I've read blog posts and articles with similar titles to this one, but today, after receiving multiple questions from traders about my methods, i thought i'd take a shot at giving it my own 2 cents.
This is partially my way of responding "en-mass" to people who have emailed me..and partly a "note to self" for future reference.
When I am trading, setting levels, buying the market because i think it will go up, selling the market when i think it will go down, exiting to take profits, getting stopped out because i was wrong, either in my target level, or because the market went right thru my entry and just kept on going, I am not simple expressing "what i think will happen and taking a shot." The market doesn't care what i think (unless i was trading the fixed income portfolio at PIMCO or SAFE...which i'm currently not). But more importantly, I am taking positions that i think have the lowest likelihood of losing money, while attempting to also take as many of those positions as possible, with clear knowledge of how to determine if i'm wrong as soon as possible. My primary goal is not to make as much money as possible (well, it is, sortof). Rather, my intent is to not lose any money. If I can take positions and not lose, then the profits will just come. This is of course contradictory. The best method to "not lose any money" is simply not to trade. So, unless i have a good reason to put a position on...thats exactly what i do...i don't take a position. Some days i'll put on over 15 trades...some days not a single one.
The point is that "taking a stab" does not fall into the "lowest likelihood of losing money." Today, i talked about 2 explicit trades over twitter. The first was buying a dip below the bottom of the bell curve in what appeared to be a random market move on economic news out of Europe around 4am EST. The 2nd trade was hopping onboard an observed momentum move with a market technical reason combined with the volume momentum between 12 noon and 3pm. Both of these trades had both technical and qualitative reasons to argue for why they had low probabilities of losing money, and both were clear patterns that i was attempting to join. Both of these trades also had quantifiable signals to indicate if i was wrong. I could have held onto both trades and waited for them to be profitable and been "patient" (sometimes also referred to as stubborn). Had i done that, I would have gotten killed. I took a small loss (-5 ticks) on the first trade after my reason for the trade was violated (being patient here would have cost me an additional 11 ticks asof the close), and the 2nd trade played out exactly as i expected (+8 ticks) (actually, a little better than i expected...but my nervousness brought me to exit the trade early in an attempt to be "cute" and missed out on an additional 6 ticks). I'm not trying to be a hero, and I will almost never be the one to call the top or bottom of a large volume move. My best and most profitable trades take place after identifying a pattern and joining the pattern at an entry price as close as possible to my stop-loss price. Occasionally (rarely) I get the chance to be onboard a move before it gets qualified as a large volume move, and I try for these every chance i get. However, i never expect to call the top or bottom of a large volume move. I expect to miss the tip top, and the low tick bottom. Anything else seems folly to me..because neither PIMCO, SAFE, or the other multi-billion $ levered funds give me the heads up...and i don't think you should expect them to either.
So, what am i left with? 2 words: Pattern Recognition. The human brain is extremely adept at recognizing patterns. The trick to using this skill (and almost all traders have it) is to spend the time, put in the work and watch the market (like, every tick) until the pattern becomes clear as day for you. Only then, can you take a position to take advantage of the pattern. The true value of this approach is, if you are positioning for a specific pattern and you put in the work, you will clearly see if the market behavior deviates from the expected pattern. If it does, then you exit the position as the pattern has been broken, thereby invalidating your trade thesis. You then go back to work, watching the market, looking for the next pattern to "appear" to you. This might happen 30 seconds after you get stopped out of your previous trade, and it might not happen for the rest of the day. The point is that trading liquid markets takes a combination of discipline, focus, hard work, and excruciating attention to detail. Even if after putting in all this work, some people aren't cut out to be traders, usually because they are unwilling to follow the rules. If you are constantly getting stopped out after doing all the correct "work" then the most likely explanation is that you are trading patterns that don't really exist.
This is my trading "style." There are other styles, and they all require different skill-sets. My style revolves around the precept that I have identified a set of patterns (not just simple price volume patterns, but patterns that involve a multitude of factors). Every trader has the responsibility to find their own patterns (whatever that means to you) and trade them accordingly. If you aren't willing to do this, then you should not be surprised if the market takes all your money. Some traders will get lucky and make a lot of money...and its true...being lucky is better than being good...but for those "unlucky" ones out there, this is the only way.
So, in conclusion...size your risk units accordingly for your system of patterns, keep your emotions in check, and be patient yet fierce. As Sun Tsu said, "the time to strike is when opportunity presents itself"