An Interesting Encounter

BarroMetrics Views: An Interesting Encounter

I had an interesting encounter today. I met a trader with six years trading experience and one year of profitable results. In the course of our conversation, she mentioned she taught that the ideal trade is the momentum trade wherein there is no loss from entry and one that proceeds to exit in short order. She also mentioned that she thought this sort of trade should happen with regular occurrence.

I didn’t tell her but in my view, this idea – that with the proper trading tools, we should be able to trade without heat – is an exercise in wishful thinking. It may be available in the ultra-short time frame but that is now dominated by the quants and I doubt that the normal retail traders can compete with them in their timeframe. As retail traders, we need to expand our timeframe to retain our edge. But the farther out we move, the less chance the envisaged ‘high-win-ratio’ trade will occur with any degree of consistency.

Think about it for the moment – what is she asking for here? She is asking for a tool/tools that will define momentum in such a way that the breakout will always (or at least almost always) immediately reward us; and, if that doesn’t occur, she suggests we should immediately exit the position. In short, we are looking for a tool/tools that on breakout would immediately (or shortly thereafter) tell us if the breakout is valid.

I wish that such a tool would exit and that I would get to know about it. Unfortunately, given the fact that price action is the result of human action and the fact that human action in a small sample size tends to be inconsistent, I am unlikely to discover this magic wand any time soon.

The fact is we need to manage our trades with the knowledge that reality dictates a trade needs room to move – ‘move’ in terms of price and/or time.  How much time, and how much price is a function of our personality and expectancy return. In turn our expectancy return depends on our trading plan, risk management plan and consistency of execution. In my view those are the skills a newbie should look to develop rather than engage in some futile search for a Holy Grail.

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