Direction is everything.

[meanreversion]

For any trading strategy where instruments are bought/sold for an anticipated outright directional advantage, a means of assessing the likely directional bias is not only sensible, it’s vital. When you’ve got it right, you have the confidence to both initiate your position and utilise the on-going feedback necessary to manage your position sensibly. When you get it wrong, it’s even more important that you have a directional bias. The getting it wrong bit is where your money management and risk management come into play and you limit your downside. It doesn’t mean you’re assessment is wrong – yet. It may just mean your timing was off.

When I review my trades, I can often spot where I’ve taken a view on direction and traded accordingly when in retrospect, as I sit back from the chart, sobbing quietly, I acknowledge I was completely out of whack with the market. However, because I was trading with what I believed to be the trend, this (misplaced) confidence and the initial expectations of being on the right side enabled me to generate a small profit rather than pass on a no trade or even suffer a loser. If you’re carefully managing your trades with confidence you can take a Bull blip out of a Bear run without realising you’ve just bucked the trend. I’m not suggesting this as a gold star strategy – just a personal admission that even when you get it wrong (which for comfort and sense, should be less often than you get it right), you still get to manage your position intelligently and can, more often than not, snatch if not a victory, at least a few pennies from the jaws of defeat.

How you decide upon assessing a directional bias is up to you. How you identify timing opportunities is up to you.

Price action alone will do for some. I’m fairly old fashioned in this respect and reckon it’s pretty much all there for you on the chart without too many inds, though I do carry a few just for contrast and amusement. While I used to believe that the longer term timeframes were the ones that dictated (any) directional bias, my views have modified somewhat over the years. While it’s obvious the fundamentals are reflected in the longer TF charts, they matter less to you on your trading TF than do those TFs below your trading TF. If I want to know what time the train is going to reach this piece of track to which I’ve been tied, I’m less interested in what time it went by yesterday than I am in looking down the track to see what’s coming my way, today, right now. If you’re trading the hourlies, why would you imagine the H4 or Daily has anything to tell you about what’s going to happen next? It may (and more importantly may not) have some leverage on upcoming action. But there’s no mistaking the M30 is telling the hourly, and the M15 is informing the M30…I’d recommend looking at what’s coming down the track toward you (and your trading TF) – not in the other direction.

Other bods will quite happily use just a MACD or CCI above a specific value or require only that the slope of these (or other) indicators regardless of their level is supportive of their view.

While still others need the equivalent of a six-pack of multi-hued squiggles before feeling confident.

The problem with adding additional indicators to your price chart is that you have to start considering them. Otherwise you have to get rid of them as they serve no purpose.

And the more indicators you require to line up to confirm your view, the later you will get into the move, the smaller will be your slice of the action and the lower your gains relative to your risk. You’ll also, in theory, have fewer trades and fewer losing trades. Your winning trades will net you a smaller, but surer profit. It’s the perennial Risk:Reward issue and relates, as has been alluded to by other posters, far more specifically to personal trader personality/psychology than it does to any objective trading strategy.

Other traders will take the higher risk and bag more losing trades in order to get in earlier and capture more of the move on their winning trades.

There isn’t one correct way. You will, if you’re serious about trading, have assessed your trading strategies across the entire spectrum of risk:reward and the bottom line is, unsurprisingly, the bottom line. If getting in earlier nets you bigger wins on winning trades, and a lower percentage of winning trades, but an overall better bottom line than the next safest option, that you would think should be sufficient to convince any trader. But trading personality/psychology plays a far more significant role than does objective review of P&Ls for various strategies. Not realising that is where many come unstuck. The bottom line tends to be the last thing on most novice traders’ minds when they are trying to justify why they didn’t wait until they got all their ‘signals’/waited too long after they got all their ‘signals’ for entry/exit.

On a personal note, I would suggest there are a couple of possibly bigger questions than the OP poses (no disrespect Split). The first is not so much about assessing which directional bias has the higher probability, but whether there is any bias at all at the current time and dependent upon that, a systematic method of assessing the possibility of profitably moving to trading a structured derivative of that/those instruments (high/low volatility without specific direction over trading time has its own games). The second, what is the market offering you in terms of risk:reward? There are times when it is generous and times when it makes you work really hard for a 1:1. If you can assess that, in advance, then you are in fairly good place to decide when and if to play and on what terms. This does of course suggest a trader who is not in the thrall of the innate trading personality/psychology which they brought into the game in the beginning and to which many stick like glue, and make decent profits too, I’m not knocking it. But the trader who knows when he/she is taking a higher risk trade because it is appropriate to do so in the given circumstances and when it is sufficient/prudent to wait for a more advantageous/safer spot is one who has been able to trade their entire game up a degree. And that opens up a whole new dimension.

