A trading strategy is a systematic methodology used for buying and selling in the securities markets. A trading strategy is based on predefined rules and criteria used when making trading decisions.
Active VS. Passive trading strategies
Passive Strategies (존버) – Buying bitcoin 10 years ago and just holding it until today
Semi-active Strategies (Long-only Strategies) – Hold bitcoin in your wallet until you believe prices will rise
Active Strategies – High Frequency Trading
Identifying Trading Opportunities | Formulating a Strategy | Strategy Testing
The next three steps go hand in hand. Depending on the strategy, these steps are executed simultaneously or one after another. The trader starts with a rough idea of what a profitable strategy could look like. Then, the strategy is defined with a programming language.
The following step is the most critical in the whole process. The trader must test the performance of the strategy on the data at hand. This is called backtesting. The performance includes risk and return/profit metrics. Promising strategies have the following characteristics:
- They are highly profitable.
- They have an acceptable risk profile (the lower, the better).
- They should beat the benchmark.
The benchmark is a comparable instrument or strategy. Often, a simple buy-and-hold strategy is the best benchmark.