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Just One Side of the Trade
Let’s face it. Whether you are constructing a complex multivariate econometric model or simply looking at a 5 minute chart there are only two ways to trade. You can trade momentum -- i.e. trend or you can pick tops or bottoms. It doesn’t matter what instrument you follow -- from the simplest common stock or plain vanilla currency pair to a CDS or a swapoption, the mechanics are all the same.
Here is the catch however.
You have to decide ahead of time what kind of trader you are. Why? Because most traders are not psychologically capable of changing styles in mid-market. Basically you either buy breakouts or fade them. More importantly you have to accept the consequences of your choice. In choppy markets momentum trades gets decimated and sometimes the best thing for a trend trader to do is to set aside until direction re-establishes itself. In strongly trending markets every pause is just an invitation for range traders and to take away their money as the market squeezes them higher or presses them lower.
The worst thing in the world to do however, is to change tactics in mid-stream. I know that better than anybody, because although I am a momentum trader I will sometimes succumb to the temptation of selling tops and picking bottoms and will inevitably lose money in the process.
The key to sticking to your style is to understand and more importantly to expect when you will lose money. The reason most traders alter their approaches on the fly is because they are frustrated by the losses of their strategy. But by constantly changing tactics however, they only exacerbate their problems. Instead of constantly changing how you trade, it is much more productive to seeks out an instrument that is conducive to your style. In FX for example buying breakouts in cable is generally a sucker’s bet, but following flow in euro works much better.
Know your style, know your instrument, know yourself and you will have a much easier time mastering the game.