Prediction markets have been around for a long time now. However, unlike the earlier days, prediction markets or betting markets are now more profitable to traders who understand these markets’ ins and outs.
When trading in a prediction market, it is important to employ all tools that can help to make the trade profitable. Unfortunately, while many have learned to use these trading tools to aid their trade, a few still choose to avoid such tools. Usually, these tools help the trader make an informed decision with a high-profit probability than losses.
A trading strategy is among these important tools that every trader should employ. A profitable trading strategy is always a step closer to getting the most from prediction markets.
What is a Trading Strategy
A trading strategy can be defined as a fixed plan or systematic methodology that traders use to buy, sell or predict outcomes in financial markets. In prediction markets, a trading strategy allows traders to correctly bet on the outcome of various events with an unknown future.
A trading strategy considers various aspects like risk tolerance, investment objectives, tax implications, and time horizon. Notably, traders employ a trading strategy to avoid acting on their bad behavioral financial biases. These tools work by identifying recurrent market behavior or patterns. This could be any recurring pattern but is usually based on technical analysis.
Usually, a trading strategy can be simple or complex, focusing on time, day, or particular systems like technical indicators.
The difference between an ordinary and profitable trading strategy is that the latter garners more wins than losses. Thus, this strategy provides the traders with a greater payout to cover the losses incurred.
What makes a good Trading Strategy
While trading, a trader’s success using a particular strategy does not guarantee the same success to other traders. In a good strategy, the plan works and suits the trader’s requirements. For the strategy to be good and profitable, the trader needs to choose one that best fits their needs while considering their personality type, available resources, and lifestyle.
Unfortunately, there is no way to be 100% certain that a trading strategy will work. It is thus important for traders to test out the strategy or strategies before fully adopting them for trade.
In addition, traders also need to update their strategy once in a while to make sure the strategy does not stop working to their advantage. To test whether a good trading strategy is still viable, traders should use a walk-forward analysis, forward test, or in/out sample testing.
How to develop a profitable Trading Strategy
A trading strategy comes into being through various programming tools. Development involves creating a detailed set of guidelines that have both entry and exit techniques. It also involves outlining the possible risks and rewards. Normally, developing a profitable trading strategy for prediction markets involves eight steps including formulation, preliminary testing, specification in computer-testable form, optimization, trading of the strategy, monitoring of trading performance, evaluation of performance and robustness, refinement, and evolution.
Types of Trading Strategies
Many trading strategies are available today for prediction markets ranging from simple and traditional strategies to more complex and modern (updated) plans. The four commonly known trading strategies include:
Scalping Trading Strategy: A short-term form of trading, scalping allows traders to hold positions open for a few seconds or minutes at most. This strategy is aimed at allowing the trader to make small quick trades with smaller profit margins.
Day Trading Strategy: As the name suggests, this strategy involves entering and exiting a position on the same day. Thus, the strategy eliminates the hurdles of any large overnight moves. This strategy mainly focuses on technical and fundamental analysis.
Position Trading Strategy: Position trading entails focusing on long-term price movements. Traders using this strategy are usually looking to make maximum profits from a major shift in prices. Traders usually use weekly and monthly price charts to make their analyses.
Swing Trading Strategy: This strategy allows traders to hold their positions for several days and even weeks. Many traders prefer this strategy since it allows them to engage in other activities rather than constantly monitoring charts and their trades all day.
There are more means like News Trading Strategy, Trend Trading, End of Day Strategy, etc.
Benefits of trading strategies
A good trading strategy will always help a trader decide when, how, and what should be invested in a particular trade. In addition, a profitable trading strategy allows the trader to seek the possible opportunities available in the market that are not easily visible to others.
Using a trading strategy instills discipline in a trader’s life. It eliminates the need to act on emotions or premature and incorrect data. In addition, a trading strategy also helps a trader in managing their assets. By narrowing down the available options, the strategy reduces the money loss incurred when investing in bad ideas. The elements of a profitable trading strategy constitute understanding the needs of the trader. Moreover, a profitable strategy will differ from one trader to the next. Therefore, it is always important for traders to update their strategy to keep up with the changes in the markets and technologies.