In the last installment we covered the mythical vs practical notion of “The Holy Grail”–how perfect systems do not exist but that an optimal conjunction of method + trader + technology might be the closest you will ever get to your developing your own personal “holy grail.” In short, every successful trader or investor has something that typically works only for him or her, a mode of practice that suits the trader’s distinct personal skills, temperament, knowledge, and means.
In this installment, we’re going to talk about what it means to “see” the markets from a big picture perspective. Seeing too much may slow down your ability to react & take action; while seeing too little may make you vulnerable to surprise market movements.
Principle #3 – Trade Tactically But See Strategically
Strategy relates to the big picture – it is broad, an overview of events on the horizon. Tactics relates to matters at hand – it is specific, a close look at the events as they are happening. You can be a skilled strategist but lousy tactician; likewise, you can be a great tactician but poor strategist.
When it comes to trading, you need both skills in order to see what’s happening in front of you, around you, and way ahead of you. This is easier said than done. And every trader has fallen into at least one of the following personas.
Simon the Sideswiped
Simon finds the perfect short-trade setup in a tech sector semiconductor ETF. He pulls the trigger with a large position. The trade initially works out but then begins to mysteriously stall for an hour or so. Suddenly the ETF jumps skyward three times its standard daily range, taking Simon’s trading account with it. Simon was under the assumption that all fundamentals were evident in the technical price action. Too bad he didn’t realize that it was FOMC announcement day.
Mia the Myopic
Mia went long several ag futures as her daily chart exhibited a strong uptrend. She used the hourly chart to fine-tune her entry, going long a breakout and expecting the trend to continue. At the end of the day, corn futures saw a steep, sudden, and violent plunge. Had she checked the weekly and monthly charts, perhaps she would have realized her “uptrend” was merely a downtrend correction, and she got in right at the top.
Farley the Far-Sighted
Farley is a fundamentally-based investor who decided to go long an asset after a 20% pullback from current peak to current trough. Farley believed that pullbacks can often present good buying opportunities if an asset’s underlying fundamentals are strong. He was right, but only from a long-term perspective. The asset continued to decline for the next several days. Once the asset reached a 45% pullback, he decided that his losses were too much for to bear. He decided that his fundamental outlook was flawed. So he closed his position. Once the pullback declined to 50% of its current peak-to-trough value, it started to rally, exceeding Farley’s original entry point.
- Strategically, Farley was right on–the asset had strong fundamentals.
- Tactically, it might have helped Farley to know something about Fibonacci levels, as every technically-savvy investor waited for price to reach a 50% to 61.8% retracement before jumping in. Sorry, Farley.
Carley the Cart-Before-Horse Trader
Carley had the potential to become a highly-skilled day trader. A walking encyclopedia of trading tactics, she was quick to assess market opportunities and capable of executing trades with speed and precision. Her only drawback was that she had a small account as she was just starting out. So when she started trading a method that generated 5 to 10 trades per day, she realized to her dismay that she couldn’t make it to the end of the week when the method hit a temporary losing streak. Losing streaks are not predictable, and although her method might have been profitable “on average,” that average might contain periods of losing streaks. The problem: like a competitor who focuses too much on offense and not enough on defense, she focused too much on trading technique, setups and executions and not enough on money management.
Always Keep an Eye on the Big Picture or Risk Getting Sideswiped
If you’re a technical trader, pay attention to fundamental developments. If you’re a fundamental trader, learn something about technical setups. If you trade trends, try to see the larger trend context. And if you are focusing on market action, don’t neglect the intermediate-term effect it can have on your capital. Make sure you are always aware of the big picture context around you. In short, take your blinders off.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.
Disclaimer Regarding Hypothetical Performance Results: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.