Key Steps to Building a Successful Game Plan

[RichardCox 10]

It is not uncommon for new traders to view the forex markets with a certain level of mystique. This is largely because of the wide variety of trading approaches that can be implemented at any given time. If we compare forex trading to riding a bicycle, some similarities emerge. Learning to ride a bike requires skill, patience, balance, the proper equipment, and the ability to accurately assess your surroundings. It wouldn’t be a good idea to practice riding on a street with speedy traffic, and the same attitudes and rules should be applied to the forex markets as well. When we are able to combine solid analysis with effective practices, it becomes easier to increase success rates. Like many things with substantial potential for rewards, successful trading requires both talent and hard work. Here, we look at some ways to combine the advantages of your natural talents with your strategic approach to put you on course to develop methods that will improve success in all trading markets.

 

Understanding the Value of Patient Preparation

 

Before any trades are placed, it is important to understand the value patience and preparation can add to any strategy. This requires an assessment of your trading goals and personal strengths. Nobody can make these judgements better than you can, and this is not something that you can learn by reading textbooks on the subject. When applying these strengths and goals to your trading plan, it is generally a good first step to decide on a time frame that will typically be used for your trades. Time frames can be altered, of course, but it is a good idea to choose a time frame that is best suited for your temperament and level of time availability.

 

Traders that typically use 5-minute charts, for example, tend to be uncomfortable holding positions overnight, as these trades carry certain types of added risk. Conversely, traders that use weekly charts tend to be willing to hold positions even through periods where prices might be working against the trade. Traders using shorter time frames will generally have to spend more time during the day monitoring their computer screens - looking for new opportunities and closing positions once the market is ready to change. Traders using longer time frames might spend more time doing research, for example using the weekend to look for new opportunities and then arriving at a game plan for the coming week.

 

Using a Consistent Methodology

 

Once you are able to settle on a general time frame, it is important to look for a methodology that you will be able to implement with consistency. For example, some traders to identify ranges and then buy when prices fall toward support and sell when prices rise back toward resistance. Some traders prefer to wait for breakouts and then trade in the direction of the underlying momentum. Others wait for indicator readings to send certain signals or for significant price patterns to develop.

 

Once you settle on a system that matches your strengths, it is often a good idea to test your ideas to see if the strategy works over a long period of time. If backtesting results show that your system generates reliable signals in more than 50% of your positions, you will be able to gain an edge and improve on the results of most of your competition. It is also important to test a few different strategies and then settle on the one that best matches your temperament and generates positive outcomes on a consistent basis. Use a variety of different forex pairs for your assessments and look at multiple time frames in order to get a broader perspective on the success or failure of your preferred methods.

 

Develop a Trader's Mindset

 

Having a go-to time frame and a solid strategy is great, but these can only have a limited impact if the trader using these techniques fails to exhibit a consistent mindset. A successful mindset comes with an adherence to four key areas: Discipline, Patience, Manageable Expectations, and Market Objectivity. Once you settle on a system, you must exercise the patience to wait for situations where all of your trading requirements are met. If your system requires prices to reach a certain area, and that area is never reached, no trades should be placed. It is time to look for opportunities in other areas. If you miss a train, you don't run after the train, you simply wait for the next one to arrive. In the forex markets another opportunity will present itself.

 

The ability to wait for the next opportunity also requires discipline, and a willingness to obey your strategic rules. Discipline is also required in order to place trades and open or close a position when it is necessary. This becomes even more important when dealing with stop losses. Market objectivity comes in when traders must detach their biases and emotions and rely on the strengths of a trading system. Traders must also create manageable expectations that are realistic. It is unreasonable to take a $500 trading account and expect to make $1,000 on each trade. There will be instances where a market will more more than you expect (and generate substantial profits) but if you expect this to happen all the time, you are setting yourself up for disappointment.

 

Don’t Focus on Too Many Markets at Once

 

Many new traders feel the need to be in a position all the time and monitor an unmanageable number of forex pairs at once. While it is true that the use more more forex pairs will generate more trading opportunities, this is a practice that is largely unnecessary. Its generally a better idea to limit yourself to a smaller number of markets, and then to have a better understanding of how those markets operate. Some currency pairs will behave differently in different market environments, so it is also a good idea to have a pairs that exhibit different types of moves so that you will have a trade to make when conditions change.

