Ed Mamula.com

Ray Barros has posted a great series of articles on routines and habits and how they relate to the construction of a trading plan.  This is a great post and deserves to be read and re-read several times.  It highlights, among other things, the tendency of beginning traders to favor discretionary approaches rather than mechanical ones.  This preference can be quite damaging though, as beginners have not likely developed the ability to trade what they see rather than what they want to see.  This is referred to as confusing intution with “into wishing”. 

Mechanical approaches are ideal for beginners, as they force us to trade what we see as we develop a feel for the market.  In my former life as a stock and option trader, I would bounce around from one idea to the next, blowing up my account several times in the process.  The problem with such a random approach was that sometimes luck did shine on me and save me from losing…and of course these random rewards are the most addictive and difficult to reproduce.

When I shifted focus to the currency markets and became aware of all of the great tools for developing mechanical trading systems, I firmly made the mental shift that a mechanical approach would be best for me…after all, my discretionary trading had led me to a track record of 8 consecutive losing years.  You know what they say…quitters never win and winners never quit, but those who never win and never quit are idiots!

Now that I’ve focused almost exclusively on the British pound for a few years, I believe that I’m starting to develop a reliable feel for the market.  I am certainly NOT ready to incorporate much discretion into my trading plan, because the mechanical approach has worked so well, but I’m becoming more interested in how an experienced trader moves from a mechanical approach to a discretionary one and consistently outperforms the mechanical approach.

Of course, when we talk about intuition, we must carefully define the term.  The first definition on dictionary.com comes closest to what we are referring, but it is still incomplete:  “direct perception of truth, fact, etc., independent of any reasoning process; immediate apprehension.”  Well in this case, we’re not really talking about understanding that is independent of reason, but rather immediate understanding derived from unconscious integration of our experience trading the market.  It’s quite a fascinating process, but one that I’ll admit that I’m at a loss to describe the mechanics of.

All that I can do is make a note of just how long it has taken me to begin to develop a market intution and remind beginners that the goal of consistent profitability is a mountain with an unseen (and uncertain!) peak.  If your trading plan keeps you in the game long enough, your “into-wishing” just might turn into intuition after all. 

Long before I had put the Cable Glider system into production or even given it it’s name, I had always thought of trading systems as belonging to one of two broad categories.  The first one, which I call a Grinder, is a system that exploits short term statistical anomalies and derives its edge by having a high winning percentage, but not necessarily from having a greater average win than average loss.  I have toyed with a grinder type system with the Euro over the past few months, but this system is not something that I’m very confident in.  In fact, the system has generated very little profit so far, but thankfully, it hasn’t generated significant losses either.

The second category of trading system that I think in terms of is the Home Run Hitter.  This type of system derives its edge from achieving greater average wins than average losses, but not necessarily from a high winning percentage.  The Cable Glider falls squarely into this category.  I’m much more comfortable trading this type of system, but no matter how well the Cable Glider works, I continue to feel vulnerable without a stable portfolio of other systems to back it up.  I’m sure I’ve mentioned this before, but the fact that the Cable Glider has worked so well makes my other attempts at system development feel like failures, even if these other systems are marginally profitable.

At any rate, my first goal for 2008 is to create a Grinder style system that will work for the British pound.  So far, even in the context of trying to create a grinder system, I’ve found it very helpful to stay out of the markets on days of significant economic releases.  It seems to me that on these days, the market ignores technical setups to a large extent as it schizophrenically adjusts to the new data.  Right now, I have a one parameter system on the 4 hour chart for the British pound that tests as well as the Euro system that I currently have in production.  The rules are so simple it’s almost stupid, but again, the system would not work well at all without the economic release date filters to keep it out of choppy waters.

So if I could offer anything as a word of advice to aspiring traders, it would be to examine how economic releases such as the employment report, the CPI, central bank interest rate decisions, etc, affect your trading strategies.  I continue to find a dual benefit to staying out of markets on those days…a chance to preserve my capital, and to recharge my mental batteries to trade clearly….LATER…in calmer conditions.

 Good luck to all in 2008.