» Intuition and Trading Blog for Trading Success: Ray Barros

BarroMetrics Views: Intuition and Trading

A Pete Steidlmayer saying: ‘most traders want to operate at 120% effectiveness; the reality is we need be satisfied with a consistent 60%’.

Well there wording is not exact but the meaning is. Pete was saying that too many traders expect to operating at peak effectiveness all of the time and that this is just not possible. The problem with the expectation is it gets in the way of our trading. It’s better to accept that we will, more often than not, make mistakes; as a result, we’ll lose money; and, by being aware that this will happen, limit the loss.

For me, this is well illustrated over the Chinese New Year Break.

I had taken the view that the EURUSD’s 18-day trend (monthly trend) was down and that we were unlikely to continue heading South. I had been looking for a rally to the 1.3900 to 1.3940 area but on Monday, the Euro broke below support. Now normally I don’t take breakout trades, and I put this trade down to the fact that I was trading in the Sydney time zone and unused to time difference.

That may be true but I do note that I did decide to stay in even though the bar failed to accept prices at or below the breakout point. Moreover the diary entries show that I my initial (intuitive) response was to say that the EURUSD was probably forming a Spring CIT; given that, it would be best to exit first - since I had sold a break and therefore had poor trade location - and re-short should the breakdown prove genuine. The entry then goes on to note ‘reasons’ why I should hold the trade.

On Monday, I did add to the original shorts when the market rejected off the top of the Primary Buy Zone 1.3642 to 1.3617 with stops above 1.3857. (The diary shows I did not give the Spring enough consideration). But as the EURUSD started to accumulate steam and momentum, my overriding feeling was that I had seen a valid Spring and that I needed to exit. Exit I did around 1.3717. If we see 1.3857. that’s a saving of 140 points. Of course we may not - the market can and will do anything. But given the Spring, it is more than likely we’ll see that price.

The point I am making is the original decision to stay in was not the best one in the circumstance. The same can be said about the decision to add to the position. On the other hand, whatever happens in the next few days, the exit last night was appropriate. This decision was the product of my intuition rather than a rational pre-planned response.

There is a chance the rally could be a bear trap; but on my end-of- day assessment (i.e. rational assessment), the probabilities favour prices above 1.3857. This means that the preparation prior to last night’s trading provided a basis for action - this is true even if I had not given the Spring the conscious attention it deserved. By willing to accept I am going to trade below 100% efficacy, I find I have greater flexibility and openness to current market information. This contrasts with holding on to a position in the face of contrary information.

Figure 1 shows the picture at the end of Frida’s trading. Figure 2 shows the EURUSD current to today’s trading.