Investment Strategies – Why Logic Is Important

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One of the things I have noticed during the 20 years I have spent either actively investing in various strategies, or trialing them, is that the ones which make logical sense usually are the ones which work best in real life.

There are so many strategies I’ve tried, I have lost count. And there are at least as many which I’ve let go without trying. There are just too many. I found a quick fire way though which helps disregard the strategies which are useless, so you can trial the ones which are worth trialing. Its logic. Look at the logic of your trading strategy and see if there are holes in it. You’ll be amazed by the number of strategies with big logical holes.

Most strategies presented to you will make sense. They have to or you would disregard them as nonsense. This is not what I am talking about though. The concern discussed in this article is logical completeness. If a strategy does not cover all possible scenarios you may come across, it will not take long before you find one of those scenarios. And when you do find a scenario which is not covered by your strategy, all of a sudden you need to make decisions outside the strategy. You will probably be left scratching your head or guessing.

When I am in this situation, where I have to make a decision outside a strategy I am trading because the strategy does not offer me guidance, I believe I am gambling. This is not good. I may make the right decision, but then again, I may lose my money. In all good investment strategies, you should not have to do this. You should simply plan the trade, and then trade the plan. There should not be room for guess work.

The other problem with this is that no matter what happens to your returns from that point, you will never know if it happened because the strategy worked or because of the guess you just made. This also can create problems as it must impact your confidence in the strategy. If your confidence is impacted, this may further cause you to divert from the strategy in other circumstances, exacerbating the problem.

So if you are thinking about trading a new strategy, short cut experiencing some pain and loss. Go through the logic of the strategy in a robust and thorough manner. Are there scenarios you can see, which the strategy possibly does not cover? If so, try and get answers for those scenarios. If you can’t get answers for them, personally, I’d avoid the strategy. Lets face it, going to the horse races is much more fun

And don’t forget to dummy trade before you put any money down. When you are dummy trading you will most likely find a bunch of trading scenarios you never thought about before. Make sure these are covered by the logic of the strategy too. Its much easier to sort this stuff out without money, than when you have money on the line.

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Article Citation
MLA Style Citation:
Urquart, Gnifrus "Investment Strategies – Why Logic Is Important." Investment Strategies – Why Logic Is Important. 17 Apr. 2009. uberarticles.com. 7 Apr 2012 <http://uberarticles.com/finance/investments/investment-strategies-why-logic-is-important/>.

APA Style Citation:
Urquart, G (2009, April 17). Investment Strategies – Why Logic Is Important. Retrieved April 7, 2012, from http://uberarticles.com/finance/investments/investment-strategies-why-logic-is-important/

Chicago Style Citation:
Urquart, Gnifrus "Investment Strategies – Why Logic Is Important" uberarticles.com. http://uberarticles.com/finance/investments/investment-strategies-why-logic-is-important/

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