You've learnt the pattern or setup. Great. But that's not trading.
Now work on the real-time contextual decision making around that pattern or setup.
Look beyond the pattern itself to the wider context.
Where is the pattern occurring within the larger timeframe market structure? What structure will suggest avoiding this particular setup? What structure might suggest caution, or reduced position sizing? What structure might suggest increased odds and the potential to really press the trade for a larger gain?
Where is the pattern occurring within time? Are there news influences which suggest passing on the trade? Are their time-of-day / week / month factors which might suggest standing aside?
Consider the behaviour of price movement – the pace, the volatility, smooth vs choppy price action.
What conditions might suggest adjustments to the default plan? All-in vs scaling in? All-out vs scaling out? Closer stops vs wider stops? Closer targets vs extended targets?
Consider the real-time decision making once in a trade.
What signs might suggest a loss of edge? How will you react to this new information?
What signs might suggest greater potential than originally perceived? How will you react to this new information?
What conditions suggest a re-entry attempt should be taken, if stopped out of the position? And how many re-entry attempts are appropriate?
Trading is not about simplistic patterns. It's about real-time contextual decision making.
If you've been on the wrong path then it's time to make a change. It's time to do the real work.
Best of luck,
If it was as easy as: Spot Pattern – Trade Pattern – Profit, then one could just write a code that does that automatically, and go home! 🙂
Even traders that develop automated systems, actually especially these guys, are always supremely aware of the most convenient context within which to deploy a system.
S. Tartakower, a famous Chess player, has a brilliant quote: “Tactics is what you do when there is something to do; strategy is what you do when there is nothing to do.”
Lance, tell me if you agree: Pattern recognition and trading, is Tactics; assessing environment and context properly, is Strategy. Our edge is comprised of an interplay of both!
Yeah I tend to agree with that. The way I view it, which I think is essentially the same as what you’ve said, is:
The battlefield is the environment & higher timeframe market structure.
The strategy is the general concept for profiting within this battlefield.
The tactics are the plan we use to execute the strategy.
Success at the strategic level relies upon accurate assessment of environment and context. And adopting a plan which “fits” the environment.
Success at the tactical level relies upon accurate pattern recognition, decisive action and adaptability/flexibility. Trade entry/management decisions (risk on/off decisions) must “fit” the way that price moves within the environment.
Edge is, as you said, comprised of an interplay of both.
All in a constant state of change. And all in a constant state of uncertainty (fog of war).
And this is where a lot of those who are starting out (me included) misunderstand trading I think. I have started to compare trading skills to gaming skills. You could – intellectually – know what to do if say, the Big Boss shows up. But how you go about doing it during game-time is be the difference between a skilled gamer and a non-skilled one.
I have often wondered what would happen if there were a game that shows live candles on the screen (similar to any financial market chart) where the intent of the gamer is to score maximum number of points based on her entry and exit – exactly like trading, but without the backdrop of money. I am not talking about paper trading, because the ‘idea’ of money is still involved and this affects how it’s perceived (for e.g. a 12 year old might not naturally try it out as a ‘game’). I submit that a *lot* of people would score a *lot* of points at this (age no bar – in fact, the younger ones would probably be better). I wonder if internalizing trading as this game could be the breakthrough that many seek.
Thanks for the awesome posts.
I highly recommend pursuing this “trading as a game” mindset, if you can do it. Of course, risk and money management limits must be in place in order to not destroy your account through reckless behaviour. But within those limitations, the more you can see this as a skill and performance endeavour, rather than a scheme to make money, the better you will likely perform.
Yes Lance! I am actively trying to make that mindset shift. And the more I look at it and study it, the more I am convinced that’s how it should be perceived. And your reassurance helps!
This excerpt is from my one of my earlier journal entries on the nature of trading:
“Imagine a game you play with a friend of yours. Let’s call him Mike. Mike’s a runner. He likes to run and keeps running back and forth (only in two directions – say North and South). But each time he runs, he runs for a random amount of time. So for e.g., he might run for 2 seconds towards North, and then switch directions all of a sudden and run South for 5 seconds, before changing his direction again. Also,
Mike doesn’t know or care you are playing this game with him. He just keeps running. I know! Mike’s one crazy dude! The game is simple.
Your objective is to run, as much as possible, in sync with Mike, in the same direction as he runs. Mike’s not the only crazy one here.
Assume that you won’t have any problems running in the same speed as him. If you are in sync with Mike, the more points you win. (You are in sync with him if you are running in the same direction as he is). The more you are in sync, the more points you get. If you are out of sync, you lose points. (You are out of sync if you get a false start or you run in the opposite direction to his) you lose points. The more you are out of sync, the more points you lose.
So, how will you fare in this game?
I would fare pretty badly and I wouldn’t play. Why? Because the bugger changes direction randomly and runs in one direction a random amount of time. It’s all completely random!
But now consider these points. (a) I have loads of time to score my points. There is no deadline; (b) I get to stand aside when I don’t think I can be in sync with him; I get to stand aside when I don’t want to play; (c) I have observed Mike closely for quite some time now (I am also jobless). And I have noticed that when Mike reaches certain key points (I had noted down these points on the field earlier) he tends to change direction to the opposite direction. Aha! There seems to be a pattern in his running. He doesn’t follow this *all* the time, but too often to be considered random. First breakthrough! (d) Also, when Mike approaches these key points, he sometimes slows down, and changes his direction in a certain, specific manner. Another breakthrough!
I now start to see some order amidst all the chaos. A plan materializes. I decide to only play when he departs from these key points. I stay away from all his other areas, because I *know* those movements are random and I *know* I can’t keep up.
Do I think I will be able to be in sync with him during all of his departures from these key points? No. Do I think I will get false starts? For sure! But do I now think I have a chance to score positive number of points? Yup! So would I play this game now? Hell yeah!”
Great analogy Chandra. I love it. And that’s exactly the process we follow with the markets. Observation, over time allows us to identify small pockets of opportunity. And as you say at the end… we won’t always be in sync with this opportunity. And even when we are, we’ll sometimes execute poorly. But if there’s edge there, this is a game we should be playing. Hell yeah!