What It Takes To Succeed IV

BarroMetrics Views: What It Takes To Succeed IV

In the preceding posts, I looked at the ‘generic’ factors for trading success. In the next we’ll look at the specific factors,  what Dr Elder calls ‘method’ ‘money’ and ‘mind’.  I like to use the ‘formula’:

Plan with and Edge (method) x Risk Management (money) x Winning Psychology (mind) = Success.

The multiplication sign is important because it highlights that success is a function of the weakest element in the chain. If you fall below the pass mark for any of them, then failure in all of the chain must result. Each of these has its essential elements.

Let’s first look at  ‘method’ but before I do that, I’d like to consider the role of ‘context’.

Plans can run the gauntlet from mechanical system to ‘gut’ trading. Figure 1, courtesy of Three Skills of Top Traders, shows Pruden’s view of this range and the relationship with state management. He feels that the mechanical trader is best served with simple rules; moreover, he takes the view that the mechanical trader has the lowest need for state management. While I agree that may be the case for entry, it’s not the case when a mechanical system shifts into drawdown mode: when a system is experiencing loss after loss, the trader needs high state management. But that’s merely an aside – let’s get back to the main point.

I take the view that ‘context’ allows a discretionary trader greater flexibility in selecting low risk trades. As an example. let’s take the current AUDUSD situation:

  1. Figure 2 shows the 12-month swing. We see a possible Triangle Change in Trend Pattern forming. The ‘e’ leg of a Triangle will either fail to reach the trendline or will end a ‘throwover’.  If that’s the case, how do we know that the Triangle is complete? The great thing about Triangle completion is the strong impulsive thrusts in the direction of the new trend.
  2. Figure 3 is the 13-week swing chart.  We see a possible completion patten on Aug 10. The following week we see a strong thrust down So far all seems well with the TRI CIT scenario. BUT…. last week… the move down slowed. Now it’s true that in another context I’d treat last week’s price action as a bearish bar because:
  • there was an attempt to rally
  • that rally failed and
  • we then saw the market push past the open and close near the lows. But in the TRI CIT context……..we have a problem.

3.  The problem is we saw a range and volume for the week that was below normal. In this context, this price action  throws doubt on the idea that the Triangle is complete. As a result. if short, I’d be covering the whole position (I did) or at least a substantial part of it.

This is the power of context: the flexibility to determine, within the happening environment, whether a pattern is bullish, bearish or neutral.

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FIGURE 1 Trading Plan

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FIGURE 2 AUDUSD 12-M Swing

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FIGURE 3 AUDUSD 13-W Swing

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