Mr TheBramble, good post, I don't recall seeing your username before. I have to ask, were your previous 6k posts all of this length ...

 

[MrGecko]

For any trading strategy where instruments are bought/sold for an anticipated outright directional advantage, a means of assessing the likely directional bias is not only sensible, it’s vital. When you’ve got it right, you have the confidence to both initiate your position and utilise the on-going feedback necessary to manage your position sensibly. When you get it wrong, it’s even more important that you have a directional bias. The getting it wrong bit is where your money management and risk management come into play and you limit your downside. It doesn’t mean you’re assessment is wrong – yet. It may just mean your timing was off.

When I review my trades, I can often spot where I’ve taken a view on direction and traded accordingly when in retrospect, as I sit back from the chart, sobbing quietly, I acknowledge I was completely out of whack with the market. However, because I was trading with what I believed to be the trend, this (misplaced) confidence and the initial expectations of being on the right side enabled me to generate a small profit rather than pass on a no trade or even suffer a loser. If you’re carefully managing your trades with confidence you can take a Bull blip out of a Bear run without realising you’ve just bucked the trend. I’m not suggesting this as a gold star strategy – just a personal admission that even when you get it wrong (which for comfort and sense, should be less often than you get it right), you still get to manage your position intelligently and can, more often than not, snatch if not a victory, at least a few pennies from the jaws of defeat.

How you decide upon assessing a directional bias is up to you. How you identify timing opportunities is up to you.

Price action alone will do for some. I’m fairly old fashioned in this respect and reckon it’s pretty much all there for you on the chart without too many inds, though I do carry a few just for contrast and amusement. While I used to believe that the longer term timeframes were the ones that dictated (any) directional bias, my views have modified somewhat over the years. While it’s obvious the fundamentals are reflected in the longer TF charts, they matter less to you on your trading TF than do those TFs below your trading TF. If I want to know what time the train is going to reach this piece of track to which I’ve been tied, I’m less interested in what time it went by yesterday than I am in looking down the track to see what’s coming my way, today, right now. If you’re trading the hourlies, why would you imagine the H4 or Daily has anything to tell you about what’s going to happen next? It may (and more importantly may not) have some leverage on upcoming action. But there’s no mistaking the M30 is telling the hourly, and the M15 is informing the M30…I’d recommend looking at what’s coming down the track toward you (and your trading TF) – not in the other direction.

Other bods will quite happily use just a MACD or CCI above a specific value or require only that the slope of these (or other) indicators regardless of their level is supportive of their view.

While still others need the equivalent of a six-pack of multi-hued squiggles before feeling confident.

The problem with adding additional indicators to your price chart is that you have to start considering them. Otherwise you have to get rid of them as they serve no purpose.

And the more indicators you require to line up to confirm your view, the later you will get into the move, the smaller will be your slice of the action and the lower your gains relative to your risk. You’ll also, in theory, have fewer trades and fewer losing trades. Your winning trades will net you a smaller, but surer profit. It’s the perennial Risk:Reward issue and relates, as has been alluded to by other posters, far more specifically to personal trader personality/psychology than it does to any objective trading strategy.

Other traders will take the higher risk and bag more losing trades in order to get in earlier and capture more of the move on their winning trades.

There isn’t one correct way. You will, if you’re serious about trading, have assessed your trading strategies across the entire spectrum of risk:reward and the bottom line is, unsurprisingly, the bottom line. If getting in earlier nets you bigger wins on winning trades, and a lower percentage of winning trades, but an overall better bottom line than the next safest option, that you would think should be sufficient to convince any trader. But trading personality/psychology plays a far more significant role than does objective review of P&Ls for various strategies. Not realising that is where many come unstuck. The bottom line tends to be the last thing on most novice traders’ minds when they are trying to justify why they didn’t wait until they got all their ‘signals’/waited too long after they got all their ‘signals’ for entry/exit.

On a personal note, I would suggest there are a couple of possibly bigger questions than the OP poses (no disrespect Split). The first is not so much about assessing which directional bias has the higher probability, but whether there is any bias at all at the current time and dependent upon that, a systematic method of assessing the possibility of profitably moving to trading a structured derivative of that/those instruments (high/low volatility without specific direction over trading time has its own games). The second, what is the market offering you in terms of risk:reward? There are times when it is generous and times when it makes you work really hard for a 1:1. If you can assess that, in advance, then you are in fairly good place to decide when and if to play and on what terms. This does of course suggest a trader who is not in the thrall of the innate trading personality/psychology which they brought into the game in the beginning and to which many stick like glue, and make decent profits too, I’m not knocking it. But the trader who knows when he/she is taking a higher risk trade because it is appropriate to do so in the given circumstances and when it is sufficient/prudent to wait for a more advantageous/safer spot is one who has been able to trade their entire game up a degree. And that opens up a whole new dimension.

