Devising a System/Method
January 1, 2017
We all need at least a basic system/method to be able to navigate markets well over the long haul. But it needs to be part of an overall approach to markets – trading skills, work ethic, persistence, understanding our own psychology, and more. The problem with focusing too much on a method is that the method doesn’t actually do anything. It just sits there on it’s lazy rear end. We are the ones who devise these systems and we are the ones who have to implement them in some manner and to some degree. The method itself does nothing, we have to use it. In other words, we have to execute the trade. But a pretty good method can help to get us close and then we need to take over with skills, experience and focus. And the often overlooked part of any approach is not where to enter, but where to exit, with full profits, partial profits, break evens, or losses. And we have to be patient, respect the market, and do our best job of letting the market set up. It seems almost everyone talks about where/when to buy, but almost no attention is paid to where/when/how to sell. It’s the overall approach to markets which is the important factor, not the method. Also, short term trading needs to have a much more disciplined/rigid approach than a long term view. Short term trading is basically about going from point A to point B. It’s purely about risk. We’re trying to generate income so to speak, almost like a real job. The long term view has more factors in play. There is more overall volatility involved and there is more room to “wing it”. We might be trying to accumulate an asset over time and give the market plenty of room to turn and start heading higher. It’s still about risk. But, for example, we may believe the bond market long term has become a risk and we want to sell those bonds for another asset.
Modern day technical analysis is not what my method is based upon, but I do rely heavily on several types of market divergences. I’ve seen people incorporating RSI for that approach. Now from my own experience, the biggest flaw when using a system is in not taking the trend of the market into enough consideration. Or if they do, it’s only based on an uptrend or a downtrend. (And when based solely on moving averages, there is no way to buy into the extreme weakness, after we’ve gotten warning signals of the downtrend weakening, and potentially ready to turn. In other words, taking high probability bets into the new lows.) But there’s also the sideways trend, a.k.a. the trading range. It can be identified via the resistance and support levels being relatively straight across, like this QQQ range or this DXY ($) range. The $ had the previous lower range and now the new range is in “effect”, and here is the even bigger range. Trading ranges are extremely common in markets, and if the system does not take this into account, then it will get chopped up in the trading ranges. So it’s very important to have total focus on the technical condition of the market, and to try and identify the beginnings/development of the trading range as early as possible. Different trends require different approaches, or tweaks, to the system. And once again, using stops, especially as a short term trader, is critical, as are where/when/how to take the initial (full or partial) profit. This business just doesn’t work well without at times taking some profits and moving the capital around. For instance, how many people, even long term investors, did not take any profits in PMs in 2011. Capital needs to flow freely and efficiently (not stagnate) to maintain a vibrant economy. The same sort of idea needs to be part of an approach to markets.
So some kind of a system/method to markets is very important, but the overall approach (including a method) is much more important. If someone only does short term trading, then the approach to markets will be much different than an investor. But investors could consider some of these concepts also. A basic system/method for markets for me would have these important concepts – it: is generally based on divergences; adjusts for/takes into account the 3 different trends of a market; is “easy” to understand; is “easy” to implement intraday with the least amount of emotions as possible; uses some way of indicating overbought and oversold conditions; takes into account signs of strength and signs of weakness; has loss exiting strategies; has initial/partial profit taking strategies; has strategies to “insure” break even on the remainder of a position after partial profits; uses support and resistance to gauge entry, exit, and profit potential; has at least one filter; does not listen to anyone else’s “opinion”. And most importantly, it can be used with confidence, therefore can be repeated over and over.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day. Scott returned to markets over fifteen years ago where he continues as an independent trader.