Trading is an uncomfortable profession. Naturally, we tend to lean towards the known and the usual, rather than the uncertain and unfamiliar. But markets and their participants are constantly in a state of flux. No two trades are ever exactly the same – and that’s even if we’re looking at the same product on the same day in the same phase. But then they also evolve over time as markets change technically, trading technology changes, strategies advance and adapt, financial conditions change and the political climate varies. So there’s a constant need for balance between the desire to perform consistent and trader evolution in this ever-changing business.
EVERYONE WANTS A SOLUTION
The trouble for traders who are trying to make it, is that they are looking for something, indeed anything that works. Once they find something that does work, they tend to focus on it. This is good to an extent – getting really good at executing a strategy and understanding it fully can make a huge difference to your trading results – but there’s a danger that a trader can become blinkered by their newfound winning method and as a consequence, fail to continue their perpetual learning process. They are comfortable in the false knowledge that they’ve found their way to trade. But when the strategy starts to fail, the trader goes looking for something new and so the painful process of finding a winning strategy starts all over again.
“Any man who reads too much and uses his own brain too little falls into lazy habits of thinking.”
– Albert Einstein
COSTLY CHANGES IN MARKET CONDITIONS
When the markets inevitably change, it’s these traders who are inadequately prepared who usually suffer the most. They are likely to be less responsive to changing conditions and as they’ve had some success, they’ll probably have increased their position size – and this creates a situation where there is great potential for them to be extremely vulnerable.
MAKING MONEY IS ONLY HALF THE BATTLE
So you need to be constantly learning, developing and refining your trading methods, even if you’ve found a strategy that’s currently working and are happy with keeping it as it is. But how do you do that without looking for new setups? The answer is that you’re learning about the framework within which the market operates. So at the same time as you are trading, you are also noting how the market is moving and what it’s responding to. Is the market trending or is it in balance? How does it break out of balances and what happens at the end of a trend? What effect is the volume having on price movement? How freely is the market moving? Is it volatile or quiet and how does this effect different types of strategy?
“Real knowledge is to know the extent of one’s ignorance.”
Realizing that there is so much information out there, a great deal of which you will never know, is key to the process of build a robust framework. There are many different considerations in building up your understanding of how a market trades and like with everything else in trading, it may well change over time. If you are able to build a robust enough framework and market understanding, you’ll find that new opportunities to develop strategies present themselves far more readily and additionally you’ll learn more about the setups you currently trade. But more than anything else, having a broad framework for the market and keeping a close check on how it’s trading relative to your expectations, allows you to remain nimble enough to recognize changes to the market that could cause your methods to start to fail – and quickly see different ways to trade that could work in the new trading environment.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.