Saturday, 23 October 2010

Trade a lot or be very selective?

As discretionary traders, we must decide how we want to trade.

My process requires the identification of a trading "picture" with a high win rate and profitability.  I qualify the picture by first defining it, so I can back test it. Without first defining it, I can't test it. If I don't test it, I can't trade it, because I don't know in advance whether I will make money and whether I will have a high enough win rate - the main requirements for me.

But how restrictive do we make our definition? The answer to this question depends on what we want to achieve. Of course we want to make a profit every day, week or month,  but we have to be more specific.

I want a high win rate, I know that. But do I want many small profits, or do I want to be able to catch a trade that will give me a larger profit and not take lots of smaller trades? My picture definition has to be specific enough to meet my requirements.

How do I do this? Back testing. I know my basic setup, but I have to add context and nuances. The context and nuances will further qualify the picture to catch the type of trade I want to catch. Lots of work involved.

It's not enough to just show up.

Arrived in Chicago and looking forward to the training starting on Sunday.

1 comment:

  1. Hello EL,

    I would like to know whether total volume is important to you. Trading wisdom says that pullbacks should be on light volume and trend continuation should be on heavy volume. We know that you care about market delta. However, do you think that a market delta of +1,000 with a total volume of 5,000 is different than a market delta of +1,000 with a total volume of 100,000 contracts? Which situation would you prefer for an entry given that the context is exactly the same?

    Also let's keep in mind that many times there are informed traders that go long by being on the bid (vice-a-verse for sellers)....

    Let me give you an example: Suppose we have a green bar after a series of red bars. The green bar is on an up-movement, while the red bars were a down-trend. However, market delta of the green bar is strongly negative and total volume is very high. Would not this be a sign that there huge buyers buying from the sellers at the bid? In this situation, the sellers would sell, sell and sell but they are not moving price any lower, because buyers are refreshing their bids again and again... In this case, you would see negative market delta, but the total volume is huge. All this negative market delta failed to move prices lower because of buyers on the bid...

    What do you think?

    Thanks a lot!

    Best regards,