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Back Your Way Into Better Trades

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Back Your Way Into Better Trades

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  #1 (permalink)
Austin, TX
Experience: Intermediate
Platform: NinjaTrader
Trading: Currencies
hondo69's Avatar
Posts: 165 since Jun 2009
Thanks: 57 given, 246 received

Seems to me most people approach the trading business from the wrong direction. They throw up some charts, add a few nice indicators and start trading. After getting beat up a few times they'll then turn to better indicators, read some more books then take a whack at it again. The next step is to join a few trading rooms and bide their time until their account is drained.

Don't get me wrong, there's great value to be gained from getting beat to a pulp and not sleeping at night. It weeds out the wannabe's and hones the killer instinct of those that go on to become good traders. But understanding a few fundamentals might help traders approach the business from a better angle.

1] Know your trading style
Some people like to jump in, grab a few ticks and get out quick. That's fine as long as you understand you'll eventually need to trade 10 or 20 lots to retire wealthy. Others trade only a few contracts and manage their trades hoping to catch the occasional long run. That's fine too. The key is understanding your personal tolerances and how they affect your trading. Settle on one style and stick with it.

2] Select an instrument
Jumping from the ES to the 6E to the CL will not make you a better trader. Find the instrument that suits your trading style and then work it to your best ability. Each instrument has it's own personality and you need to fully understand all of it's facets in order to maximize what that market will allow.

Only after completing steps 1 & 2 are you ready to open some charts and get to work. Find the chart settings that complement both your trading style and that particular market. Having 2 or 3 charts of the same instrument is a good idea, just understand the settings for each will need to be different.

This is a much better approach than throwing a chart up on a screen and hoping you can learn how that instrument behaves. That would be the same as someone telling you tomorrow your job is to be a baker. If you don't know anything about baking and it doesn't suite your personality your bound to fail at that job.

Instead evaluate your own personality and that of various instruments to find the best combination of the two. Then go on to the next step of putting together charts and indicators that compliment that optimal combination.

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  #2 (permalink)
 Turning Point 
Experience: Advanced
Platform: NT, TOS
Posts: 65 since Aug 2009
Thanks: 10 given, 43 received

Great Post.

I was going to start a thread on Risk Management, but I think it ties directly into your post so I will reply here and keep the board a little less hectic. I hope you don't mind.

3. Risk Management

A. Everyone views risk differently. Know the type of trader you are and STICK to your plan! I use a fixed fraction method of capital to calculate my risk and then back into my trade size. I do not say "I'm going to trade 3 lots" and just do it.

B. Define your risk. You can do this many different ways. For me, I measure volatility in the current time frame for the last 10-14 bars. I then multiply it by 1.5. IF you are trading the ES and in your given time frame that's 1.5 points, your calculated risk could be somewhere in the neighborhood of 2.25-2.5 points. On small time frames that's quite a bit of wiggle room. The larger the time frame the larger the number. I would assume if you are risking that you are also looking for a reward that is equal to that or more. I personally use multiple time frames, using the lower time frame to time my entry and using a medium/long time frame for my "target" and direction.

C. Stick to what you are doing! If you enter a trade willing to risk 2%, then make sure you are willing to risk that. Mentally it should be "gone" from the decision making process of you should be managing the trade from that point (i.e. trailing stops, news just came out, etc). If a trade is against you 1% and you decide to close, you are probably risking too much from a $ perspective (or you simply aren't following your plan).

D. Paul Tudor Jones gave an interview in the 80's that you can find on You Tube. He is the master at cutting losers and letting winners run. Above his desk he had a piece of paper that had 3 words: "Losers average Losers". Now, if averaging is part of your strategy then great (i.e. enter a 1/3 of your total position at first then the rest at some point where you are doing X ticks (I'm assuming you are still keeping with a total Risk of Y%)).

If you are down 2 % and you say to yourself "I know it's going to turn" and enter another new position (when your plan says "risk 2%)) you have committed a fatal error. Just don't do it! Accept that you were wrong that time and WAIT (don't look for redemption!) for the next opportunity.

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  #3 (permalink)
Austin, TX
Experience: Intermediate
Platform: NinjaTrader
Trading: Currencies
hondo69's Avatar
Posts: 165 since Jun 2009
Thanks: 57 given, 246 received

Very well put.

Thought I'd add some information on my personal trading style. I trade the 6E Euro only, though I watch the S&P and other instruments that sometimes effect the Euro. My trades are done off a tick chart though I always keep a 5 and 10 min chart handy as well.

By focusing on strictly one instrument I can keep up with news and other outside events that affect it's price action. It also allows me to best understand the personality of that instrument. Anyone that's ever had a roommate knows after a few months you get to know each other pretty well.

When price action is slow I'll sit on the sidelines or trade a single contract now and then. When action heats up I switch to 2 contracts. At times when the market really gets moving I'll change to 3 contracts.

No doubt some will disagree with this trading style feeling you should always trade the same number of contracts. I understand that argument but my trading style is based on trend and there are many types of trends. Personally, I think of them as I would a stop light. You get either red, yellow or green and when you get the "go" signal it's time to jump in with both feet.

The trick is being aggressive while also playing defense. The 2% rule outlined above is the key to success.

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