 

There is no system that will create successful trades 100% of the time. Even in cases where a system is accurate 65% of the time, you will still see periods of loss (the other 35% of the time). Because of this, overall profitability is really an exercise in risk management and trading execution. It is important to cut your losses and accept defeat in a trade in order to prevent further losses from accumulating. Look to trade in areas where prices are likely to move in your chosen direction right out of the gate. This is especially true for traders using shorter time frames. In some cases, you will need to try a position two or three times in order to see prices move in your direction right off the bat. This requires a high level of discipline and patience, but when it is done correctly, you will be able to trail your stops and stay in the trade until the move has run its course. There are many different ways to approach the forex markets in a coherent fashion, and these key steps are vital when developing a strategy that works over time. No matter your preference for time frames or strategy, these steps must be considered before putting your money at risk in potentially volatile markets.

[TheDude 10]

Key Steps to Building a Successful Game Plan....

 

All fairly vague stuff.

 

You need an edge to be successful.

 

If you go to an investor seeking money for ANY type of business, the investor is going to DEMAND to know how you will make money. What value will you be adding to your product that allows you to sell it for a higher price? Or in trading parlance, how can you demonstrate that over time, your strategy WILL return profit based on changing asset prices. This is usually based on knowledge of intra or inter market interactions, or observable and demonstrable external factors and their impact on the markets. TA is too vague and subjective to offer this. TA does not offer any edge in itself.

 

So,

 

What edge can be found in the FX market? What time frames are these edges occurring in?

 

This is what should be addressed in my opinion.

 

Political factors, economic releases, fiscal policies, rate markets, repo transactions, seasonality such as tax cycles, commodities, option mechanics, etc, etc....

 

Forget your 5 min chart. You'll need to do a lot more work than back testing basic pattern recognition to find any edge.

[suby 10]

Key Steps to Building a Successful Game Plan....

 

All fairly vague stuff.

 

You need an edge to be successful.

 

If you go to an investor seeking money for ANY type of business, the investor is going to DEMAND to know how you will make money. What value will you be adding to your product that allows you to sell it for a higher price? Or in trading parlance, how can you demonstrate that over time, your strategy WILL return profit based on changing asset prices. This is usually based on knowledge of intra or inter market interactions, or observable and demonstrable external factors and their impact on the markets. TA is too vague and subjective to offer this. TA does not offer any edge in itself.

 

So,

 

What edge can be found in the FX market? What time frames are these edges occurring in?

 

This is what should be addressed in my opinion.

 

Political factors, economic releases, fiscal policies, rate markets, repo transactions, seasonality such as tax cycles, commodities, option mechanics, etc, etc....

 

Forget your 5 min chart. You'll need to do a lot more work than back testing basic pattern recognition to find any edge.

 

 

 

Political factors, economic releases, fiscal policies, rate markets, repo transactions, seasonality such as tax cycles, commodities, option mechanics, etc, etc....

 

Forget your 5 min chart. You'll need to do a lot more work than back testing basic pattern recognition to find any edge.[/

 

I agree with you dude, but if you were to get even more specific, what part of that framework can and do you quantify?

 

Price is nothing more than the heartbeat of the markets; however, (in my opinion at least) trading ideas should be based off of hypothesis that play on a behaviour or external factor, like what you have listed.

 

Something that has recently come to light...

 

The day before any important economic release, if the day ends positive, the odds are high that the following day will also end positive

[TheDude 10]

Seems like you've pretty much got it.

 

Basically, I think there are 2 types of edge.

 

1. Hard mechanical edges based on pricing distortions. These have very low risk. Typically involving some kind of arbitrage, like basis trading, delta neutral trading, structure against structure. Due to the low risk, they are the most competitive - but there are still opportunities. So, generally your transaction costs need to be quite low to exploit them.

 

2. Softer edges involving inter-market cycles and correlations. You mention a good example. These don't last as long - some longer than others. I used to trade a similar one you mention when I traded Euro futures. Examples include CL & ES, seasonal calendar spreads, etc. They will work more often than not, but the relationships shift over time.

