Sunday, November 16, 2014

Trade Your Personality

The most important thing I've learned in trading is you have to trade in a style that aligns with your personality.  There's as many ways to trade as there are traders.  If you're a math orientated person and you tend to have trouble with direction and timing, and you tend to take profits quickly, then selling option premium is the perfect strategy for you.  If you tend to be good at direction and timing and can fight the tendency to take quick profits so you can let your winners run, then you need to be trading with the trend.  If you are very deliberate in your decision making, you need to trade a longer time frame than someone who is more nimble and quick, or simply prefers to be active.

If you have a high tolerance for taking heat on a trade but usually end up getting the direction right then you should be using smaller size on entry and scaling in slowly.  If your life is ruined when you have overnight market exposure then you should be looking for trades with a very small risk, meaning, one that's coming into a clear support line that should hold if your idea is right, and be more of a day trader.  If you tend to be good at psychology and reading the price action, then technical trading is the path for you.  If you're a data head and love to do research and develop a strong fundamental conviction about a trade, then you should be a position trader for longer holds, more like an investor than a trader.  In all cases, a thorough understanding and awareness of the technicals will always be helpful.  Ignoring technicals is like ignoring gravity.  

If your winners are smaller than your losers than you need to have a higher win percentage.  If your winners are bigger than your losers, you can get away with winning less often.   Meaning, if you have seven losses that are $1 and three wins that are $3 out of every ten trades, then you are a profitable trader with a 30% win rate.  Conversely, if you have two losses that are $3 and eight wins that are $1 out of every ten trades, then you're still profitable but you need to have an 80% win rate to remain that way. Win percentage and the size of winners vs losers is a major factor in figuring out what style of a trader you are.  The one thing you can't do is trade in a way that is not in alignment with your personality.  Unfortunately, the only way to figure out what style is best for you is to start trading and figure it out.  If you stay small until you find a way of trading that fits, you will be able to withstand the draw downs that blow up beginner accounts.

This blog is not going to be about learning how to trade.  But I want to be clear about the reasons that led to my style of trading:
  • I'm drawn to the psychology of trading.  I like figuring out what the other players are doing and where they are looking to be buyers or sellers.  I ask questions like: who is in control of this market?  What do they respond to?  What could alter their sentiment?  What is coming up that could impact their outlook?  Meaning, I don't care about my own outlook as much as I care about the outlook of the other players.      
  • I am a macro, big picture thinker, so I'm drawn to gold, silver, currencies (mostly the dollar, the Yen, and the Euro), the broad equity market indices, oil (sometimes), and bonds (sometimes).  I do play individual stocks but only special circumstances.  
  • I hate the overnight risk of options and equities, so while I trade options a lot, I much prefer futures because you can put a stop loss in and know with confidence that it doesn't matter what happens overnight, you will be taken out if your stop is hit.  This sometimes leads to opportunities when you can get way bigger in futures than you can in options or equities because that stop loss is secure so you don't have overnight risk (with the exception of the 45 min market close).  However, sometimes being in options is an advantage because a futures stop might get hit overnight but then the price rebounds, which makes being locked out of the market a good thing because it keeps you in your options trade.  So there are advantages to both.  
  • I tend to day trade and swing trade.  Anything that lasts more than a couple weeks is an accident and I'm just trailing a stop until I get taken out.  
What you won't find on this blog will be anything related to data or research or the mathematics of option probability.  I have nothing against those ways of trading.  If that works for you, then have at it.  Occasionally, I write about monetary or economic issues, but mostly I plan to share my outlook based on chart technicals and positioning.  I find that even when you disagree with someone, hearing another point of view often help solidify yours.  So I like hearing what other traders have to say, especially when they include their reasoning behind the idea.  I find the reasoning often exposes why I do or don't agree with their outlook, which means I don't care if someone else is wrong, I only care about what their thinking was because if it's based on an economic outlook I don't agree with, or a personal bias they might not be aware of, then it gives me more confidence in my own idea.  In that spirit, whether you agree or disagree with my analysis, I hope it helps to solidify yours, or at least gives you another angle to consider.