Professional Trader Series: The Art of Trading Style
- 22 June 2016
Professional trader and author of The Universal Principles of Successful Trading (Wiley 2010) now translated into German, Polish, Japanese, Korean and Simplified Chinese.
The fourth step in the process of trading is to select an appropriate trading style. Before you can start trading you will need to make two deliberate decisions about your trading mode and timeframe. Let's take a look.
Trading mode refers to the type of trading you would like to do. There are only two models. Trading with the trend and trading against the trend, or "swing" trading. You will either trade with the trend or against it. That's the easy part. The hard part is working out the trend!
Before deciding which mode you'd like to trade you first need to know some important points about the markets and each mode. Firstly, you will need to understand markets rarely trend where they spend most of their time range bound, chopping around and frustrating trend traders. For trend traders that's the bad news. The good news is that when they catch a trend they win big, big enough to pay for all their previous loses and still have money over to record a profit. For counter trend or swing traders the good news is that they experience higher accuracy, usually winning around 67% of their trades. The bad news is that it is difficult to develop an effective, robust and winning counter trend methodology.
So there is a dilemma each trader needs to resolve.
If they choose to be a trend trader they will be embarking on a life of misery. A miserable and depressing existence where they will rarely win, usually only 33% of the time and lose often, usually about 67% of the time. The good news is that it's the safest way to trade, to trade with the trend, and it's relatively easier to develop a wining trend trading methodology then it is to develop a winning counter trend one.
If they choose to be a counter trend or swing trader they will be embarking on a contrarian life, always betting against the prevailing trend. The good news is that they should win regularly, usually 67% of the time and lose rarely, usually 33% of the time. Emotionally it is easier to trade when you are receiving regular positive feedback (67% profits as opposed to 33% loses). The bad news, as I've mentioned, is that it is relatively harder to develop an effective counter trend strategy that will hold up over the test of time.
In addition to a trading mode traders will need to select an appropriate timeframe they would like to trade ï¿½C day, week, month, quarterly etc. That is, do they wish to be a day trader, closing out all their trades at the end of each trading session or become a short-term (daily), medium-term (weekly) or longer-term trader (monthly to quarterly)? Psychologically it is easier to trade shorter timeframes compared to longer timeframes. It's easier to trade seeing profits in the bank compared to seeing profits fluctuate day in and day out in the market as longer term strategies hold positions for longer periods.
Choosing Your Trading Style
Between trading modes and timeframes there are plenty of combinations you can choose from. The general consensus amongst trading books is that you should select a trading style (mode and timeframe) that suits your temperament. The books generally say you need to feel comfortable, to feel as one with your trading style otherwise you'll find it hard to follow and execute your methodology. This does makes intuitive sense. Aren't we all different with varying levels of temperaments and personalities? Yes we are. So yes we do need our own strategy that will fit us.
Yes, isn't there always a "but"?
The "but" in this case is reality.
Certainly if everything that was ever written or said about trading worked you could cherry pick a trading style that made you feel comfortable, warm and secure. Unfortunately most of what is written or said about trading and the markets doesn't work and is rarely supported with proof that it does.
So in my opinion your first priority is to find a strategy that both works and has a positive expectancy, not whether it makes you feel warm, comfortable and secure. In trading profit comes before niceties. I wish it was otherwise, but in my experience it isn't.
My recommendation is to develop a short to medium-term trend trading methodology.
Although trading with the trend is miserable (where you lose on average 67% of the time) it does work, and if executed professionally it will deliver you profits. In addition being short to medium-term will make it easier psychologically trade. It's always easier on the soul when profits are in the bank and not bouncing around appearing and disappearing between positive and negative market gyrations.
But first you just need to develop or find a short to medium-term trend trading strategy that works.