A different type of blog post – here’s a mail I wrote to my trading coach recently (slightly edited) sharing my thoughts about my trend-following strategy:
“Dear Trading Coach,
Since our last skype call, I have done a fair bit of thinking/reflection/analysis and had conversations with several fellow traders – see my blog post here for details of those conversations. Anyways, as I am sure you can imagine, these reflective phases (which, for me, typically follow periods of losses) are quite tough mentally.
I thought I share with you some of my recent reflections.
As planned, I did some further work in reviewing the March 2017 charts to identify the ‘valid setups’ on the six instruments (4 currency pairs and 2 indices) that I had been trading. Eventually, I decided to abort checking the lower timeframes (5M and 15M) for the fx pairs for setups, even though I did trade those charts in March. This was because the charts were too unclear and messy for picking the setups in hindsight. For the indices I included 5M and 15M because those charts were easier to work with, they tended to be clearer.
As far as reversal setups were concerned, it was ok to review all timeframes for all six instruments. In the end, those instrument-timeframe permutations for both strategies came to a total of 50 setups. Once that was completed, it was then easy for me to look at the MAE (maximum adverse excursion) and MFE (maximum favorable excursion) figures for those valid setups and create some simple rules for setting stops, targets and stop-adjustments. So that was good. I figure having a structured rule-based position management approach would lower the amount of concentration and energy I need during the trading sessions.
Identified valid setups. Created some simple trade management rules. So far so good.
Forgetting about the reversal trades for a moment, I then commenced forward-testing in ForexTester trading thru the March data for the trend-following setup. Unfortunately, I then very quickly realised that I am not able to pin point setups in ‘real time’, it was just too difficult. I had to conclude that I could in fact only spot ‘valid’ setups once I saw subsequent price movements. In other words, how price behaved after the setup actually influenced my judging of the setup’s validity. This of course borders on extreme futility – in real-time trading I obviously don’t know what the future price movement will be!
Identifying the trend environment and the support/resistance levels of an instrument in real-time are not a problem. However judging the price action component of the setup (the pullback and the ‘running out of steam’) – that seems to be the challenge here.
Consequently I had to conclude that I can’t trade in this manner. If my setup is unclear to such an extent that I cannot forward test it, then I cannot determine whether the strategy really has an edge or not. Neither can I determine a good trade management approach for the trades. Regarding the reversal strategy, I feel that it is even LESS clear.
Thinking back to November, on several occasions, I said to you – “I know what I am looking for on the chart”. Some weeks later, I had some trouble/confusion when I allowed myself to trade on the basis of several permutations of price action, and then also looked for the setups on several timeframes – that was over December and January. When at one point, I did simplify things and only went for the ‘valid’ setups, I got destroyed in a big losing streak in the first three weeks of the year (which coincided with the move into the new office). Since then I have been doing my best to trade a combination of pullbacks with small momentum and/or out-of-steam candles around the EMAs, whilst using the higher timeframes for context and trend. Now looking back, this was probably not the best yield on my work time, though I do feel that my chart analysis skills have improved a good amount in 2017 thus far.
Hence, all up, right now, I feel I am back in the position where I don’t have a clear setup that I am meant to be looking for on the charts. The setup is clear enough for me to spot on the chart afterwards, but it is not clear enough for me to identify in real-time, be that in live markets or in a simulated environment – that’s obviously not good enough in order to trade!
I am encouraged by you saying that there are many traders who effectively trade this strategy profitably. It motivates me to keep on going with this strategy, and your constant encouragement that I am on the right track.
I also agree with your comment that it’s futile to jump from one system to another. You said that the issue at hand is not a system one, but that the issue is something to do with me. Having thought about that, I do actually believe that at least part of the problem is technical in nature – meaning I still need to work on refining it (though that doesn’t necessarily mean making it more complicated), rather than blaming all of it on psychological issues – not saying that there are no psychological issues at hand!
Hence I am keen to simplify and clarify my setup so that I can recognise it clearly in real time. I believe that if I can’t do that, then I don’t have a benchmark against which I can judge my trading executions, I can’t go on practice executing the setup in a testing environment, can’t develop a rule-based approach for managing my trades, and I can’t estimate the expectancy of the trading strategy.
Hence, clearly I have work to do. Just wanted to share my thinking with you, so you can hopefully understand what’s been going on in my mind.”