"The Tricks of the Trade" Seminar
"Practical Trading"
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In this section we will discuss the more practical aspects of futures
trading. I wish to make the following preliminary points first of all:
Method should make sense to you!
Whatever method you adopt as a trading strategy it should make sense
to you and you should feel comfortable with it otherwise you are not going
to stick with it during difficult trading conditions. It is no good if
I were tell you that the only way to trade was using astrological cycles
to predict the markets if you do not believe in or feel comfortable with
such an approach. You may be of a mathematical bent and wish to follow
complicated osciallators, or alternatively you may wish just to watch a
raw tick chart of the market action as it unfolds. Each to his or her own!
There are as many ways of trading as there are traders and there is no
one right way.
Market Context
When analysing the markets it is important that you bear in mind the
market context. That is, is the market currently trending or is it rather
aimless? Is it volatile and unpredictable or is it moving very smoothly?
The condition of the market is an important factor in your trading decision
making process: if the market is too volatile or is completely directionless
then trading is going to be harder than if the market is moving smoothly
and strongly in one direction. Also, if there is a strong directional bias
then you may very well not wish to take trades against the prevailing trend
direction.
Quantifying and Controlling Risk
One of the most important considerations before you place a trade is
quantifying the risk that is involved. It is no good when putting on a
FTSE trade for example, saying "well I only have a small account and
I don't want to risk very much so I will put my stop loss 4 ticks away
and risk £100". The market does not care what size account that
you have and if it wants to move more than 4 ticks against you it will.
Stops should be ideally placed at a certain market price for a good reason.
For example, if going long, you may well look for a support level and place
your stop below that. This may be something as simple as a pivot low on
a 5 minute bar chart but at least it is there for a reason. This way the
amount that you are risking is known before entering the trade and if it
is too much for your account size to bear then don't take the trade, it
is as simple as that. There will be plenty of other opportunities coming
along shortly and it is better to wait.
Quantifying the risk before hand also gives the trader the chance to
assess the risk reward ratio before placing the trade Ask yourself, what
sort of profit you are looking to make. If it is not significantly greater
than the amount you are risking then it is not worth taking the trade.
After all, one needs a good incentive to hold something as risky as a futures
contract for any length of time!. Later on we will be discussing different
trades and assesing their risks and potential rewards.
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