Trading from a Different Perspective
If 95% of traders fail it would seem intuitive to figure out what they are doing and then do something else. Clearly, it is not intuitive because the first thing traders do when they enter the field is try to find out what everyone else is doing and emulate them. The chat rooms and trading forums are full of people all trying to use the same old tried and true methods of trading. They succeed wildly in learning these tried and true methods, because in short order they join the ranks of losing traders.
Hmmm, maybe, just maybe there is a different approach.
The 95 percenters almost all use a price based approach to trading. The indicators and tools they use are price based. The majority of the time they are trying to figure out how to make six ticks while risking six ticks, and to be able to find the Holy Grail indicator or system that allows them do this all day long. Can it be done? Yes, it can. About 2% of the traders attempting to trade are able to succeed trading this one-to-one, price based approach. The mathematically inclined may note we’re missing some traders. What are the other 3% of successful traders doing? They are doing something very, very different.
These traders make time their friend as opposed to an enemy. They are not trading 1:1; they are trading 1:3, 1:5, 1:10 or more, regardless of the timeframe they are trading. They trade for handles, not ticks. Yes, intraday traders can consistently trade risking 1 to make 10. The 3 percenters trade market condition, not price. They understand how a market develops and have an objective and consistent way of determining when the percentages are in their favor. They do not focus so much on predicting the path of the market, but rather the focus becomes identifying trade location from where it is probable an outsized move will occur. What are the 1:1 traders going to do when the equation shifts even more and the “friction” (transaction costs) increase? When the powers that be plop a transaction tax on futures trades (would you want to bet against this?), even if it is not as onerous as presently proposed by an esteemed member of congress, it will change the game enough that a lot of the very short term traders that presently make money are going to have a much more difficult time. It is going to become even more important to learn an approach to trading that is designed to capture larger market moves.
The benefits of this approach are many. This is an approach that “works” in anytime frame, from intraday trading to long-term investing. The exact same form of analysis and logic applies regardless of the timeframe being traded. This is an approach that applies to any asset – stock, ETF, futures, commodities currencies or interest rate instruments. The trading virtues of patience and discipline (I guess those are universal virtues, come to think of it) are rewarded by this methodology. One of the reasons so many traders have difficulty with patience and discipline is that they trade randomly and never have a consistent opportunity to see a pay off. When we are rewarded for behavior we will repeat that behavior.
What is this approach? It is an approach based on an understanding of Market Development and Market Structure viewed through the lens of auction market principles. “Market Profile™” is the popular name for this, but the profile graph is only a piece of the puzzle and is one of the means to a much larger end, not the end in itself.
Trading is not easy. There is a learning curve. A commitment to finding a valid approach is the first step in the process. If you never find a valid approach you will never have an opportunity to progress or succeed as a trader. There are a lot of traders out there with years of experience that have never made a nickel trading. The unsuccessful trader with eight years of experience bouncing from one gimmick to another does not have eight years of experience, he has one year experienced eight times.
Studying the market through the lens of auction market principles ensures one will not be wasting time traveling in a circle year after year not making any progress. Make the commitment to examine what you are presently using as the basis for your trading. Ask the hard question: “Is this really valid?” If it is, super – keep on keeping on. If it isn’t, pursue something that is valid and give yourself the opportunity to join the few select people in the trading profession that consistently make money.