Experierence Counts

BarroMetrics Views: Expierence Counts

I have been watching the Australian Open, in particular I wanted to see how the young turks would fare against the seasoned warriors. Although the turks claimed one scalp – that of Roger Federer – they failed to rise to the challenge, at least at this stage. Murray dispatched Kyrgios, and Djokovic accounted for Roanic; Murray is into the finals; Djokovic will meet Wawrinka for the other finals berth – all seasoned warriors.

Watching the games, I could not help but notice that one, and probably the critical  difference (between the two sets of players), was experience. Time and again the young turks would play the wrong short at the wrong time – opting for outright winner (which resulted in an error) rather than a safer shot. That shot might or might not have ended the rally, but it was the one which had a higher probability of success.

It reminded me of the differences between successful and unsuccessful traders.

Successful traders first and foremost strive to protect their capital. In a trade where the reward:risk is highly attractive, but one where there may be more assessed risk than normal, the successful trader will reduce position size or bypass the trade; the unsuccessful trader loads up for bear. Successful traders identify high quality trades; unsuccessful ones don’t seem to know the difference. Or, if they do, fail to execute.

For example, since Dec 8 to Jan 29, the USDJPY has gone sideways, bounded by 121.84 and 115.56; whereas the AUDUSD (on a close basis) has gone from 0.8298 to .7890. The former is currently trading in the middle of the range and offering few attractive opportunities (at least on an 18-day swing basis); whereas the latter is in what I call a R2 downtrend i.e. a strong trend where there are few retracements.

To identify the opportunities offered, the trader needs to identify the type of trend in progress. The quicker he does this, the earlier he can decide on a strategy that will offer optimal results for his style of trading.

Successful traders know there is no certainty in the markets – the best we can hope for a reasoned guess. For this reason, we surround a trade with benchmarks of what the trade should look like if it is likely to be successful, and what it is likely to do if the reverse is true. In this regard, the successful trader opts for the right timeframe to manage a trade. I have seen unsuccessful traders seek to manage an 18-day swing trade with a 15-minute chart – then bemoan the fact that they exited a trade just before the market exploded in their direction.

So, is experience our only guide? Well, experience does count. But, as traders, we can give a not so gentle push by keeping a journal; then using the journal to learn from our successes and failures. The process will expedite our learning curve.