Which Trading Strategy Is Most Successful?

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:

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 the percentage winners of all trades taken.

If we look at the math, a strategy with a high win rate is equal compared to a strategy that has a low win rate, given that overall profits for both are equal. 

However, we tend to disagree. The reason for that is simple: humans tend to like winning, and hate losing. A low win rate strategy increases the probability of having many consecutive losers, while a high win rate tend to have many consecutive winners. 

This matters, because traders have trading biases that are hard to avoid. Can you push the buttons after 7 losers in a row? Our experience is that most traders don’t have the stomach to handle frequent losers, even though the occasional winners more than make up for the losers (over time). 

The risk of ruin in trading also increases the lower the win rate. Thus, you need to lower the size of your positions to mitigate that risk. 

Which high win rate trading strategy is the best? The type of trading strategy with the highest win rate is mean reversion trading strategies.

Since we started this blog in 2012 we have published plenty of mean reversion strategies. This type of trading strategy works very well in the stock market, at least since futures trading started in 1982, but it doesn’t work so well on other assets, perhaps with an exception of bonds.

For example, we have published an article called the 3 best mean reversion trading strategies, but also another one with a more diverse type of trading types called 10 best swing trading strategies. You might fancy reading those, they both come with trading rules. 

Which trading strategy has the highest probability of success?

The trading strategy that has the highest probability of success is a combination of trading styles: a diversified trading strategy.

The reason is simple: you want trading strategies that complement each other where you can make money and lose at different times. If you lose big in strategy A, you might offset some of this by gains in strategies C and B. 

For example, you want to trade both mean reversion and trend following because they have different features, but you also want to trade different directions (long and short), different time frames (short and long term), and you want to trade many different assets. 

Mean reversion has many small winners and frequent large losers, while trend following tend to have few large winners and many small losers. They have opposite features, and thus they should work well together to smooth overall returns. 

Trading strategy diversification is a great tool, just like diversification among different stocks. You don’t want to invest in just one stock, and you don’t want to trade just one strategy.   

If you want to delve further into the subject, you’ll find our example of two trading strategies that complement each other useful, and you should also read about correlation in trading.

What is the most powerful trading strategy?

There is a type of trading strategy that is very powerful, but you are unlikely to have ever heard about it: it’s the trading strategy that mitigates risk, perhaps even both mitigating risk and increasing returns. Again, this is also about trading strategy diversification. 

Is that possible?

Yes, but of course, it’s not easy. Mark Spitznagel dedicated a whole book to risk mitigation called Safe Haven Investing. If you are serious about trading and investing, we recommend reading it. 

Mitigating risk: the most powerful trading strategy  

Conventional financial theory suggests that higher risk is associated with higher returns.

However, Nassim Nicholas Taleb, a renowned author and scholar, challenges this notion. He proposes a contrarian view that risk mitigation can actually lead to wealth accumulation, even when accepting lower returns. Taleb has worked together with Spitznagel to solve this puzzle. Nassim Taleb is a strong advocate of the Barbell strategy.

Taleb’s and Spitznagel’s ideas, though seemingly counterintuitive, offer a fresh perspective on the role of defensive assets in investment portfolios. They argue that risk-mitigating assets can provide valuable benefits by reducing the likelihood of large setbacks and promoting consistent compounding.

To illustrate his point, Spitznagel employed dice games as a simplified analogy in his book. He demonstrates that even an asset with negative arithmetic returns can boost geometric returns by reducing the frequency of major losses. This, in turn, can lead to significant wealth accumulation over time. The arithmetic average is different from the geometric average, and trading is all about geometric averages.

This challenges the conventional wisdom of financial theory and offers a compelling case for the inclusion of defensive assets in investment portfolios, such as bonds and gold, for example.

By mitigating risk, investors can potentially achieve consistent growth and protect their wealth from devastating losses!

Which trading strategy is most successful? Conclusion

By now you probably understand there are no single trading strategy that is the most successful, but rather a portfolio of trading strategies and styles that are most likely to turn you into a successful trader. 

Trading is no easy money, and thus you better be prepared to work hard for it. It takes a lot of time – we are talking years to gain valuable experience.  

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