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Steps Towards Finding A Successful Trading Approach For You

November 29, 2009

Most traders would be better off spending at least a weekend’s worth of reflection trying to decide how they should trade. This includes figuring out the right tools that should be used (indicators or strategies), the time frame that should be employed (day,swing, long-term), and the main vehicles that they should trade (stocks, ETFs, futures). Success in the markets is not about finding the ultimate strategy. Success flows from finding both a style and instrument that you are comfortable with and are willing to become an expert in. Remember that all you have to do is find a way to make money in a consistent manner. This could involve only trading one strategy and one vehicle in one time frame. Most successful traders I have read about are specialists in one area. Even then, they don’t trade every day, they wait for the highest edge situations —a point emphasized constantly by Rob Hanna of Quantifiable Edges. Think of the great predators in the animal kingdom, despite the power of a lion or a tiger, they don’t attack prey impulsively. Often they will forego opportunities to attack animals that they can probably overpower, and wait for even more favorable situations. They wait for the sick, the weak or the young, and even then they wait for the exact right moment. Unless you are highly organized and have a lot of capital, you should leave the multi-strategy approach to the hedge-funds or institutions. You have to stay focused and go for the easy prey.

Aside from finding out what suits you best, you should also take into account the constraints of your own position: 1) how much money do you have in your account–with less than $10,000 I would argue that trade countertrend and short-term will leave you broke 80% of the time due to commissions, position-sizing constraints, and too little capital relative to leverage embedded in most futures contracts 2) how much time can you spend trading a given time frame? If you work at the office all day, even if you have access or some time, day-trading is obviously out of the question. Even swing trading without automatic execution or a substantial amount of planning or discipline will be difficult—you will have to be organized and make a daily game plan to succeed. Missing a few exits or entries can mean the difference between having a profitable versus losing year. 3) do you have access to a good platform to do backtesting and have real-time indicator display? without a platform day-trading is obviously silly to consider, and swing trading should not be attempted either. 4) what is your personality like? If you are a type-A, highly motivated and highly organized person, then quantifiable swing trading is probably ideal for you and a good route to consistent success. Day-trading might require a little too much flexibility to suit your personality, and will probably seem more like a crapshoot with a high degree of noise and fluctuation. If you are a type-B, very relaxed and somewhat disorganized person that has difficulty maintaining routine, then trend trading should be your game. Your personality is suited towards having the patience to wait for and then ride out big moves. The whipsaws and lower win rate will probably affect you much less than a type-A person. Shorter-term trading will eat you alive if you do not keep records, or account for all the details like position-sizing, commissions, and good execution. Risk management will probably not appeal to you, and in the short-term arena this is not something you can approach half-heartedly. A good article on this topic by Brett Steenbarger. Lastly, as a type-B person trying to trade short-term, you can’t just fall asleep at the wheel, or go through periods of inattention to your trading.

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7 Comments leave one →
  1. Red Hue permalink
    November 30, 2009 12:45 pm

    This is an excellent post and I hope many people take it to heart rather than take it for granted.

  2. Keith Piccirillo permalink
    November 30, 2009 9:49 pm

    Ditto.

  3. Doug permalink
    December 1, 2009 12:14 pm

    Good article. I have been experimenting with a system I developed (so it’s clearly got room for improvement, at this point, its basically a vehicle for me to improve). It’s a swing trading system and I am a small fry (about 10 grand to play with). So for a couple of reasons, I am exploring trend following instead and like what I see. Here’s the question: I get the impression that (long term) trend following tends to have larger drawdowns relative to most other systems. Is that correct? Also, is there any idea as to how many positions one should have at a time in a good trend following system? I realize that these are broad questions, but any guidance is welcome.

    • david varadi permalink*
      December 1, 2009 12:18 pm

      hi doug, i think trend following will work out well for you initially. I think the most important thing to do
      is to wait for a new buy or new sell signal. Otherwise its too risky. As for the drawdowns, they usually occur after you make good money…..ie you buy oil at 50 it goes up to 140 and you sell at 100. Most of the time you are risking only 2-5% of equity per trade, so it takes 10 losing trades in a row at 2% to be down 20%. Obviously this is less likely to happen. I would stick with fewer positions at one time for now, and just try to be patient……..whatever happens day to day as a trend follower is just noise. You are in it for the big moves.

      cheers
      dv

      • Doug permalink
        December 5, 2009 3:37 pm

        David: Thanks for the reply. I was thinking about a simple long only stock system based upon “x” period highs (1 year, 3 year,etc. I haven’t decided yet). When you say 2-5% of my equity should be at risk per trade, I am assuming you mean that 2-5% should be “inside” my stop loss window…and not saying that the entire position shouldn’t be more than 2-5% of my portfolio, correct? Also, do you feel the total amount of positions held simultaneously isn’t that important at the beginning, as long as I obey my risk management/position sizing rules? Thanks!

  4. February 24, 2010 3:51 pm

    Great post!

    I agree everyone should create their own trading system. Use the analysing tools that you feel most comfortable with and deliver you good results.

    Everyone has his own trading style, some are daytraders, some trade for results in the long run. You should use the tools that most help you with your short or longterm goal.

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