As a trading mentor, I speak to many up and coming traders who are looking for guidance. There are a number of things that I ask to gauge where the trader is in their learning curve. One of the main pieces of information that I like to learn about a trader is what strategy or strategies are they executing within their trading plan. The reason is I am trying to uncover how conventional they are as a trader.
The more conventional you are, the less likely you will be consistent in my opinion. Being a conventional trader means doing things like: buying and selling on signals generated by a five-minute stochastic oscillator while price bounces off a 20 period simple moving average while trending higher or lower. The reason why this does not work in the long run is because in terms of crowd behavior, stochastic readings and 20 period sma’s are irrelevant if they are not used in a way connected to actual market behavior. If you are following technical signals simply because they are present, you are not in tune with what the market really wants to do.
Then you have the people who attempt to trade on fundamentals, or base a large part of their decision on some fundamental information that the rest of the world not only already knows, but has factored into the price already. Again, conventional and far from unique.
So the question is, how does a trader become unconventional? It all starts with developing a strong understanding of market behavior. What really moves the price, and why the crowd would act a certain way in certain conditions. A trader needs to operate on a premise that is relevant to market behavior. An example would be looking to sell after a failed high is confirmed. Why? Let’s think about what happens inside of that movement. There was a break out to new highs, all the conventional break out traders jumped in because their systems told them to. What their systems did not tell them is that they just bought into a major resistance which means there are probably more sellers up here than buyers. Guess what happens next. So if you knew what prices would be attractive to sellers, and the market was trading at one of these prices, wouldn’t you want to be a seller?
So to begin to trade against the conventional traders, you need to develop a methodology that aims to identify and benefit from these repetitive market behaviors. Or you can learn from someone who has already figured this out and has a well defined set of rules that guide every part of the trade, from identification to exit. SMB has such a methodology which is applied to forex and futures on a regular basis.
One tip that may help you on your journey is this: you can use conventional tools, but you have to learn to use them in unconventional ways. Experience is a key factor here.
So what market behavior is your methodology based on? I would love to hear from you.
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Marc Principato, CMT,
*No Relevant Positions