 

The point is, is that you can define each one, and state why it works, how it works, when it will work etc. They arent subjective. The less subjective, the better the edge IMO.

 

Sometimes the edge is a one off - such as the news of a pipeline being build that has altered the relationship between Brent and WTI. That spread will trend for days/weeks as it takes the refineries some time to put their trades on accordingly. The point is that the trade is not subjective. The pipeline has increased supply, so there is an extremely high probability the spread between them will change. It kind of almost has to. You wont see much looking at the outrights though. Yield curve shifts (flattners and steepners) are another example. Understanding bond maths takes a lot more effort than learning a few clown patterns in TA - so few will bother - instead they try to get rich quick - ending up spending years thinking they are learning not to lose. lol.

 

Intraday edges are more likely to be one-offs, but you can spot the same ones recurring if you understand market structure through MP and how to read DOM. This is almost a 3rd type of edge as it is perhaps the vaguest, and definitely more subjective. This isnt TA though. It's understanding how large orders interact with the market. It's becoming harder due to algos breaking up large orders. A chart will never show you this due to the games played though. It's also the hardest to learn - so most pro's wont bother with it.

[suby 10]

Seems like you've pretty much got it.

 

Basically, I think there are 2 types of edge.

 

1. Hard mechanical edges based on pricing distortions. These have very low risk. Typically involving some kind of arbitrage, like basis trading, delta neutral trading, structure against structure. Due to the low risk, they are the most competitive - but there are still opportunities. So, generally your transaction costs need to be quite low to exploit them.

 

2. Softer edges involving inter-market cycles and correlations. You mention a good example. These don't last as long - some longer than others. I used to trade a similar one you mention when I traded Euro futures. Examples include CL & ES, seasonal calendar spreads, etc. They will work more often than not, but the relationships shift over time.

 

The point is, is that you can define each one, and state why it works, how it works, when it will work etc. They arent subjective. The less subjective, the better the edge IMO.

 

Sometimes the edge is a one off - such as the news of a pipeline being build that has altered the relationship between Brent and WTI. That spread will trend for days/weeks as it takes the refineries some time to put their trades on accordingly. The point is that the trade is not subjective. The pipeline has increased supply, so there is an extremely high probability the spread between them will change. It kind of almost has to. You wont see much looking at the outrights though. Yield curve shifts (flattners and steepners) are another example. Understanding bond maths takes a lot more effort than learning a few clown patterns in TA - so few will bother - instead they try to get rich quick - ending up spending years thinking they are learning not to lose. lol.

 

Intraday edges are more likely to be one-offs, but you can spot the same ones recurring if you understand market structure through MP and how to read DOM. This is almost a 3rd type of edge as it is perhaps the vaguest, and definitely more subjective. This isnt TA though. It's understanding how large orders interact with the market. It's becoming harder due to algos breaking up large orders. A chart will never show you this due to the games played though. It's also the hardest to learn - so most pro's wont bother with it.

 

Thanks for clarifying between the two different realms dude.

 

The majority of my labor is spent specifically in the first school of thought. I won't reveal all of my magic bullets but one of my favourite trades is a divergence trade between the indices and the vix (the model has recently incorporated bonds into the mix)

 

In regards to correlations and shifts (what i like to refer to as regime shifts), this is something i am spending a lot more time into lately. I'm not sure what kind of window you use to determine your correlations but I suggest using no longer than 60 days maximum since these things are constantly changing (as i'm sure you already know)

 

Just recently have I been putting in serious efforting into learning the latter (i.e. intraday edges through the dom). If i ever trade intraday, I will never look for a scalp... I like to go into the trading day with a general outline of areas of interest and then i'll use the dom/tape and other moving parts in my models to help identify if a trade is on or off. HFT does not make this easy by any means but with time, practice and patience I believe one can build an edge in this style of trading as well.

 

Happy to see your applying a strict logic to the madness rather than a trendline/fib retracement/or bear/bullflag

[Ammeo 10]

One thing Pros say over and over again and now im experiencing that myself is sticking to the asset or industry which u know about and which you feel confident to trade in..

Going into random things leads to nowhere..