April 3, 2023
Are you looking to create a successful trading strategy? A strategy builder can help you define and evaluate your strategy! By using payoff graph , margin calculator, and testing the historical performance of chosen asset, you can make informed decisions about your strategy and increase your chances of success in the market. Don’t miss out on this valuable tool – read on to learn more about how a strategy builder can help you succeed in the markets.
Create Custom Trade Strategies and Run Them on Autopilot
What is a Trading Strategy?
A systematic method based on certain predefined rules and criteria that are used for buying and selling in the securities markets is known as a trading strategy. Strategies can be about how to buy and/or sell stocks, bonds, ETFs, or other investments and can also include more complex instruments such as options or futures.
Based on the various factors that are taken into consideration, it can be a simple or a complex strategy. Some of these factors are:
- Value vs growth
- Market cap
- Fundamental analysis
- Level of portfolio diversification
- Risk tolerance
- Tax
When a strategy is devised, objective data and its analysis are required to be followed diligently. Added to this, a periodic re-evaluation is needed so that the strategy is based on the prevalent market conditions. Post this, the trading positions are monitored, the risk/gains are calculated, and the tax implications are also found out.
What is a Bollinger Band?
The remaining article will be explained with the help of Bollinger Bands. Hence, it is important to understand, first, what this is.
Bollinger Bands are a type of chart indicator to conduct technical analysis of stocks, futures, and currencies. It was developed in the 1980s by John Bollinger. It has gained a lot of popularity because they are a simple trading tool and they offer unique insights into price and volatility.
The bands are envelopes which are plotted at a standard deviation level above and below a simple moving average of the price. As the distance of the bands is based on standard deviation, adjustment to volatility swings in the underlying price is possible.
Often, the bands are used to find out about overbought and oversold conditions. However, using only the bands to analyse if a strategy is viable or not is a risky proposition as it ignores much other relevant information.
What Does a Strategy Builder Do?
A strategy builder is a powerful strategy engine that helps investors to define as well as evaluate strategies through the use of both fundamental and technical analysis. The strategies, including multi-factor investment models, can be selected from a pre-built library or be created by the individual who is investing.
- By using the strategy builder, the investor can define the profit/loss, break-even points, and much more.
- By changing parameters, one can assess different strategies and can assess them using flowcharts.
- Traders can filter out stocks by using different technical and quantitative criteria.
- The historical performance of the chosen stocks when the selected strategy is implemented on them can be tested to see if they would result in gains or not.
Thus, it may be said that a strategy builder provides life to an investor’s logic and makes sure that the execution is carried forward in the best way possible. Such precision is almost unattainable if done manually by traders.
Bollinger Bands
Advantage of Using Bollinger Bands
Earlier, the calculations that were involved in the Bollinger Bands concept were very long. It has now become quicker due to the development of automated trading. So much so that only a few actually know what the mathematical background of the Bands is.
- For calculation, the following steps come into play:
- Finding out the simple moving average of the asset for a given time period. Usually, the time period that is considered is 20 days. Based on what strategy you are using in the strategy builder, this can, of course, be tweaked.
- Finding out the two standard deviations of this simple moving average.
- The area between the line of the simple moving average and each of the bands is called the channel and the area that is between the simple moving average line and the line above it is known as the buying channel.
Bollinger Bands consider volatility (i.e., the degree by which the price of the item varies over time). This helps to devise strategies.
- The wider the bands, the more volatility in the market.
- If the market price falls outside the bands, the ‘breaking the bands’ scenario comes into play. It is also a reflection of high volatility.
This function helps a trader to assess the volatility levels of any asset over a period of time. This, in turn, assists traders in making better decisions. This is because traders who have been operating in the market for a long time can make more money during volatile situations. For new entrants, though, this is the worst time to trade as the risks are high.
When a double-top situation occurs, there are high chances of a trend reversal, thus indicating that it is unlikely that the market will see any further price rises. This means that overbuying has happened. This indicates a sell signal, hence. Reversely, a double-bottom position means an oversold position when traders want to start buying.
Bollinger Bands can also identify breakouts, which are periods when an asset’s price can move in either direction post a period of consolidation. When the bands are squeezed, it is a sign of a breakout. The issue here is that one can’t predict which way the prices will move to post this. For this, other tools have to be used. For instance, oscillators like moving average convergence divergence (MACD), Stochastic, and the Relative Strength Index (RSI) are then used.
Bollinger Bands are also used in trend following wherein a trader buys when others are doing the same and sells when others are also selling. It is a type of herd mentality when an investor jumps on the same bandwagon as the others and follows an already-existing trend. To do this, the middle and the upper lines are considered during an uptrend because then the prices will move with the Bollinger Bands. The reverse happens during a downtrend.
Introducing Pre-made Options Strategies
Options are complex instruments, and their advantage lies in the fact that they can be used in any market condition. Pre-made options strategies help to simplify the process of trading with options – building one from scratch can be quite intimidating, even for someone who has been dealing with options for a long time.
To get started, a trader can begin by selecting from a list of strategies that are pre-curated. The next step is to know the probability of profits, the maximum profit/loss that can be incurred if a certain strategy is opted for, and the funds that will be needed for the strategy. The last step is to trade using single-click entry and exit orders.
Why Ready-made Strategies are Used
Advantage of Ready-made Strategies
Ready-made strategies are used for the following reasons:
- One can obtain a number of pre-made strategies easily. For example, there are some market conditions when a trader has to use a greater number of strategies. When using read-made options, this process becomes simplified.
- Predicting the market direction – bearish/bullish, volatile/neutral – becomes easier. This includes knowing what the possible profit will be, what the maximum profit can be earned, and also if more funds are needed.
- The expiry of the trade can be selected.
- Most traders are unfamiliar with option strategies such as a bull-call spread or an iron condor strategy and hence use single-leg or naked options trades. Single-leg trades can lead to huge losses. Hence, using other strategies, which ready-made options offer, helps to build safer options as losses and profits are capped.
To Summarise,
- A systematic method based on certain predefined rules and criteria used for buying and selling in the securities markets is known as a trading strategy.
- Strategies are based on factors like market cap, portfolio diversification, risk and others.
- A strategy builder – like one that uses Bollinger Bands – is a powerful strategy engine that helps investors to define as well as evaluate strategies through the use of both fundamental and technical analysis.
- Strategy builders have a set of pre-curated strategies that are useful to both amateurs and experts.
For a trading strategy to be successful, the investment options and the trading plan should be well thought out. There exist many pre-curated strategies that can be used to simplify life, but to be on the safer side, one should know if these may be used on their own or need to be coupled with other strategies. Therein lies the crux of becoming a successful trader.
