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A while back, we were talking about why traders win or lose. Sometimes
it is because we think like analysts instead of traders.
Why Analysts lose and Traders Win in the Markets
By
Walter T. Downs
Analysts have a tough time in the markets. They must predict the
direction of a
market as well as when the move will begin and when it will end.
Traders, on the
other hand, concern themselves with what makes money and what doesn't.
In this
respect, they view any strategy that gives them an edge as viable.
Most participants lose in the markets because they think like analysts
rather than
traders. As an example from my own trading, my favorite strategy does
not include
picking direction in the market. Only magnitude, commonly referred to as
"volatility".
I call this type of trading "point of change".
Trading Points of Change
Trading POC's is a straightforward strategy. First, you need a tool that
defines
volatility in the underlying market. I use a proprietary index that has
a
knack for finding markets that are about to explode. However, there are
many
standard volatility indicators that can be used. As an example, the
standard
volatility indicator found in TradeStation can be used, or else
volatility ratios
such as those given in "Secrets of a Hedge-Fund Manager" by Connors and
Hayward can be utilized.
Rules:
1. Wait for the volatility of the market to move to a very low reading.
2. Price action in the market must be contracting. A classical pattern
example would be a "triangle" formation. An alternative would be if the
current price is sitting right on a major trendline.
>From here we can clearly see that the market has reached a point of
change. Where ever this market is going to be in the future it will NOT
be here. At this point, I put on an "at the money" long option straddle.
Any good primer on options can fill you in on what that is, but
basically
I am speculating that the volatility and directionality of the market is
going
to increase. It doesn't matter which direction the market goes, just
that it
goes fast and far. In general, if this strategy is not profitable within
10 days,
I exit the trade.
This is the way a trader thinks. I could care less which direction the
market
is going. Instead I concentrate on a solid strategy that gives me the
best odds
of making money.
Copyright@xxxx Walter T. Downs Permission to distribute this article
freely
is given with due credit to author. http://www.tacticalmarkets.com
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