22 May 3 Parts to a Trading Strategy
In recent years, I have been selective about the investment talks and seminars I attend. I found the talk on investment psychology interesting and I attended it on Sunday, 19 May 13. The speaker was Wong Kok Fai, who appeared in TV programs such as Money Mind, Business Tonight, 财经追击. He is currently an algo trader at Azurewing Asset Management in Hong Kong.
Most of the things he said were the usual investing psych stuffs. But I do find his investment framework particularly useful. The framework defines 3 parts to a trading strategy
- investment philosophy
- trading plan (process)
- a system of trading
Investment Philosophy is the cornerstone of any strategy and it is unique to individual. It is about understanding your beliefs and trading tendencies. We trade our beliefs in the market and use them to filter the information we observe. For example, Kok Fai’s philosophy is to act after public news. Instead of second guessing or expecting a certain outcome, he prefers to act on news that are confirmed.
Trading plan is a process to define how you will search, filter, buy, monitor and sell. Your trading plan is developed based on your investment philosophy. For example, he will search and filter for big cap stocks that are going to be added to a stock index. He will wait for the confirmation through public news. No matter what, fund managers who track the index will have to buy too, and in much bigger amount. You should have noted that his philosophy to act after public news drives this trading plan.
A system of trading plans
He said that there are 6 kinds of market conditions:
- Bullish Quiet market
- Bullish Volatile market
- Bearish Quiet market
- Bearish Volatile market
- Sideways Quiet market
- Sideways Volatile market
The trading plan which you have developed may only be applicable in one or a few, but not all of the 6 market conditions. Hence, there is a need to develop more than one trading plan that can perform in other market conditions. But all the trading plans must be a product of your investment philosophy. For example, Kok Fai has another trading plan which is to buy after a major placement to private investors. Those big private investors who have taken a big pie in the stock cannot be disappointed so share price must go up for them to profit. Again, you should note that his additional trading plan is still congruent with his investment philosophy – he will wait for public announcements for such placement.
Do you agree with this framework? What is your investment philosophy?