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Hi,
Introduction
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This is intended to be the start of a thread without a market view!
It is based on expensive experience - may yours be cheaper than mine.
It talks about four types of trading systems.
First there is a psychological health warning.
Warning
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This email may help those sharing particular market views (as opposed to
how to analyse market status, trading system, psychology, money
management,...) take stock of where they are in the trading universe.
It is not an attack, merely a series of statements derived from experience.
If you find these statements provocative to your person, then look deeply
into your ego and think.
I neither know any of the participants well enough to make a direct attack
- all such feelings are responses to a stimulus which only you can control.
I know that I have benefited from these ideas - but it took some time - my
intial reaction was not entirely positive. Was I wrong!
Based on my own and others responses to this material, reading this
material can seriously challenge some cherished ideas.
Hopefully I have taken the sting out of the message without a loss of
cutting edge, but you have been warned.
Types of Trading Systems
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Every trading system that traders have divulged and discussed with me, and
most, if not all, that I have read about seem to fall into four main types:
- find and follow the trend (expected seasonal or perceived current),
- fade the crowd,
- spread to exploit relative mispricing,
- spread to exploit future volatility (either actual or implied).
The first category is the most common for new traders and least common for
those who regularly make money every month without losing most of it back
again.
Common sense will tell you that the really big guys cannot use a system
that fits into the first category because there are not enough
counterparties for their volume.
Implications
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A corollary of these thoughts is that only traders operating a trend
following system have market views.
This might not obviously apply to the faders, but they have no preference
or view other than the majority are probably wrong (this time or soon) and
will respond to, not predict or even forecast, each future shift in price.
The two types spreaders hope to exploit price movements in either
direction. If they have a market view it is secondary or irrelevant to
their trading.
My Experience
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Traders making regular, monthly, consistent profits from a trend following
approach appear to be relatively rare - it seems it needs a level of skill
very much higher than required for the other approaches. I certainly do
not have the required attributes.
When I moved to a non-trend following system, a large part of my psychology
stayed a market forecaster. If your trading system is NOT a trend
following system, are you making my mistake and still thinking in trend
following terms?
If you are using a trend following system, then it may be more difficult
for you to conceive of trading systems that are not trend following and/or
the interests of traders using such systems.
Even if your trading system is not a trend following type, you may still be
partially thinking as a trend follower.
Hope this is food for productive thought. Before replying, check
carefully if this email says what your first reaction tells you it says.
Afterall - are you not a trader - that is someone who tries to perceive
reality as accurately as possible?
Regards, Ric.
P.S.
A definition of a wise man is "someone who can learn from anothers experience".
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