Instructor

Anyone that decides to take trading to a professional level and not just as something to dabble in has to decide in what fashion he will engage the market. There are many styles in which traders are told they can profit. For example, some market speculators refer to themselves as trend followers, while others only jump on trades when the market is exhibiting high velocity, or momentum as its commonly referred to in the business. Later, well explore some of these methods the pros and cons and the common thread that all profitable trading has in common.

Another important aspect to understanding what type of trading you want to pursue is the amount of time spent in the market. Some people just dont have the temperament to be in the market every day, several times a day. For those folks, swing or position trading might be a better fit. For readers that dont understand these terms: Swing and position trading are styles of trading that involve holding positions beyond an intraday period (and yes, this does include futures contracts). Understanding what works or doesnt work for each individual trader seems trivial, but it is more important than you think.

I have seen too many traders fail because the style of trading they attempted didnt fit their makeup. For example, a type A personality would probably do better at high speed intraday trading as this go-go-go individual would typically not have the patience to wait a long time for a setup to come along, or hold on to a trade for any lengthy period of time.

Conversely, those that do orderly work, such as an accountant or engineering, would most likely fair better trading in longer term time frames as they are wired to do thorough analysis before they feel comfortable making any kind of decision. This can be a good attribute, but can also be detrimental if they fall into the paralysis by over analysis camp. Another issue this cohort of traders has to contend with is the fact that in their realm, everything is black and white there is no gray area. In other words, five plus five will always equal ten in this arena, whereas in the financial markets, often times things are not what they seem.

One of the most popular styles of trading is trend following. Most of you Im sure know how it works. However, as easy as this method of trading is purported to be (you know, just jump in on the direction of the trend and youll make money), executing it is much more difficult. One of the challenges for many traders focused on trends is recognizing when the trend is changing and having the patience to wait for the retracements to enter on a low risk basis.

Below, we see a very nice uptrend in the Eurodollar futures contract. Notice that in the entire uptrend, there were only a few low risk buying opportunities (which Ive highlighted), unless you have the stomach to sit through the pullbacks, and are willing to give back some profits when the trend finally changes.

Figure 1

One tenet that must hold true, regardless of the strategy that is being implemented, is that trades can only be taken if they are low risk, high probability, and have a reward of at least 3 units of the amount risked.

One way to accomplish a low risk entry and catch a trend before it turns is to buy and sell at extreme highs and lows. This is part of the core strategy that we teach here at Online Trading Academy. Some traders refer to this as a mean reversion strategy in which the market is stretched to the point where the momentum becomes unsustainable and the odds increase substantially for a trend reversal at qualified supply or demand levels.

An illustration of this can be seen in the Russell 2000 as it reversed a steep downtrend when it touched a major level of demand at the beginning of October.

Figure 2

These trades offer the biggest reward for the lowest risk, but keep in mind that you are buying in a downtrend and selling, or shorting, into an ongoing uptrend. This strategy is also challenging for many as it runs counter to every trading notion that has been published or talked about in the trading community.

At the end of the day, you have to find the strategy thats right for you and only you. It has to be in alignment with your available trading hours, risk temperament, capital allocation, and financial goals. And lastly, dont lose sight of what the essence of long-term profitability is: Low risk, high probability, and high reward.

Until next time, have a great week.

If you have questions or comments, please email me at gvelazquez@tradingacademy.com .