This post will focus on explaining why i can share my strategy and still preserve my trading edge. And why this goes against what most trading books teach you.
There is a common knowledge in the world of trading that if way too many people have exactly the same trading strategy at the same time, that strategy becomes not effective. It is also a fact that a lot of professional traders sell their trading systems and strategies to retail traders looking for involvement in trading.
The answer is that the edge is not in the mechanical element of the strategy. It rather is in the discretionary implementation of this strategy.
This signifies that in order to make any strategy work you have to become proficient at it. The only way to reach this is to trade it without stopping over a sustained period of time. It also means that if you merely ‘take every trade’ of most mechanical strategies you will finally end up in a net losing position.
The reason for this is that mechanical systems take advantage of common patterns that play out over and over again; and when obvious patterns become clear the market picks up on them and attempts to trade them too.
This is known as ‘saturation’ and when this occurs the strategy ceases to be as effective as it once was; until sufficient numbers of traders become deterred by the decrease in performance and swap to another strategy that seems to be working good at the time. At this point the original strategy or pattern will start to become much more efficient again.
This phenomenon is more prevalent in smaller markets. However, it is still valid in Forex trading although not to quite the same extent.
Another reason that mechanical strategies cycle between profitable and non-profitable conditions is that the cause to any move are institutions entering the market with sufficient volume to actually move the price up or down.
It is not just a case of trending or non-trending markets because the only reason trends happen is when institutional investors have good fundamental reasons to become active in the market, which can happen often or not very much at all.
During these times of inactivity the price merely will not move very far. However, mechanical traders continue to place their trades as normal; which, of course, results in a higher frequency of losses than during normal or trending conditions.
It makes absolutely no difference what ‘hit rate’ the system boasts. Or even how perfectly it worked last week if the markets are not moving.
These periods of low market movement are when traders lose faith in their trading system and move on to something that is performing very well during the current time, and so the cycle continues.
Discretion is when you have a set up occur but decide not to actually take it. This decision to leave out trades is a crucial part of our trading development. Without it we will simply continue taking blind trades all of the time which results in a net loss due to periods when the market simply isn’t moving.
A dead giveaway of any supposed trader that has never actually traded professionally is anyone that advises you to just stick to your strategy and take every trade as they set up without fear and hesitation. This is, of course, what all of the text books will teach you because the text books are generally written by academics and analysts that simply analyse price rather than actually make a living trading it every day.
Trading a strategy consistently will make you a profitable trader. However, that is far removed from taking every set up blindly no matter what. They are two completely different concepts, the latter of which will actually see you losing money in general.
In order to actually become proficient you must trade a style or strategy over a sustained period of time. Trade it until you are actually familiar enough that you begin preferring certain set ups over others. This recognition of price action is a good sign that your discretion is getting better. When you do get the feeling to skip a trade then you should listen and act on it.
It’s very important that the reason is your discretion and not because you fear losing even more capital. If this is the case then you are risking too much. Drastically reduce your trading size until your confidence is up and the performance justifies more risk.
You should also become aware of what is going on in the news. These events are what drive the markets so you also need to ‘tune in’ fundamentally and become proficient at thinking like an institutional trader.
This is not too difficult, because you will gradually learn how different events invoke different reactions from traders who move the markets. These moves will tell you how the information is being interpreted.
When the markets are quiet they are generally awaiting the outcome of some kind of large fundamental event; such as a vote or election and etc. And very often the outcome of these events can produce very predictable moves and market conditions.
Knowing all of this and thinking in line with how the markets actually move will develop your discretion. You will see a marked improvement in your trading results!