The big picture trading strategy is highly effective, but very boring for most traders because of its simplicity. This is a big obstacle for some, but the serious trader should look to this as an opportunity. Because many people avoid it thanks to its simplicity, it is highly effective at creating a base of stability as you go about your other trades. The higher probability of success here allows you to find other areas where the risk is higher without sacrificing overall profitability. Let’s take a look at how to use a big picture trading strategy, and what the drawbacks are.
Application of the Picture
This is a very simple strategy to start using. It relies solely upon indices, and consists of varying your expiry times. The shortest expiry that you should look at is the end of the trading day, and the longest is the end of the trading week. The basic premise of this strategy is that indices are more highly predictable than the stocks that comprise them, and by looking at fundamental information and consumer sentiment, you can get a good idea of which direction the index will go long term. By converting this to a few trades, you can determine a few trades per week that have a very high probability of success.
First, look at where you expect the major index of your choice to be at the end of the trading week. Looking to the S&P 500 is a good way for U.S. traders to include the general tone of the entire U.S. economy in their approach, but this can really be modified for any index. Your end of the week trade should be your first trade. After this, you should look at that index again, day by day. Ideally, the directions of your trades should not change, but because you will be looking at these trades on a daily basis, you can adjust your approach as necessary, minimizing any risk that might pop up. If you need to, you can take out opposite directions for the overall week the next day, or even for the end of the trading day. This allows you to hedge your investments in a way and still make a profit even if your original assessments are incorrect.
Trades should be made as early in the day as your broker will allow you to make them. Most brokers do not allow index trades until the market that they represent has been open for at least 30 minutes. This waiting period gives you a chance to get a general feel for what the day’s tone will be, which is a nice plus.
Looking at Some of the DownFalls
Even if this strategy can be highly effective, there are negative qualities to it. First, not all brokers offer expiries that extend out to the end of a week, but when you find one that does, plus combines it with decent rates of return on index trades, you will know that you are in the right spot.
However, the biggest drawback is that this strategy is not a huge money maker. Yes, your trades will be more successful than normal with this, but your rates of return will tend to be a bit lower, and you will not be making many of them. A typical trader using this strategy will make less than 10 trades per week with it. Those trades are likely to have a very high correct trade rate, but it’s not going to be a huge draw to many as a result. It works best when you mix it in with your other trades as it adds a small base of steady profits, which is a nice way to diversify your trades and reduce volatility.
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