Quick intro about myself: I have been trading for 5 years, mostly FX, sometimes gold and indicies.
I had my (big) ups and downs and I just want to summarize what I have leared about the markets and what I think is most important to making money. Feel free to comment or challange my ideas.
I try to keep my ideas in a logical order and come up with a solution how the markets are supposed to be traded (it's just one point of view).
1) Bad beats are not randomly distributed because the market tends to have characteristics which can persist for a period of time.
2) You must risk always less than you are willing to win, since the bad-beat of a high-risk to low-reward trading profile is much worse.
3) Price is stable 85% of the time (same amount of buyers as sellers)
4) You can only make money when the price is moving more than it retraces so there is imbalance. (Only 15% of the time!!)
5) Your primary goal in trading must be to identify existing or incoming imbalance.
How can you analyse the markets?
A) Fundamentals: when the conditions are clear, they are your best and single-most important ally. (In FX it's mostly about GDP growth, inflation and monetary policy in reflection of these 2 factors; Indexes are mostly correlated with GDP growth; stocks are mostly correlated with (expected) company profitability (which also has a bunch of sub-factors).
B) Technicals: when the fundamentals are clear, the daily technical picture makes sense. You can trade on the most basic trading patterns (head-and-shoulders; double top/bottom; backtest of breakout level; fibonacci backtest)
I think it is the most effort-less way of making money. The problem is time and capital.
You can leverage yourself only gradually over a long period of time (since bigger time-frames have more noise); so you would need BIG capital to have significant returns AND you would also need to have some luck to not be shaken out of the market; thus this is not "trading for a living" but rather "buying my second Ferrari with the money I don't know what to do with."
I think you get the point.
This problem brings us to day-trading where most people lose their pants, mainly because they either don't cut losses and take huge rips or overtrade and have too many small losses.
My experience with short-term technicals: THEY DON'T WORK by their own. If they did, like in a text-book (or any fancy trading system on the internet), the market couldn't be a zero-sum game in the short run. (It is not zero-sum long term, since value is created through GDP expansion).
To sum it up my view is:
I. You can make money sitting patiently in a fundamental trend with a lot of cash and addition income.
II. You cannot predict the mid-term moves with technicals.
III. You can make quick bucks selling in a fast downmove and buying in a quick upmove.
This gives us one simple method for scalping:
Identify daily trend and intraday trend. For daily trend use simple candlesitcks, for short term 50-200EMA on 1min.
When intraday-trend matches the daily trend buy or sell in the anticipation of the price to continue it's move. Filter noise by using Heiken Ashi bars. Use Risk-to-Reward close to 1:1, so your winning percentage can be easly "predicted". It is best to trade volatile markets when price moves more in one direction, rather then retracing. (CL, GC).
This method is basicly blind guessing with fixed RR rules and probabilites of 50%+.
Honestly I don't like this because you can still get a bad-beat.
My goal is to close the day positive at least 4-times a trading week!
So this drives me to another approach of getting consistent trading results.
Please bear in mind the most important trading rule:
You can only make money if you can correctly identify imbalance.
I have made a killing selling gold by understanding the technical picture and the POSITIONING of other participants. (Everyone was wrongly long, since there was no inflation as popular belief thought because of …