There are numerous strategies for trading Forex and CFDs (Contract for Differences). Choosing between a single complex trading system and several simple systems can prove tricky for traders. Let’s analyze the merits and demerits of both strategies and why numerous skilled traders utilize multiple simple yet diversified strategies.
One complex trading system
Advantages:
- In-depth market analysis: A complex system looks at numerous factors and indicators, making it easier to anticipate market behavior.
- Automation: If the system is algorithmic, it can be automated fully and reduce the human element.
- Versatility: A good complex strategy can be easily used with various assets and time frames.
- Parameter optimization: The trader can adjust the system in detail according to particular market situations.
Disadvantages:
- Development and work complexity: Such a complex system requires deep insight, time, and programming acumen or analysis software skills.
- Adaptability problems: In complex systems, there is normally a need to adapt to changes in market fluctuation. Due to many parameters, the risk of “overoptimization” exists, and the system works perfectly using historical data but fails to act when actual market changes happen.
- Emotional stress: When the complex system collapses, a trader can become tense and lose confidence in the plan.
- Inflexibility: In case a complex system fails to perform in certain situations, there is nothing for the trader to offset the loss because everything is based on a single approach.
Some basic trading plans
Advantages:
- Risk diversification: Using many strategies on multiple assets and periods allows you to minimize risks and restrict the impact of one’s system’s losses on the result.
- Ease of implementation: Simple strategies are easier to understand, try, and modify to suit current market conditions.
- Flexibility: If one strategy doesn’t work, one can substitute or modify it without losing too much time.
- Resistance to market movements: A set of strategies facilitates adjustment to different phases of the market, i.e., trends, flat, high, and low volatility.
- Psychological robustness: Losses on one strategy become psychologically more manageable if the others are profitable.
Limitations:
- Monitoring requirement: Using multiple strategies requires continuous monitoring of their performance and timely adjustments.
- Risk of conflict of strategies: Different strategies may sometimes give conflicting signals, making decision-making difficult.
- Discipline and management: Several strategies are difficult to handle, and a person requires high discipline and sound risk management ability.
- Time cost: While each strategy is simple, handling a combination of strategies may be time-consuming and effortful.
What do experienced traders recommend?
Most veteran CFD and forex traders believe that using a couple of simple yet diversified strategies is a must. Here’s why:
- Risk minimization: When one strategy experiences losses, the others can cover them with gains, reducing the likelihood of major financial losses.
- Flexibility: Different strategies do well under different market conditions. For example, a breakout strategy does well during a trend, while a rebound strategy does well during a flat market.
- Optimize time and effort: Simple strategies do not require elaborate analysis and can be quickly tested and implemented.
- Learning effectiveness: A trader will learn more easily by becoming proficient in simple strategies and adding to his trading arsenal step by step.
Example of a diversified approach
- Breakout strategy of support and resistance levels.
- Scalping on minute charts using the application of RSI and Moving Average indicators.
- Moving averages trend strategy on a daily chart.
- Counter-trend approach to Price Action patterns.
These strategies can all be used in different assets and time frames, creating a diversified trading portfolio. But let us remember backtesting. First, any simple strategy has to prove its impact on history. Then, it should be properly joined to the risk management rules, and only after that can it be applied in the live market.
The decision to use one complicated system or multiple simple strategies is based on a trader’s style and experience. Practice indicates that applying multiple very simple strategies spread across various assets and market conditions provides a more stable and consistent outcome in the Forex and CFD market. Diversification allows for reducing risks, adjusting to market fluctuations, and improving trading stability. Incidentally, a 4-time World Trading Championship winner, Andrea Unger, used this approach during the tournament, which made him stable for longer periods when other traders sometimes lost their efficiency.