Trading Strategy vs. Plan vs. System vs. Idea

I’ve already seen other threads on this but not very many actual examples. So from my understanding, the order of these 4 are as follows:

Trading Strategy >> Trading Plan >> Trading System/Idea

So I’m thinking the strategy is your overarching method for trading, your plan is your tactic for enacting the strategy and the system/idea will be the specific plan/rules for that particular trade.

For example!

The strategy is something like what @tommor wrote in another thread - to trade/hop in uptrends. Ok so what’s the trading plan, maybe to use channels or moving averages to confirm the trend. The system / idea can be if there’s a crossover or once a channel is identified.

Did I get it right? :open_mouth:

Cause what if someone says “I use the ichimoku for trading” – would that be a strategy or plan?? Or am I being just caught up in semantics? :laughing:

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@ponponwei

It’s important to get the semantics right - after all us traders even get up set when trading is called gambling, or is not!

On a serious note, you are correct

Strategic would be more long termed orientated, map view like planning.

Tactical is the more individual, following the terrain type planning

That is my take on it anyway.

Incidentally for anyone interested there is a great little book out there - not trading related - but of interest called Work the System.

It’s by Sam Carpenter and a very enjoyable read. I even think you can read it for free either from his website or as PDF download.

It goes into the difference between the two types of planning. I’ve read it many times and really puts forward the case for thinking in systems.

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This one right here right? Get the book free - Work the System

:laughing:

So I suppose when newbies ask for trading strategies, are they really asking for trading plans then?

For instance, something semi-specific like: Buy above 50SMA when it’s also above 200 SMA, look for crosses, set SL to XYZ and then exit when it’s below 50SMA, that’s a plan yes? And the strategy would be “MA Crossover”? Sorry I just really want to make sure!

@ponponwei

You are correct on both counts.

Actually this conversation has prompted me to read the book again for the umpteenth time.

Thanks

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@ponponwei

Thinking about this more may be that strategic thinking in my case is to be trading tech stocks as long as uptrend persists.

My tactics would be to trade inside bars, or pin bars

Like the gambling not gambling debate we open a can of worms when discussing certain wording.

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Trading idea is the raw representation of your possible trading edge. It should exploit some persistent market pattern or inefficiency (arbitrage of some type). Next step is development of rules of entry, exit (stop-loss or take profit), lot size.

After you develop them you backtest it on quality historical rates, preferably on several trading instruments and using walk-forward test to ensure robustness.

Try to make your model parsimonious to avoid known issue of overfitting (“optimising” for past performance or to some concrete dataset). Your goal is maximise some parameters of return while minimising parameters of risk (standard deviation of returns). It is best know as Sharpe Ratio.

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Great that you mention “edge” at this point - if an idea doesn’t have an edge in terms of probability of subsequent price behaviour, it is not worth further work. Small edges can be developed into major performance - look what the casinos have done with the roulette wheel: having an edge puts you in the position of “the house” rather than the punter.

Of course there are some who will point out that you can cultivate an edge from your money management so that your entries can be random. This is probably true but why start off down what is probably the wrong road and then have to hack your way cross-country to find a possible route to your destination?

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You are right. Success in the forex market mainly depends on the strategy you are using to make money.

I liked your thoughts very much. Could you please explain in detail how the Casino -’‘the house’’ and the ‘‘Punter’’ could be compared with tradings.

In roulette the house has an edge. Every bet is a loser if the ball lands on a zero. There is nothing the punter can do to increase his probability of winning or reduce the house’s probability of winning. It does not matter how good he is at maths or how much experience he has playing roulette, the respective probabilities cannot be altered.

In trading, the trader can gain skills and experience which can be used to increase his probability of winning.

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Any trading system works as long as we understand the game. But never try to predict the market. An impossible task.

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Hypothetically, think of a trading plan as a parent in the trading family, the trading system, strategy and trade ideas being some of the many children in that family. That is the relationship between the terms
Let me break it down for you to understand. A trading plan is inclusive of everything you do in relation to your trading career. (pre-market routine, watchlist, monitoring your trades, risk and money management, your trading system , post market routine etc.
See how your trading system is also included in your trading plan? A trading system describes how you will enter and exit trades. It involves the mechanics of how you will tackle the market, whether it is a mechanical or discretional system. A trading system is just one of the several important parts of a trading plan.
A trading strategy is simply a component of your trading system. It only comes after you have decided whether you are going to use a discretional or mechanical system. This is when you decide on which timeframes, and indicators to use to define your setups.
A trade idea on the other hand is simply when you see a potential setup, that is meeting some of the criteria of your trading strategy. When you are still waiting for all the criteria to be met, the trade is still an idea, until you pull the trigger.
That is how I understand the terms.

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Yes this is exactly how I imagined it to work!

This sounds much easier in theory. :sweat_smile:

Oh man. I can see how this works also but it’s like completely different from how I understand it - at least the plan and strategy part. The idea though we’re the same! @Johnscott31, now I see the semantics issue cropping up.

But I suppose the important thing is to be consistent with the terminologies when you execute whatever plan you have. Kind of like having your own dictionary? :open_mouth:

Exactly. Remember that this is not for anyone out there, but yourself. The main point is for you to trade whatever you understand in a consistent manner. However you understand it, it will always and simply serve the same purpose. For example, I had serious issues trying to remember candlestick patterns names when I first started trading. I then realized that I wasn’t preparing for an exam. No one was going to ask me for those names. All I needed was just to recognize them and understand their meaning. I somehow added some fun to my discovery by naming the patterns after things I understand better.

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Makes sense. The only way I can see this becoming an issue is learning with a group but other than that, if it’s just us using these terms by ourselves, we should be golden!