I felt the urge to start a new thread in the rookie section to put some meat on some of my ramblings and posts in some of the trading threads.
What is trading?
Trading is participating in a global opportunities game. To be successful to any degree one needs to identify an edge, a slight skewing of the opportunities in one’s favour. Supposed one would toss a coin 1,000 times and record the amounts of heads and tails, one could reasonable deduct that each occurrence would happen 50% of the time, now suppose one would add a small weight to one side of the coin, one could reasonably deduct that the weighted side would land bottoms down more then 50% of the time. Trading is very similar, a trader finds a way to skew the odds in one’s favour by identifying patterns and fine tuning entries to those pattern.
A price moves up because there are more buyers then sellers, a buyer will buy a currency because he expects to be able to sell if at a later time for a profit, the more buyers think, feel or know the same the higher the price rises. A trading system finds a way to make sense out of the chaos and tries to identify patterns within the price.
Success.
Supposedly one has identified an edge, a setup of an identification to a future price direction. The trader first needs to understand that every entry signal is different to any previous one, think about it; for the entry signal to be exactly the same every time every trader in the world that bought the currency previously therefore generating the entry signal would have to be present again to generate the same entry signal, of course this will never happen. So every entry signal is different from a previous one. So how does the trader know the entry signal will result in a profitable trade? He does not. A successful trader expects nothing out of each and every trade but is grateful when the trade turns into profit taking his money of the table and knows where and when to take his loss. He knows when is he is no longer willing to invest money on his entry signal, he reached the point where he recognises that his entry did not result in a profitable outcome.
Balance.
Now one needs to trade this enough times to get a good sample, let’s use the number 1,000 again. So after 1,000 trades the trader identifies that he is right 40% of the time, this does not automatically mean that his trading strategy is wrong. Once we enter a trade based on any signal, whether it is a Bollinger band touch, a MA, a volume based entry signal, a major support breach, a trend line, a channel, whatever it is we have two choices, when to get out and how long to stay in. If a system is only successful 40% of the time but the profitable trades average 30 pips and the losers 15 pips, a system could still generate 3,000 pips on every 1,000 trades. This brings me to how to make a system profitable.
Profit system.
The win/loss ratio is not the only important factor in a system, once a trader has identified an edge he now needs to find a large enough sample to see whether his profit for his winning trades is larger then his losses. So Weekly, Monthly, Quarterly and Yearly a trader needs to take stock over his entire trading history. A trader needs to continuously adapt his trading system. He needs to find ways to increase his edge, can he find better entries, can he find better exits, can he identify when his entry signal is wrong quicker. All of these measures can make any trading system profitable. So the only way to validate one’s “edge” over the market, one’s trading system is to trade it to get a large sampling using the same size lots for a significant large amount of trades. Then a trader needs to adjust his stops, his losses, his entries and his exits to make a trading system profitable as a whole. A trader would constantly work on fine tuning his system, not discounting it at the first hurdle. A successful system is build by the trader himself to give him an edge over the market. Good trading systems are run by good traders that recognise that any edge can be fine tuned to make it profitable.
Audit.
As part of the audit process a trader needs to identify what currencies suit his trading system the best, he needs to identify what TF's suit his trading system the best and a trader needs to identify what trading hours suit his trading system the best. The audit stage of a system is the only way to identify strength and weaknesses in one's trading system and adjust for it accordingly.
What is trading?
Trading is participating in a global opportunities game. To be successful to any degree one needs to identify an edge, a slight skewing of the opportunities in one’s favour. Supposed one would toss a coin 1,000 times and record the amounts of heads and tails, one could reasonable deduct that each occurrence would happen 50% of the time, now suppose one would add a small weight to one side of the coin, one could reasonably deduct that the weighted side would land bottoms down more then 50% of the time. Trading is very similar, a trader finds a way to skew the odds in one’s favour by identifying patterns and fine tuning entries to those pattern.
A price moves up because there are more buyers then sellers, a buyer will buy a currency because he expects to be able to sell if at a later time for a profit, the more buyers think, feel or know the same the higher the price rises. A trading system finds a way to make sense out of the chaos and tries to identify patterns within the price.
Success.
Supposedly one has identified an edge, a setup of an identification to a future price direction. The trader first needs to understand that every entry signal is different to any previous one, think about it; for the entry signal to be exactly the same every time every trader in the world that bought the currency previously therefore generating the entry signal would have to be present again to generate the same entry signal, of course this will never happen. So every entry signal is different from a previous one. So how does the trader know the entry signal will result in a profitable trade? He does not. A successful trader expects nothing out of each and every trade but is grateful when the trade turns into profit taking his money of the table and knows where and when to take his loss. He knows when is he is no longer willing to invest money on his entry signal, he reached the point where he recognises that his entry did not result in a profitable outcome.
Balance.
Now one needs to trade this enough times to get a good sample, let’s use the number 1,000 again. So after 1,000 trades the trader identifies that he is right 40% of the time, this does not automatically mean that his trading strategy is wrong. Once we enter a trade based on any signal, whether it is a Bollinger band touch, a MA, a volume based entry signal, a major support breach, a trend line, a channel, whatever it is we have two choices, when to get out and how long to stay in. If a system is only successful 40% of the time but the profitable trades average 30 pips and the losers 15 pips, a system could still generate 3,000 pips on every 1,000 trades. This brings me to how to make a system profitable.
Profit system.
The win/loss ratio is not the only important factor in a system, once a trader has identified an edge he now needs to find a large enough sample to see whether his profit for his winning trades is larger then his losses. So Weekly, Monthly, Quarterly and Yearly a trader needs to take stock over his entire trading history. A trader needs to continuously adapt his trading system. He needs to find ways to increase his edge, can he find better entries, can he find better exits, can he identify when his entry signal is wrong quicker. All of these measures can make any trading system profitable. So the only way to validate one’s “edge” over the market, one’s trading system is to trade it to get a large sampling using the same size lots for a significant large amount of trades. Then a trader needs to adjust his stops, his losses, his entries and his exits to make a trading system profitable as a whole. A trader would constantly work on fine tuning his system, not discounting it at the first hurdle. A successful system is build by the trader himself to give him an edge over the market. Good trading systems are run by good traders that recognise that any edge can be fine tuned to make it profitable.
Audit.
As part of the audit process a trader needs to identify what currencies suit his trading system the best, he needs to identify what TF's suit his trading system the best and a trader needs to identify what trading hours suit his trading system the best. The audit stage of a system is the only way to identify strength and weaknesses in one's trading system and adjust for it accordingly.
