Success and The Trader II

BarroMetrics Views: Success and The Trader II

If I were forced to come up with an answer to the question: “what are the main distinctions between a professional and retail trader?”, I’d say:

  1. The professional is willing to accept uncertainty with all the discomfort that this brings and
  2. The professional knows when ‘to hold them and when to fold them’.

There is, of course, a link between the two.

Turing to the first quality:

The retail trader takes a view about the direction of the market, determines his entry, stop and target…..and that is where the thinking ends. The professional thinks in terms of scenarios and on any given moment within his timeframe (day, 60-minutes etc) assesses the most likely and most favourable. He then determines the likely direction of the market, determines his entry, stop and target ….BUT this is NOT where the thinking stops.

The professional is continually re-assessing his view in the light of the information that the market is presenting.

This is easier said than done: since the market is fractal and chaotic, the professional needs to assess the probability that the information is relevant to his timeframe. One way of doing this is to wait for his period to end, e.g. wait for the end of day bar to complete; another way is to attempt to pre-empt the end his period, by taking signals in the shorter timeframe. Both approaches involve trade-offs.

  • If we wait to the end of the period, we may face too large a bar for entry since the reward to risk would not be favourable e.g. the S&P’s price action on Aug 29.
  • If we pre-empt, we run the risk that the earlier signal will not carry through to our time frame, e.g. the S&P’s price action on Aug 30.

Here’s where market understanding provides help. Both Wyckoff and Market Profile provide insights into the nature of price action. I am not talking about what is normally taught to newbies e.g. moving average cross over systems. These approaches tell us nothing about the nature and structure of markets. I am talking about the deep understanding that remains constant while giving the trader the necessary insights to change his tools as markets change: in short, the principles remain timeless while the application tools change as technology and market conditions change.

It was the understanding of how QE had changed the underlying conditions that enabled me to avoid the drawdowns that many funds have experienced. If my knowledge had been about tools rather than principles, I doubt if I would have been able to make the necessary changes.

I’ll deal with ‘hold them and fold them’ tomorrow.

3 thoughts on “Success and The Trader II”

  1. Good thoughts, Ray. More wisdom from Kenny Rogers:

    “You shouldn’t count your money,
    Sittin’ at the table,
    There’ll be plenty time for countin’,
    When the deal is done.”

    I find that when I think about the dollar amount of profit or loss during a trade, it’s only a distraction. This presumes a sound money management strategy has been worked out prior to execution of the entry, of course.

  2. Incidentally, I found a near-textbook Wolfe Wave that has set up on the 60 minute ES (combined session). It’s targeting 1180 Friday morning around NFP.

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