Learn to Choose the Right Strategy

by Bob Eldridge

I think most would agree with me when I describe our current market as being somewhat unpredictable. This means that many of our trades are going to be less than profitable, a fact which could easily cause us to jump from one strategy to another, looking for one that still works consistently.

I call this "strategy hopping." It can be both confusing and dangerous. This is not to say that we don't have to occasionally change what we're doing to keep up with a changing market. We certainly do! We can avoid this dangerous practice of "strategy hopping" or at least minimize it by planning ahead a little.

Here are some tips for choosing the "right" strategy.

Think about what you're trying to accomplish with your trading. Making a profit will likely be the first answer which comes to mind. Try a bit harder. Are you trying to produce a steady stream of cash flow? Are you trading for a specific financial goal? That is, are you trying to earn a specific amount of money perhaps within a given period of time? Are you simply speculating ... and whatever happens, happens? These are all questions which must be answered if you are going to be able to weather the trading storms you are bound to encounter.

Take a look at the probabilities of the trade's outcome. I stress this in my Daily Cash Flow Trade Labs. How likely is it that your trade premise will actually happen? For example, if you are trading stocks to move in a specific direction -- up, down, sideways -- what are the odds that your stock will move in the direction you've selected?

I'm very big on trading only those strategies which have the highest probability of producing a profit. For example, if you think a stock is moving up -- checked all the technical indicators, reviewed the fundamentals and done all else within your power to ascertain which direction the stock is moving -- you'll likely conclude that the stock will either move up or down and then trade it that way. And you're right: The stock will either move up or down! Of course, you have no idea which way it's moving (regardless of your research), because as human beings, we are incapable of predicting the future. So your odds of making a profit on this trade will be around 50 percent. I will not touch such a trade!

Rather than trading what we cannot know for sure, let's only trade what we DO know is going to happen. In this case, we know that the stock will either move up or down 100 percent of the time! So, trade the stock that way by using a neutral trade such as a strangle or straddle. I like to avoid the more involved and complicated neutral positions like married puts, iron condors, etc. The simpler, the better!