Dr. Richard Olsen is founder and CEO of the Zurich-based Olsen Group , a pioneer in the development of online financial forecasting systems and trading models for applications ranging from trading to investment and risk management.
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You are your best advisor.
One of the biggest pitfalls in trading is to rely too heavily on the guidance of other people. It is important to formulate your own personal view of the world and make investment decisions in tune with this view.
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Be clear about your competitive edge.
Everyone has a personal competitive edge. The competitive edge might be as little as being more removed from the market than other players and thus not having to contend with the distractions of short term price movements. Some of the most successful investors have taken a very broad brush view of the world and have generated huge returns by making some long- term bets.
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Use quantitative tools.
Market prices are determined by the interaction of groups of investors trading on very different time scales . The actual impact of fundamental factors depends on the market dynamics. Typically, market observers take a far too simplistic view of the interaction between market dynamics and fundamental events. Only sophisticated quantitative models, that are similar to weather forecasting models, can systematically analyse market conditions and generate forecasts of consistent quality. See our forecasting services at http://ois.olsen.ch or www.oanda.com.
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Trade in liquid markets.
Markets are not continuous and it is dangerous to assume that positions can be liquidated at any time. For this reason, investors should stay away from illiquid markets, except if their investment horizons are very long term.
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Follow a top down approach.
In establishing an investment strategy, it is important to take a top down approach starting with defining the investment philosophy, formulating the decision process and allocating the assets to the markets and underlying instruments.
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Build up positions over time.
A major pitfall to any investment strategy is the discrete start of the investment program. If all funds are committed at the start of the program, the overall performance of the investment program will depend significantly on the specific entry point. If the investor is lucky, his performance will have a positive bias, otherwise , he will be negatively impacted by the start of the program.
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Stick to your time scale of trading.
Another major pitfall is that investors change their trading horizons depending on the profits and losses of their positions. If an investor accumulates losses, he tends to extend his trading horizon in the hope of recouping his losses. He should not do so. He should stick to his initial strategy and close out his position. There are many other investment opportunities waiting for him provided he has not lost his money.
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Watch out for transaction costs.
Transaction costs are far more important in the overall performance of an investment strategy than typically understood . The reason is simple: Transaction costs are 'certain' costs, whereas trading returns are uncertain . It is easy to control transaction costs, whereas it is difficult to enhance the success of your trading decisions.
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Use tactical tricks, such as limit orders and stop losses.
Performance of any investment strategy is increased by setting limit orders in opening positions and maintaining a strict stop loss regime . In this way, the investor can turn to his advantage the short-term overshooting of markets. Quantitative forecasts are an ideal tool to set limit orders and position stop losses.