As a trader or investor you have two strategic choices: invest your money passively or take an active role in determining your financial future.
If you take an active role, then the most important question is this: does your investing or trading strategy produce alpha?
Alpha is what professional traders are paid to produce every day. Alpha is defined as the return above the market’s return – for example, the return above what a passive investor might earn over the same period by buying and holding the ^SPY^.
So in asking yourself if your investing or trading strategy has alpha, you are asking: do my trading strategies consistently outperform the stock market?
Emphasis on “consistently.” Does your trading strategy outperform the market only in rising markets? Or does your trading strategy outperform the market in sideways and bear markets, as well? Believe it or not, many trading strategies that outperform the stock market to the upside are the same trading strategies that actually do worse than the stock market when the market moves sideways or lower.
Knowing if your trading strategy delivers alpha is important because a lot of time and effort goes into building an investing or trading strategy – to say nothing of a lot of money. And frankly, if your trading strategies do not perform better than passive investing in the S&P 500 or similar index, then you are better off either buying and holding the SPY or finding a better trading strategy.
To learn more about alpha and why it is an important aspect in deciding which investing and trading strategies are right for you, click the link below to join Larry Connors for a special online webinar, How to Harness the Alpha in The Machine.
Larry Connors is founder and CEO of TradingMarkets, and a trader with nearly 30 years experience in the financial industry. His upcoming presentation will explain both why alpha is the key element in actively managing your money and how resources like The Machine can help traders and investors use quantified trading strategies to produce alpha for their own investment portfolios.
If you’ve taken an active role in managing your money, but wonder if your investing or trading strategies are producing the returns that they should, then clink the link below to learn more about Larry’s upcoming webinar – presented for free by TradingMarkets.com – How to Harness the Alpha in The Machine.
David Penn is Editor in Chief of TradingMarkets.com