Specialization

• The financial markets are too big and diverse for anybody to be equally good at everything. A good strategy specializes in a particular segment of the market or method of trading. For example, traders may specialize in biotech stocks; others may focus on shorting --- profiting from stock declines.
  
  

Selection Criteria

• The key to a profitable strategy is for a trader to select stocks that he believes will outperform market averages. For example, a trader who specializes in growth stocks must have a quick and reliable way to select a dozen or so stocks out of a pool of several thousand that, in his opinion, have the best return potential. The selection criteria must enable a trader to make his selections quickly and efficiently.
  
  

Risk Management

• Trading capital is the lifeblood of trading. If a trader loses her capital, the most profitable trading strategy is meaningless because she can't implement it. A key component of a profitable trading strategy is capital preservation through risk management so that no one trade can wipe the trader out. Risk management has two parts: emotion control and portfolio management. Emotion control helps a trader make better, more rational decisions through control of her own emotions. Portfolio management provides sound money-management rules that help minimize risks while maximizing returns. For example, a trader may have a rule to not risk more than 2 percent of her capital on any one trade or to cut all her losses at 5 percent or 10 percent.
  
  

Consistency

• The difference between a fad and a strategy is that a fad is short-lived: It may work in a specific situation or under a particular set of circumstances, but it can't be replicated. A good strategy works in a variety of markets and situations. No trading strategy is perfect or works 100 percent of the time. A good strategy, properly implemented, should provide consistent profitable returns.