The global financial markets are constantly changing and evolving, which makes it challenging for traders to keep up and maintain profitable trading strategies in the long run.
Numerous different factors can cause shifts on the market and render previously profitable strategies ineffective.
Therefore, traders all over the world are constantly looking to develop resilient strategies that can stand the test of time and stand a higher chance of being profitable in the long run.
Scalping strategies are particularly popular among traders who want to stay on top of the market and you can look at a few options by viewing these scalping strategies at Axiory.
Why trading strategies fail so often
There are multiple reasons why trading strategies ultimately fail in the long run and the most important factor is rather simple – market conditions change over time and most strategies are not resilient enough to keep up.
Whether a short-term trading strategy or a long-term investment one, strategies only work so far as market conditions remain relatively stable.
We can review some of the core factors that change on the market often and cause trading strategies to fail in greater detail below.
Volatility
Volatility is what makes asset prices change and market conditions alter and different market conditions can cause the volatility to drop or spike.
For example, major positive economic news, such as above-average economic growth figures, can affect financial markets greatly and cause asset prices to rise rapidly – also increasing the volatility of the market in the process.
When forecasting market conditions using a particular trading strategy, it is important to incorporate certain volatility indicators in order to measure how volatility shifts on the market over a period of time.
When liquidity on the market rises, volatility tends to decrease, as singular transactions no longer affect the price of an instrument as much.Therefore, keeping track of such data is essential in developing a market-beating trading strategy, regardless of which financial instruments you are aiming to trade.
Market news
As political and economic conditions change around the world, financial news outlets and government officials are quick to post updates, which can greatly affect the performance of assets on financial markets.
When building a trading strategy, it is practically impossible to forecast every single important news release, as a large number of unexpected changes can occur over a rather short period of time. The best traders can do is react to news as quickly as possible – often using the power of machine learning and AI.
News trading is a separate trading strategy on its own and involves traders closely following market updates and often using automated strategies to take advantage of changing conditions as soon as possible.
Sentiment
Depending on the news reaching the market, the sentiment of traders can shift greatly – altering asset prices in the process.
For instance, a major negative piece of information can cause asset prices to tank, before gradually recovering in the coming weeks. Such drastic changes are frequent and guided purely by the sentiments of market participants. The principle of sentiment analysis is rather simple – if traders and investors are afraid and uncertain about the future – they sell or avert buying.
Conversely, when the sentiment is optimistic, traders and investors alike are likely to buy or open long positions, thus, increasing the price of the instruments in question.
How to forecast market shifts and generate profits
While there is no one clear-cut method of generating profits on the financial markets, whether the instruments traded are stocks, currencies or crypto, there are nonetheless some key principles that will help you structure your trading strategy appropriately:
- Regularly check volatility figures, such as the Beta coefficient of stocks to identify potential spikes or slowdowns in volatility
- Monitor market sentiment on major investing forums, or use sentiment analysis software to your advantage
- Keep in mind that other investors are also human and prone to errors and overreactions
The key to a successful long-term trading strategy is to be able to analyze market data and decide which instruments are likely to benefit from current conditions and which are likely to falter.
Furthermore, remaining flexible and resilient can help you find opportunities before the rest of the market buys into it, which allows you to greatly profit from trades that go your way.
Market forecasts are generally quite complex and take multiple different metrics and data points into consideration before arriving at a buy or sell signal, which means that retail traders and investors make plenty of mistakes when analyzing the markets on their own and this should not discourage you from assessing the markets to formulate your own strategies.
Overall, forecasting market shifts is a complex process that requires thorough analysis of technical factors, such as volatility, market news and updates and investor sentiment. A combination of these three factors can increase the chances of formulating a winning trading strategy.
