The Secret To Trading Well

Last week in my Day Traders Manifesto I mentioned that tactics are more important than analytics. That’s a topic worthy of deeper discussion. Basically when we are doing analytics we are asking the question -- What do I think will happen? When we are dealing with tactics the question becomes -- What will I do if XXX occurs? Between the two the second question is much more important when it come to trading.

If you were to record my daily trading brainstorm sessions with Kathy you would burst out in laughter at how wildly inaccurate our forecasts may be. Sometimes we are wrong about data, sometimes we misread sentiment, sometimes we are simply blindsided by unexpected events. My point is that even informed traders are wrong a lot. Just watch CNBC for a week and meticulously record every tradable prediction. My guess is that the win/lose ratio will not be much better than 50/50.

That’s why tactics are so important. Tactics basically come in after the forecasting decision has been made and they involve every other aspect of the trade -- from stop and take profit considerations to entry criteria, to trade management plans, to reaction to market conditions. A recent trade in short AUD/NZD that we put on in our BK signal service is a good example of tactics at work. We sold the pair at 1.2270 and it moved towards our first profit target of 1.2240 several times during the European and early North American trade but just missed making the target by 1 pip each time. At that point I made a decision to take half the trade off at +25 and move to breakeven.

Eventually the pair did slip lower and made our first target, but then quickly rebounded when the New Zealand labor data came in much weaker than we thought. So was that a good decision? you betcha. It cost me 5 pips to save 120 (the size of our stop on 2 units). I would do that anytime. Tactics are often the difference between winning and losing in FX. We are all wrong a lot -- they key is to know what to do when your plans blow up in your face. The key to trading is tactics, not analytics.

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Boris Schlossberg

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