The new direction of our blog has attracted a number of good questions from struggling traders, to which we are grateful because it gives us the opportunity to respond directly to people’s issues. Today we are going to address various shades of the same issue, which for lack of a better definition we shall call: “sabotaging logical rules“.
The Optimization Trap
Traders can sabotage their trading habits in the most subtle of ways. For example, we believe that trading strong, evident trends is a logical way for retail traders to tackle the markets. It seems like a simple suggestion. However, traders find innumerable ways to sabotage simple concepts.
Here is a potentially dangerous train of thought that many aspiring traders demonstrate, in the attempt to build some kind of structure around market movement:
- how can I identify trends properly?
- perhaps I should utilize trendlines and wait for price to break & pullback to the line?
- how do I know I have drawn the trendline correctly?
- perhaps using a moving average would be more useful? But which length do I give it? 5? 10?20?50? 100? And should
- it be simple? Exponential? Maybe something else?
- etc…
This thought process can lead to endless optimization and trial/error with the end effect of never making any progress. The trader will also be facing confidence issues because he is trusting a tool (for example a moving average) to do a job (identify a trend). What happens next is usually something like:
- When will the average hold?
- When will it not hold?
- What else can help me identify potential false breaks?
So once again the trader can be lured into endless permutations and the story can drag on forever.
Keep it Simple to Avoid Sabotage
The key to keeping your trading approach simple yet subtle enough to keep you on the right side of the market is to ask yourself the correct questions when approaching the building phase. Here are some of the questions and considerations that I have seen traders sabotage their progress with:
- How do I get the entry right?
- How can I pick the perfect trade?
- I’m going to study what I do over & over again trying to weed out imperfections.
Instead, here are some questions and considerations that help avoid sabotage:
- Does this approach make sense?
- Why does it work?
- Can I strip it down to the basics even more?
If you can uncover the principles behind what you do and why you do it, you will not even need to backtest your method. You will simply need to wait for the situations where the conditions are met.
The Proof is in the Pudding
Now let us apply these correct questions to the example from above: you want to trade trends.
If we had wanted to play the recent Cad strength, which pair would have offered the better odds? Which trend is more evident?
I hope you said “the one on the right”. Playing Cad strength vs. USD weakness up until NFP last Friday was a great trade and yet you don’t need any indicators on your chart to visually promote UsdCad over NzdCad (and any other Cad pair to be honest).
Let’s use another example: if we had wanted to play NZD strength, which pair would have offered the better odds?
Once again, I hope you answered “the one on the right” because USD has been weak across the board for longer and the trend was more evident.
Why does trend trading work? I can give you 3 good reasons:
- retrail traders are typically fading trends
- strong trends usually stem from strong fundamental drivers
- trend trading directs your mind towards letting profits run
Over to You
Always ask yourself why a certain thing should work. Strip it back to a blank canvas and just learn to pay attention. This is the essence of trading what you see, and avoiding sabotage.
by
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.