This is a just a short post to outline some of my trading methods and systems. It's really just to show that there are many ways to make money trading, all down to personal preference and personality.
There's really no right or wrong way to trade, if you do what you do and it makes you money, that's the right method for you. The proof is in your bottom line, the balance sheet. Everyone can guess and predict and prophesies till the end of time, but unless you're actually making money it's all junk.
There are generally two types of traders, system specialists and market specialists. A system specialist will trade a small number of 'systems' on a large amount of assets, constantly scanning for the entry signals that suit their system. It doesn't really matter to them what the asset is, as long as the system criteria is met.
Market specialists on the other hand will concentrate on just a handful of stocks, or sectors and learn them inside out. They're very good at knowing in advance how a particular sector is going to react to a news release for example.
I'm a 'systems specialist', I have a few systems that I use repeatedly on a wide range of assets. I mostly trade Forex, but that's literally only because it's a 24hr decentralised market that doesn't gap.
It's far from being the only market I trade, I look for opportunities everywhere which can be exhausting, but that's my personality type, always active with skin in the game. It might not suit a lot of people for many reasons, but there's no right and wrong way.
So here are my three basic systems that I trade daily (in the loosest sense, some trades last weeks or months).
1: The mechanical system
This is a super basic system, I call this one my 'wages' system as I derive my income from it. It's 100% mechanical, no thought whatsoever. If it gets a trigger it's on and that's it.
It has a win probability of between 58% to 62%, and the risk reward ratio is fixed at 1:1, so it's profitable over long time periods. I've been using this system for around 8 years now in different sectors and different market conditions. It does ok in ranging markets, but outstanding in trends because it compounds when it's going in the right direction.
It only uses one indicator, a single moving average that acts as a yes/no decision point, that's it. I make around 10-20 trades a day on average using this system, it's low profit but very reliable. Each trade is set up so the dollar amount won and lost is the same, regardless of the market or volatility. Otherwise there could be a possibility to win more trades but lose more money.
2: Trapped traders / stop hunting
If I had to pick a single thing that I'm good at then it's this. I don't mean to sound boastfull, I just love this kind of trading and to be perfectly honest it's so easy to learn and execute that it's not even that much of a claim... It's almost mechanical in that it doesn't take much thought or decision making. No indicators, just looking at a naked chart.
It involves looking for stop locations and exploiting them when they get hit. This is what market makers do to generate the liquidity to get in and out of positions, so all I'm doing is copying what banks and institutional traders do. It consists almost entirely of setting stop orders that very rarely get hit. But when they do get hit I normally achieve around a 1:5 risk reward. They have just a 50:50 probability of working, but the higher risk reward makes it profitable.
I normally see around 5 of these a day, some days none, some days dozens. They just come up when they come up, I just have to spot them in advance and get my order on.
3: Swing trades
I'm relatively new to this, been going for about a year now so am very much in the learning phase. I've avoided it so far because I couldn't cope with the psychological side until recently.
This involves trying to find peaks and troughs, market reversals. For me at least, although I imagine this is true for other people that do it, it requires making an awful lot of small losses before making those huge home runs. I like to win, even small amounts, so I've really struggled with this method.
My hit rate is less than 20% probability, I'll be lucky if I get it right 1 time in 5, so lots of losses. Adding that to the statistical phenomena of 'bad clusters' (more on that in another post) then it's pretty normal to get a run of 20 to 30 losing trades. Now maybe you can imagine the psychological problems, try trading a system that's just lost 30 times in a row, how do you think you feel putting on that 31st trade ? But that's the system, in order for the maths to work, it has to be done.
The compensation is, the risk reward is just stupidly large. I sometimes get 1:30 or 1:50 or larger. Some trades are just open ended with a 3xATR trailing stop and keep going for months. Very very rare, psychologically crippling, but the rewards are worth it if you can stick it out.
Most beginner traders start off with this method which is why so many wipe out. Everyone tries to pick tops and bottoms, reversals. Trust me, reversals are a single unique event on the chart, they're pretty rare in the grand scheme of things and statistical analysis proves it. Most beginners can't cope emotionally or financially with long strings of losers, but that's just how the trading game is, no matter how good or bad you are. Good traders are the ones that can cope with it psychologically, that's the difference.
So that's it, just wanted to share a few of my trading 'methods', there are plenty more that other people do that are equally valid and profitable, it all comes down to personality and personal choice.
I don't use any indicators apart from one moving average in my mechanical system, the rest is all naked price action trading, just reading the chart. I'm not saying you can't make a great trading system using indicators, if it works for you then that's great ! Just remember it's the bottom line that counts, not how often you make good predictions but how you act on them.
So what's your trading system ? No need to give specifics if you want to share, just a broad outline about what works for you personally :-)