Series: What’s in a Trading Strategy? Methods
A number of years ago, I worked for a trading education company. Part of the company’s marketing plan was to attend the major trading shows in New York, Ft. Lauderdale, and Las Vegas. After visiting these various shows, you would see the same type of attendee. They could best be described as pilgrims on a quest for the holy grail of trading.
Although they would yearly renew their quest in earnest for their holy grail of trading, I don’t know if they effectively changed their trading results. What these pilgrims didn’t realize is that the holy grail of trading resides within each one of us. We have the ability to alter our trading results by following a few simple guide lines.
Trading strategies aren’t complex as they are adroit. Finesse is what is lacking in most discussions. Before I continue, I preface this definition by saying what follows is my opinion. This is neither a definitive point of view nor a ‘holy grail’ of trading.
The strategy is composed of 4 separate components. The first component is how you identify tradable opportunities. Many traders, yours truly included, have spent many hours and dollars on this aspect of trading. The inconvenient truth about trading methods is that at some point, they will all fail. No one method will be usable for trading in all market conditions. The reason for this is because methods are designed to take advantage of certain conditions. Trending methods work best in a trending market. Consolidation methods work best in consolidation markets. You will never find a method that works in all markets equally.
Lest you think this is an argument for multiple methods, see my posting on Feb 22nd entitled More Methods Do Not Lead to More Profit. More is definitely not better.
A trading method doesn’t need to be complicated but it should contain specific things:
- Price as the leading indicator – In my mind price is king. We know precisely what the market is thinking at any moment by reading price.
- Price overlays – These are typically price indicators like moving averages but can include support/resistance lines, candle patterns, pivots and price patterns. Price overlays should be used as a reference points to price. A support/resistance line is significant only because price action has told us. Our decision of what to do in the market is based on that reference.
- Price momentum – All price movement has a life span. A market trend has a beginning, middle and an end. As a trader, I need to know where I am in that life span. These life spans are typically measured by the lower panel indicators of CCI, RSI, MACD, Momentum, William’s %R, Stochastic, just to name a few.
- Volume – This tells us the amount of activity around a certain price level. How many contracts are being entered at a certain price level?
One final thought. Methods are as individual as the people who trade them. Whether you have purchased your method or developed it from scratch, how you choose to view the market is an extension of how you view the world. There’s no right or wrong way to do this. There’s only your way. It would be like saying Michael Jordan was a better basketball player because of the shoes he wore. Methods, like basketball shoes, are merely tools of the trade (pun intended.) What you do with them is up to you.
These are the 4 components of a method. If you would like more detail about identifying tradable opportunities, send me an email and I’ll be happy to send you the pdf.