Steps Towards Finding A Successful Trading Approach For You
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.