Trading Plan
Trading plan - it is a method of systematic identification and trading of securities. A process takes into account a large number of variables, such as:
- time,
- risk
- investment objectives.
A good trading plan is able to show how a trader copes with the execution of a target and is able to demonstrate his psychological profile based on the situations in which he bought or sold his securities. In addition, it demonstrates its approach to taking investment positions, managing those positions and what securities it tramples. A trading plan is often referred to as a map for successful investing. It is stressed that no position should be opened without a well-documented and prepared trading plan. The most basic trading plan will include entry and exit rules. This means that it sets certain investment limits at which the investor should join the venture and the moments at which he should dispose of the investment.
Effectivness of trading plan
As indicated in the literature [1] , the use of trading plans has a significant impact on the income growth of people with diversified portfolios. By planning the acquisition and sale of their shares, they achieve unusual returns on their investments. This results from effective planning and modelling of subsequent investments. Unlike investors with an emotional approach to investment, trading plans allow for cool calculations and immunize against the emotions associated with the fear of losing money.
Nevertheless, it should be borne in mind that the creation of a trading plan based on information obtained illegally or used in connection with the performance of official duties constitutes an illegal insider trading and may be subject to criminal sanctions. Hence, a trading plan based on such information - despite the fact that it will be effective, it may constitute an illegal activity[2].
Automated trading plan
Due to the development of new technologies, the approach to creating trading plans has also changed. In the past, investors used to prepare their own documents with numerical assumptions, which they verified on an ongoing basis while observing the stock exchange. This allowed them to make profits in the short or long term.
The rules of the game changed when computing machines in the form of computers were able to handle more and more information. Investment companies, dealing professionally with trading plans, started to employ the so-called quant's . These are the employees responsible for drawing up automated algorithm-based trading plans[3].
Their activity is based on systematizing information and then financial modeling. They operate on the basis of historical data provided by specialist databases, e. g. Bloomberg. In recent times, it has also been noted that investors have gone one step further and started to use machine learning for trading plans. It is based on the fact that artificial intelligence is presented in several dozen or hundreds of different investment scenarios, on the basis of which it learns itself. The technology is widely used in particular in investment funds based on trading in securities such as shares, derivatives or bonds.
Footnotes
| Trading Plan — recommended articles |
| Smart money — Floor trader — Capped Index — Equity research — Margin level — Innovative investments — FOREX trading strategies — Experimental research — Managed forex accounts |
References
- Ahern K. R. (2017).,Information networks: Evidence from illegal insider trading tips, Journal of Financial Economics
- Anderson J. P. (2015)., Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform, Utah Law Review
- Mann J., Kutz J. N. (2016)., Dynamic Mode Decomposition for Financial Trading Strategies, DMD for Finance
Author: Anna Szpakowska
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