The philosophy ….
Have you ever heard this quote, ” You don’t trade the markets, you trade your beliefs. ”
I totally agree with that. In spite of what you have got technically, whatever your backtested, forward tested and demo trading results are, you will end up in trading your own beliefs when the pressure is on and the market is trading at the hard right edge of the chart.
I know I know… You might be saying, what the hell man? If you don’t have a technical edge, all this BS about psychology, philosophy and beliefs doesn’t matter. Blah. Blah. Blah.
You are absolutely correct. There is no point is in discussing the mental side of the game if you don’t have a technical edge. You must have one and you must understand that edge to the dot to let the edge work effectively in realtime. If that is the only thing needed, oh boy, let me say, the success stats in this business would have been much better as it takes not more than a focused two months to learn a good trading system.
This article is not about the psychological aspect of the trading though. This is about the philosophy around which my whole trade plan is designed and some introduction of my beliefs with which I operate in the markets. So let’s start it.
MY TRADING PHILOSOPHY:-
I have already talked about this in one of my previous articles. Let me quote that here again, as I want to emphasize a bit on that topic.
“In a news-free environment, the market reverses at a price level that causes a supply/demand imbalance. It travels in the new direction until it hits a level that causes a supply/demand balance again. “
The reversal can be that of a swing or a trend. That depends on how strong the level is and how weak trend is. I will talk about that later.
I have mentioned in my last article that all the decisions I make will be consistent with my trading philosophy, in the pre-trade analysis, at the time of entry, while managing the trade, and while setting the targets. How??
In the Pre-Trade analysis:-
You already know how I form the bias in the given market conditions. So, I don’t want to talk about that again in this article as it makes this very lengthy. I know defining a good bias is easier said than done in real-time, But it is simple and gets better and better with experience. Once you identify the trend structure and the strength of the trend, everything is pretty straight forward.
Once that bias is identified, I relax and watch the price action to see whether the newly added candles are supporting bias or there need to update anything about the trend structure and bias. I don’t do anything until a counter bias move starts. Why?? Because I want to snatch the money from those traders who are fighting the high probable bias when they realize that they are wrong. So I want them to take a position before I take a position. Also, I would like to benefit from those traders who try to enter late into the swing. These two groups of traders give my bread and butter.
Here it comes. How long will I wait when market is moving against my bias?
What does philosophy say? Market reverses it’s the direction when it hits a level that can cause some supply/demand imbalance. So I wait until the market reaches the level that can cause some supply/demand imbalance. The level can be HTF S/R while looking for a reversal, or it can be minor S/R or trap level from LTF while looking for a with trend trade, or a range boundary when the market is ranging. During that waiting, I also make sure that the trend structure in TTF remains intact. Change of trend structure changes the bias and also changes the tactics. Without any doubt, I am a contrarian.
We don’t know whether the market respects the level that we are looking at or not. That’s the reason why I don’t place blind limit orders. The price interaction with the level will let us know whether it’s time to give entry or wait for some more time, which is a topic for future articles.
Does that mean the reversals always happen at the HTF S/R, and the pullbacks always end at LTF levels?
Definitely no. There is no statement that has the word ‘always’ in the markets. If someone uses that, he/she must be lying. It’s not about what it should do and what it shouldn’t do. It’s all about where the odds will be in favour and risk will be less.
If you need only odds, go with the breakouts. But the risk will be huge.
If you need lesser risk, trade with the blind limit orders at good levels with a volatility based stop. But the odds will be less.
Trading is all about balancing these two. Nothing else. Both of the above methods will not suit my personality. So I wait until the price reaches the level, gives a price level to hide the stop and then fire the entry as close to that stop as possible. Stop always comes before the entry. (I used always here. But it’s not a lie.. 😉 )
What if the market reverses in air without reaching my level?
Who cares!!! Let it do whatever it wants. Move onto the next opportunity. We need not trade each and every swing. Just update the trend structure and bias if that is needed and then wait for another counter bias move to start.
But the positive thing about sticking to the SD(supply/demand) levels is, historic charts prove that most of the big moves start at good levels irrespective of the timeframe. I am sticking to those good levels, so I don’t miss much of them unless I hesitate and miss an entry when the setup builds up or when the exit is early out of some emotions. Missing out of hesitation and early exits happen when we slip out of zone trying to catch every 5 or 10 tick movement or because of the fear of missing out and stuff.
I heard Chris Dunn quoting, ” Don’t waste your ammunition firing the squirrels when you are hunting for elephants.”
As a trader, our ammunition is the financial capital and most importantly, the psychological capital. Make sure you are protecting both every time you try to take a trading decision. I mean it.
Once everything in the pre-trade analysis is in place, the entry will be on the rejection from that level. It can be TST or BOF of that level. I don’t want to talk about that in this article as this one is not about entries and exits. I will skip this to future articles as well.
While setting the targets:-
This one doesn’t need much explanation. The expectation is that the market moves at least to the next SD level once it reverses. That is where I like to take half of the profits, manage the second half when the market is piercing the levels on its way in the direction of the trade.
There will be times, where I don’t exit the first half with a strict order at the immediate level when the move has a lot of potentials. I don’t recommend this to the beginners as it needs some experience to take exit decisions when the market is printing candles at the right edge.
While managing the trade:-
Use the levels within the swing you are trading, that is formed by the market when it is moving towards the targets, to trail the stop. I don’t trail the stop if there is no level to support it unless I want to scratch the trade or don’t want to take a loss any more or I want to manage the trade very aggressively.
This is what I meant when I said that the trading philosophy comes in everything I do in trading. It might look simple, but let me admit it honestly, finding a single statement as simple as this that encapsulates everything in trading, and preparing a trading plan that is consistent with that one statement from the scratch is not as easy as it appears.
In spite of all these, the market has the potential to surprise and that is when you have to take precautions like decreasing the position size, or moving back to SIM or totally moving your ass out of the computer Whatever it takes, make sure you are financially and psychologically ready for the opportunities that will come when the markets start to behave the way you can understand. Keeping a philosophy like this and reminding yourself about it often while trading tells you whether the market is conveying its information in your language or not. The moment you realize it is not your language, the best thing is to stay flat. Saying flat is also a position in trading.
Pheww. This is already lengthy and too much theoretical. I can’t help. That’s how everything related to philosophies is.. 😀 .. I thought of giving some introduction about the beliefs that I operate in this article itself. But I will skip it to the next article.