I keep hearing / reading of opinions why certain approaches work and why others don't. Obviously some approaches both work even if they are an opposite of each other because some people still make money following them. To make things more easily understandable I will make some examples and in the next post I will express my own view of them. Please feel free to do the same.
1) Discretionary trading / system following
2) Trading 1 instrument only / looking at inter-market interrelation
3) Using indicators / not using indicators
4) Making predictions / following the price
5) Using only daily charts / day-trading
Last edited by Yuri57; February 23rd, 2013 at 01:59 AM.
1) I think when someone starts trading he is a bad discretionary trader. No experience, no system. Than he develops a system or starts making better discretionary decisions. The obvious advantage of a tested system that you know with more certainty what to expect. How you would perform in the long run. However markets change over time and systems can get old too, there could be a period when a system makes loss after loss this is when you should make a discretionary decision and stop trading (or should you, that's another debate...) What I want to point out here that a system will always ignore some information which might be significant in the given circumstances. So it has it's befits and flaws. I believe discretionary trading can beat the best systems out there. It can also lead to disaster. It all depends on the individuals experience and ability to see through all the information which might be important and weight them. Judgement has to be fast, that's why it is called "intuition". Most traders either don't have the resources (time, money, patience) or too much stuck on their own opinion and don't want to change their mind. This is where I see my chance... (LOL)
2) Some say you should trade only 1 instrument and pay all your attention to it. Some say inter-market interrelation is unavoidably important. Personally I like to trade 1 instrument and see all the correlated markets. This way I have the best feeling for that particular one and also not blindfolded.
3) Using or not using indicators. That's a tricky one. I know some who trade with no indicators looking only at higher highs and lower lows (and swing highs / lows) and he is VERY profitable with this. This approach makes good sense to me. I don't like indicators to cover my view of price action, you don't want to miss what is important. I only use the 10-20-50-200 EMA. I don't care about crossovers I only watch how price acts near these averages and how they relate to each other. It gives me a feeling. No need for oscillators either.
4) That's the biggest dilemma of all 5. A lot of traders say you shouldn't try to predict where price shall go but most of them still try to. If you don't have a positive expectancy there is no reason trade so you make predictions all the time. Transferring this to trading: A) the market is ranging you sell at the high and cover near the low and you don't care what price does between your stop-loss and take-profit level. If this is part of a proven system it should work. B) You don't care about any boundaries you just wait for a strong trending period when all EMA-s are above each other, all time-frames match or you should have a very strong bullish or bearish signal, get in and keep the position ONLY until the price goes in your favor. It also makes sense to me. The funny thing is: if you enter at extremes to play inside you HAVE TO trade against averages. When you play to follow a strong trend you HAVE TO ignore the extrems.
5) It amazed me when I first heard someone say: "daily bars are only what matter, lower time-frames are just noise". Sometimes it's true: when you have a strong signal on a daily time-frame trend following in smaller time-frames become easy. When the daily bar is messy, so is the intra-day price action. But there are always exeptions to everything
Would love to hear some experienced traders what they think on the points I made and also about what I wrote about them.
Thank you, farewell:
Last edited by Yuri57; February 23rd, 2013 at 02:08 AM.
The following user says Thank You to Yuri57 for this post:
"Cut your losses and let your profits run" True or false? Could trading be that simple?
This suggestion tells you to take trades which have a higher risk/reward ratio than 1:1.
Such thing can only be beneficial in one-way market. In a choppy market price would reverse more often to the mean (also randomly) than it would go in one direction so you would get stopped out a lot.
Let's assume you enter trades with a very small stop-loss and expect the price to go a lot in your favor. This might work in a strongly trending period BUT when the market gets choppy you would get stopped out a LOT. In fact so often I might (probably will) cause more drowdown than your winnings if you take every signal assuming the price will go one way.
IMO the truth is: you don't know your actual risk (unless you are a scalper) until price moves after you enter.
You might place your stop to so many locations: below the candle, the recent low, EMA, SMA, fibo level, what else??
You could place your stop 2 miles away and say: hey, I only need 1:1 risk-to-reward, give it to me!
No! I doesn't work like that. If the market is choppy it can go a lot against you and than a lot in your way... again: price can turn your favor in a number of different places, you don't know where. You can only guess what is the actual risk of others who entered the trade. Most traders take 1:1-1:2 trades so a "spot-on" entry might result a quick gain followed by a quick fall.
And this is when trading becomes all about psychology. If you follow a rigid method with pre-defined stops and take-profits there is no psychology in it at all.
If you use hard stops you will be out befor the price goes a lot against you. BUT if you place stops too close you will be stopped out way too many times. (Price tends go a lot back and forth on a smaller timeframe). So lets say you place your stop futher out but where? If you place it to highs or lows algos WILL hunt you down. So what to do? Place stops waaay further out? Well that sucks too if prices reaches that point and reverses right after that. A stop will guarantee to get out the futhest, worst price possible. Think about it. You plan a trade, make a decision point where your idea is proved to be wrong BUT you might have a second chance to get out at a better price. Yes, not the worst.
I think this is when trading becomes the real psychological game when you use mental stops instead of hard stops.