purpose programming languages with various mathematical and trading libraries come to the aid of the trader:
It will be more difficult to program in these languages, you will have to write more code. Such is the fee for flexibility.