Ultimately, everyone wants to have as many chances to profit as possible, prompting the desire to develop multiple strategies to achieve this. Like with any tactic, some people can accomplish this, while others still prefer to focus solely on one strategy. No method is necessarily better, but if you’re wondering about the pros and cons of each, this article will tell you.
Understanding different market conditions in the forex
As we know, financial instruments are always in a state of flux since they never remain the same. Some are a die-hard trend or counter-trend traders, while others have found success trading range-bound markets and breakouts.
Whether a trader is aware of it or not, they are looking to take advantage of a specific market condition in every position. The biggest challenge with this statement is, because of how dynamic forex is, no one truly knows when conditions have actually changed until after the fact, resulting in indefinite periods of drawdown.
For example, if someone trades a head and shoulders pattern on the 4-hour time-frame, the market can be unfavorable to that structure for an uncertain while, a financially and psychologically challenging eventuality to accept.
Naturally, to maximize profitability, the question then becomes should traders adopt a different trading strategy to take advantage of another circumstance than what they usually do. And should a forex trader have more than one trading strategy?
As with many things, there is no right or wrong answer, although there are worthy considerations between having one or more.
Pros and cons of using one trading strategy
Being a one-trick pony, for many, is the way to go for numerous reasons. However, there are also some apparent, off-putting drawbacks.
- Better focus and mastery
When using one strategy, the trader can have better attention to all of its intricacies without being too bogged down by other time-consuming and intensive things.
If they’ve identified faults, they can quickly recognize and fix them where applicable. When using a strictly one approach, you only need to follow one set of rules rather than many.
Bruce Lee once said, “I fear not the man who has practiced 10 000 kicks once, but I fear the man who has practiced one kick 10 000 times.” This quote summarises the essence of using a single strategy in forex.
- Promotes patience
Patience is arguably the most crucial trait any trader, regardless of their style, should have. By using one strategy, one learns discipline in waiting until all the conditions for entering have been met. Through having more than one technique, a trader may fall into over-trading.
- Bias to one event
One major challenge with using one approach is the bias for a trader to look at one reason for why price moves than considering other possibilities. For example, someone trading a moving average crossover may be too biased into believing the market only changes because of a crossing over of moving averages.
As we know, there is a multitude of motives why the price could move contrary to what someone might believe.
- Limited opportunities
Another off-putting factor here is using one strategy means a limitation to fewer opportunities, which usually decreases the chances for profiting.
The slight counter-argument with this thinking is sometimes diversification may have a negative consequence, and just because there are opportunities in the market doesn’t mean they are ‘worth the squeeze’ or will make a trader more money.
- More chances of an extended drawdown
By relying on one trading strategy, a lengthy drawdown period means someone cannot profit from using another system that could offset this occurrence. There is no diversification in terms of fund allocation.
Pros and cons of using multiple trading strategies
The benefits and risks of adopting different ways to trade are the direct opposite of using a single method.
- More opportunities and diversification
The immediate benefit of using more than one trading strategy is the increase in profiting opportunities and diversification.
- No bias to one event
Unlike using a sole system, trading with another or other strategies means someone appreciates there will be more than one reason for a market to move. A trader is not fixed to one outcome; they are flexible to different consequences.
- Less chance for a drawdown
Because of diversification, a trader can choose to take advantage of different market circumstances. For example, if someone’s sole strategy is breakouts, they can adopt another one to trade mean reversion or reversals.
When the former goes into the drawdown, there is less chance for the latter to experience a losing streak. Once the profits and losses of the two are combined, the overall loss may be less, or there may even be a profit.
- Vulnerability to overtrading and lack of patience
By using at least two strategies, there is a higher chance of over-trading due to the increased positions. Also, it is difficult to be patient.
- Diluted focus
It is harder to have mastery of one strategy using this approach because there is more information to analyze, which can be time-consuming and drains focus.
Having more than one strategy doesn’t necessarily mean a trader will be more profitable than another who sticks to one mainly due to the risk taken by each and the potential reward for every position.
The only difference is the number of opportunities increase, though the question then becomes whether one desires low or high-quality trades. Focusing on one style fosters precision and specialization.
Much like there are different kinds of surgeons, there are countless strategies to specialize in. So, it can be an issue of ‘being a jack of all trades, and a master of none.’
Ultimately, the biggest drawback of using one strategy is limited trading set-ups; the largest issue with using more than a single strategy is the diluted focus.
Therefore, a trader sticking to one thing may consider trading other markets to increase profiting chances. For the ‘multi-strategist,’ they will have to ensure they fully master their subsequent trading systems as they did their initial while ensuring to divide their risk up accordingly.