Yesterday we began a two part article regarding the trading clichés that we’re bombarded with on a regular basis, through forums and blogs in particular. We concentrated on the clichés that we believe fail to stand up to rigorous scrutiny. In part two we’re now going to concentrate on the more positive clichés that manifest in our industry, clichés that (in our opinion) do have some merit, relevance and moreover ‘trading intelligence’ underpinning them…
[quote] Better to be out wishing you were in, than in wishing you were out. [/quote]
How true, and we’d add a caveat to this phrase; being out of the market is in fact an actual position. There are times when our trading is not ‘seamless’. We may have closed a position, hopefully with considerable gains as a swing trader and now be sitting on our hands and the side lines whilst we await our perfect high probability set up to re-occur before re-entering, either in the same direction, or taking the reversal trade as sentiment changes.
This situation is perhaps the perfect example of the cliché we’ve highlighted; we want to be in the market, but only based on our HPSU being valid. What we don’t want is to have entered by violating our trading plan to then be nervously sat screen watching, regretting and hoping that we now get lucky having made the wrong impetuous decision.
[quote]You don’t need to know what’s going to happen next in order to make money. [/quote]
If some of our readers recognize this key phrase it’s from Mark Douglas in “Trading in the Zone” and for the mature traders in our community they’ll have finally reached the conclusion that probabilities play a huge part in their trading success. Once we’re on our way to becoming successful we begin to put ego aside and realize that’s there’s only a few aspects of our trading that we can exercise any control over.
We can control our money management and our emotions, but what we can’t have is any influence over a $5.2 trillion FX market. Therefore, to paraphrase another famous market legend Jesse Livermore, – “you’ll never know ’til you bet”. We take trades and bets in our markets exercising sound money management and having control over our emotions, thereafter we use a method which hopefully has a high probability of success. Our 3 Ms are how we tackle the market, but we know deep down we have no idea what price will do next. Based on historical ‘precedents’ we may have an idea as to what might happen next. But crucially, with our sound MM and equally sound mind, we can still make a profit without knowing what’ll happen next.
[quote]Never add to winners or losers. [/quote]
Traders constantly need reminding that, unless they’re an incredibly experienced and successful trader, they should avoid complex trading methods and concentrate on KISS – ‘keep it simple stupid’. Consider it this way; if you’re going to over complicate your method there’s only one method, that in our extensive experience, we’ve found acceptable and it isn’t ‘scaling in’. It involves, for example, breaking your ‘euro’ trade into several currency pair trades. Here’s a fuller explanation and we’ll add this tomorrow to our list of potential strategies…
Instead of trading the EUR/USD singularly by 2%, why not separate your risk into 4 x 0.50% trades in the same direction? Could this be ‘playing’ the probabilities in a better fashion, whilst potentially hedging your risk to a small degree, by inadvertently playing the correlations whilst not deliberately setting out to?
If the euro is in a strong uptrend then possibly it’ll be emitting strong tendencies versus: the greenback, sterling, the Aussie and yen. Therefore we can wait for our high probability set up to occur on four currency pairs instead of risking all our full two percent risk on one single currency pair. In this way we’re also avoiding the ultimate peril of adding to losers and winners.
We’re also avoiding the potential pitfalls of scaling in our bets as the direction moves our way. Quite simply we enter when our HPSU appears each time on various pairs with the euro being the main pair. If the euro sentiment doesn’t rise versus all four pairs then we may be receiving a message, from the market makers and movers, regarding our overall positions.
