Tuesday, August 7, 2018

Developing Your Trading Strategy

"Some of you reading this are just learning to trade. You may be so new that you do not trade as of yet and thus have no trading style. Most of you however have traded for a while, and are likely less than successful. So be it. There is no shame in that. The shame would be in remaining comfortable in that situation. Previously we have discussed the essential elements of trading. They are as follows: An Idea or Edge A Trading Plan Good Money Management Self Discipline Experience These first two elements are closely correlated but not the same. You not only have to have an idea, usually based on countless hours of observations, but you also have to figure out how you plan to take advantage of that idea. You must develop the best mechanism of trading, such that you make make money off of your trading hypothesis. You must have a plan, a strategy, proper tactics.

So I have a question for those of you who trade. How do you trade? What approach do you use to take advantage of your ideas on market behavior? What are the specifics of your trading strategy and tactics that you use. Take just a moment to think about this question.


David Cook recently wrote and published a book entitled ""Golf's sacred Journey"". It is a marvelous fictional account of a golfer who has talent, but is mentally lost. The book is now a movie. It should be part of your trading education; required reading for all learning to trade.

I read Cook's book some time ago and found it both compelling and enjoyable. The young golfer is on a mini tour trying to play his way to the PGA tour, and he finds himself in contention at a tournament. Things don't go quite the way the player had hoped and he leaves the tournament sick, confused, and disgusted with his play. (Have you ever felt that way trading?). He then, by chance, comes across a rather unusual gentleman named Johnny in a town called ""Utopia"".

What the heck has this got to do with developing my trading strategy? Right? patient and give me a chance.

Johnny then offers to help this wayward pro golfer ""find his game"". An unusual, but totally appropriate choice of words. The golfer reluctantly accepts, thinking that he has little to lose. They meet at the range the next morning and after watching for a few moments Johnny asks the young man a question central to our analogy. ""Why do you grip the club the way you do?"" It takes a moment but the golfer replies ""I hadn't given it much thought, it just felt right.""

""Completely unacceptable"" comes Johnny's quick reply. But Johnny then goes on to explain....

""Your grip is fine; It is your answer that is unacceptable"".

The teacher then asks the student what Trevino, Nicklaus, Player and Palmer all had in common. The answer...... CONVICTION. Each golfer was quite different than the others in personality, swing, and approach to the golf course; yet each thought his way was the correct way. No, ""Knew"" that his way was correct.

I have played golf for many years. As I read this passage in ""Golf's Sacred Journey"" I found it enticing. It seemed as if ""Johnny"" was speaking to me, not about golf, but about trading. In the story Johnny goes on to teach the young man one reason why so many young golfers fail. They continually switch methodology, grip included, in the hopes for success. It may seem odd that a professional golfer would change something as central to his game as his grip, but they do. Each is looking for ""the answer"".

How about you?

Do you continually change crucial central components of your as your trading strategy and tactics in the hopes of finding ""the answer"". Maybe you come across a better oscillator (one that worked last Monday), or you find a new mentor who hosts a ""trading room"" where you follow his ideas and approach. Maybe you change the product that you trade after a friend has told you of the great opportunities in the oil markets? Has that ever happened?

""Every champion has convictions, but perennial champions have convictions based on first line of defense when facing adversity"" David Cook ""Golf's Sacred Journey""

Methodology is important is trading. Do you know enough to come up with an appropriate methodology? That is a key to trading. But it is far from the most important key. As we talked about earlier money management is central and equally important to that is the psychological aspect. One huge step in the right direction to have the proper mental framework for your trading is knowing what you do, and more importantly why you do it. You must be convicted in your trading strategy.

Now let's go back to the questions I asked previously. How do you trade? Why do you trade that way?

Do you know the answer? Do you have convictions in your trading methodology? On what are those convictions based? How can you be sure?

Maybe you trade only trend days, and on those days sell all rallies (or buy all dips) based on a 30% retracement, only taking your position after market confirmation of the change in direction. Maybe you watch range bound markets and trade only with a break from balance, or trade only on the second attempt at such a break. Maybe you buy selling excess and sell buying excess based on price areas not revisted in a trading session. Maybe you have multiple time frames posted on your monitors and buy or sell only when all are in conjunction. Or maybe, just maybe, YOU DON'T KNOW WHAT YOU DO!

Whatever it is you do, the hard question is ..... Once you decided on your approach, did you test it? If not, how do you know it works? How can you be sure? If so, how did you test it and once you tested it on historical data did you analyze it on real time data as well?

Traders need to treat their trading strategy and tactics just as a professional athlete might treat a vital approach to their sport. They need to have the conviction that it works, that the approach they are using is the ""best"" approach for them. Then the temptation to change methodology will be less. Of course this does not mean that you should not continually assess your approach against new market conditions, of course you should. You might also test other ideas to see if they might perform better. But what you should not do is question your methodology mid-trade, if you have taken the time to develop conviction that the approach you trade is the right one for you."