Which Trading Strategy Is Most Successful? - Quantified Trading Strategies

Let’s be honest: Which trading strategy is most successful is almost impossible to answer. It depends on so many factors. However, we can conclude this:

The most successful trading strategy is to trade many strategies and types to make sure you are diversified. Strategy diversification is the only Holy Grail in trading.

We suspect this is not the answer you were looking for (aren’t we all looking for the Holy Grail) but hopefully, after reading this article, you’ll better understand why diversification is the most successful trading strategy.

First, let’s start with defining what a trading strategy is:

Table of contents:

What is a trading strategy?

A trading strategy is an approach used by traders to make buying and selling decisions in the financial markets. Some make their approach systematic and mechanical, like we do, while others are discretionary traders. We have covered the main differences in an article called mechanical trading strategies vs. discretionary trading strategies, so we won’t go into details here.

A trading strategy should be based on predefined rules and criteria, which can be simple or complex, and may involve various factors such as investment style, technical indicators, fundamental analysis, risk tolerance, and time horizon.

It’s safe to say that the majority of traders have no such plan at all. It takes time to develop a sound plan and gain experience, and that is probably not as tempting as trying to strike it rich as soon as possible.

Trading strategies can be developed for different trading types, such as trend trading, scalping, day trading, swing trading, and position trading. The main trading styles are listed in the next section.

Obviously, the goal of a trading strategy is to make profits and minimize risk, and it is essential for traders to select a strategy that aligns with their personality and risk tolerance. Too many are trying to trade something they don’t have the stomach for, and they’ll abandon the strategy after a few losses to try something different.

The trading scene has different trading strategies that encompasses a vast spectrum of approaches, but each comes with its own set of strengths and limitations. We’ll try to cover most of this in this article.

Some traders prefer the rapid adrenaline rush of scalping, even though we are pretty sure most scalpers waste their time and lose money. Others might be happy to check their positions once a year.

Now, let’s go to the different types of trading strategies:

Types of trading strategies

What kind of trading strategies exist? The most obvious are these ones:

Buy and hold (but not really about trading)
Swing trading
Scalping
Market making (providing liquidity to markets, buy on the way down, sell on the way up)
Day trading
Position trading (more or less swing trading?)
Arbitrage – market neutral
Automated/mechanical trading

Many of these overlap each other. Most traders stick to one type or even just one strategy. However, that is not wise, in our opinion.

We can further define the types of trading strategies into mean reversion, trend following, pullback trading, reversal trading etc. There are so many labels in trading!

What then, is the most successful type of trading? We have our own opinion:

What type of trading is most successful?

Trading is just as much about the one pushing the buttons, either it’s done manually or automatically with a computer.

We believe that automated trading is the best type of trading, and has the best chances of turning you into a successful trader. With automated trading you backtest and quantify trading strategies based on statistics and probabilities, later run them in a demo account for incubation, for so to trade it live using a trading platform, for example Amibroker or Tradestation, the two platforms of our choice.

Whether you are a swing trader, day trader, or position trader, we believe that automation is the way to go. It gives you tremendous leverage in what you do, and there are basically no limits on how many trading strategies you can trade.

Why is this type of trading the most successful?

First, you have a backtested strategy. Compared to most traders, you actually know what the historical and statistical odds have been, although thre are no guarantees it will perform as well in the future. That’s a jump start compared to most traders who have no idea if they have a positive expectancy in the first place.

Second, when you are trading via a platform we believe you are putting “layer” between you and the trading. You have more detachment to the decisions, and you are less likely to procrastinate (a popular word these days) or hesitate. Good trading is when you have complete detachment to money, but that is of course easier said than done.

Third, you are less likely to suffer from trading biases and make psychological mistakes if you do automated trading. Typical mistakes are skipping trades, stop trading after three losers in a row etc. Again, you have detachment.

There are so many things that can go wrong in trading, and you want to limit the risk wherever you can. Please also read our very short guide that lists 5 steps to instantly improve your trading.

Which trading strategy is most accurate?

If we are going to measure the accuracy of a trading strategy, we need to look at the win rate – which is th