Sunday, July 21, 2013

Finding my holy grail

A major failing of many new or inexperienced traders is the constant changing of how they approach the markets, or switching between different systems following a small run of losses. This is the famed search for a holy grail method. However, a change in only one aspect from a basic idea you like the look and sound of, can set you on a life changing path.

The best way to approach the markets is to find a basic philosophy that you believe suits your personality, as well as the amount of time you can devote to trading every day. For example, it is no good wanting to day trade if you are unable to devote the time in front of the screen. Similarly, if you feel uncomfortable in holding positions overnight then you shouldn't be looking at longer term strategies.

Many people are lured by returns that a particular approach can generate, only to find that they are incompatible with that method. There's nothing wrong with that. What you will find, however, is that there will be a method that IS right for you. There are thousands of ways you can make money in the markets.

I can speak from personal experience here. When I started trading more than ten years ago, I day-traded high-beta US stocks. I joined a US based chatroom with a mentor and a number of traders. I quickly found out however that I would be unable to make money using this approach. The commissions I was incurring swallowed up what profits I did make. Quite often, I acted too slowly when a signal was given. And I also got out too early when I did get into a profitable position. It became apparent to me that this method did not suit me. After thinking about this, I concluded that my personality was better suited to a longer timeframe.

However, there was one very important aspect from that period that has stayed with me to this day. That was, you only ever entered a long position when a new high was made, and only entered a short position when prices hit a new low.

This basic rule made perfect sense to me. I could see the logic as to why that worked and how prices reacted when these price levels were breached.  So, I started looking at ways to use this on a longer timeframe. Very quickly, I came across trend following. I started reading up on the story of Richard Dennis and the Turtles, Richard Donchian, Ed Seykota and other famous traders who used such an approach.

The longer timeframe suited me, giving me time to react to new signals. The creation of entry and exit parameters 'systemised' what I was doing before when opening positions, and the exit parameters helped me to stay in my profitable trades. Once I got formulated my risk approach, I was on my way. I had found MY holy grail:
  • A system that made sense to me;
  • A system that suited my personality;
  • A system that enabled me to codify entry and exit rules, so there were no discretionary aspects to it;
  • A system which had the added bonus of not having to watch the markets throughout the day;
  • Most importantly, a system that gave me results!

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