What you are really trying to say is that the plane takes off.

 

[MrGecko]

My own view on the OP is that of course direction matters. The direction of what changes according to the instrument you are trading - it could be spot price like most here, or the ratio of some prices (as in basis trading / spread trading / stat arb), or volatility, the list goes on.

The bottom line, for me, is that to speculate one has to:

a) find something to speculate on
b) find the instrument (or plural) that lets you trade it
c) pick a direction and put it on.

I am not saying direction is the be all and end all, but you certainly can't take any risk, and make any money, without it.

 

[forker]

Direction is important if you planning on holding trades for a extended period of time. This type of trading is heavily weighted on fundamentals.

I am probably going to get some stick for what I am about to say. I wouldn't expect anything less from T2W members TBH. Speaking from my own experience, aligning my analysis so that it sits on the same page as the majority of the Market is far more important than direction. For starters I follow fundamentals because thats what ultimately determines sentiment. Secondly I enforce an obvious analysis approach. In other words, I don't follow magical indicators or strategies that reality aren't being used as decision makers by the majority. I stick to obvious support\resistance levels and nothing else.
Sentiment + obvious price levels = more success than not. This is my formula for trading and it works. What's the point in using methods that the majority are not using because it leads to more failure than success.

Focusing on direction as the primary factor in trading is not nearly enough for success from a day\swing traders point of view. Sure if you plan on holding a position for weeks to months then direction is everything. But let's face it how many of you employ this approach? Unless you have a sizeable account, such an approach needs to factor in the risk of price retracements. You will need to employ a smaller position size approach and be prepared for longevity because your account wont grow very quickly due to position size and frequency of trades.

 

[tomorton]

Direction is everything when you get it right, stop-loss is everything when you get direction wrong.

 

[Splitlink]

Direction is everything when you get it right, stop-loss is everything when you get direction wrong.

Tom, direction is everything, period. Nothing else is any good without it.

Stop-loss is a stop-gap measure to reduce the pain of being wrong.

 

[forker]

Stop-loss is a stop-gap measure to reduce the pain of being wrong.

I always thought stops are there to protect your capital. You make stops sound like a psychiatric remedy for unbalanced individuals

 

[DionysusToast]

Speaking from my own experience, aligning my analysis so that it sits on the same page as the majority of the Market is far more important than direction.

This is of course true - if you have the correct definition of "Majority"

1) Majority of traders
2) Majority of money

 

[forker]

This is of course true - if you have the correct definition of "Majority"

1) Majority of traders
2) Majority of money

Number 2

 

[Splitlink]

I always thought stops are there to protect your capital. You make stops sound like a psychiatric remedy for unbalanced individuals

Stops are there for when you have the direction wrong. Having them there and getting them triggered does not make the trade a good one although some are quite pleased that they have "only" lost so much.

Mr Market likes stops and triggers as many as possible. While you are protecting your capital he is picking away at it, if he can. He gets fat like that.

 

[tomorton]

There are strategies that make their success long-term by wilfullly ignoring direction. In such cases, the stop-loss is essential. But even when you have the direction right, the exit, such as via trailing stop-loss, is what gets the money into the bank.

 

[Splitlink]

The trailing stop-loss is a different thing and I cannot argue with that because it is locking a profit in.

 

[wackypete2]

You make stops sound like a psychiatric remedy for unbalanced individuals

What's wrong with us?

Peter

 

[counter_violent]

Stops are there for when you have the direction wrong. Having them there and getting them triggered does not make the trade a good one although some are quite pleased that they have "only" lost so much.

Mr Market likes stops and triggers as many as possible. While you are protecting your capital he is picking away at it, if he can. He gets fat like that.

Everything said in this post is at complete odds with the opening post.

If you know that Mr Market operates in this manner ( likes to trigger stops, as many as possible ) Then you are not seriously trying to suggest that by having stops in the market, that you are somehow protecting capital. Mr Market is not taking this money...rather, this money is being given away.

 

[forker]

You being serious. The market hunting stops. 5hit If I knew that I wouldn't have gotten into this business in the first place. What's the point of placing a trade if the market is just going to stop hunt it..

 

[counter_violent]

You being serious. The market hunting stops. 5hit If I knew that I wouldn't have gotten into this business in the first place. What's the point of placing a trade if the market is just going to stop hunt it..

Is this for me ?

 

[forker]

Is this for me ?

Na for split

 

[Splitlink]

You being serious. The market hunting stops. 5hit If I knew that I wouldn't have gotten into this business in the first place. What's the point of placing a trade if the market is just going to stop hunt it..

You just put your finger right on it. What's the point of having stops that are almost certain to be stopped? Haven't you ever placed a trade to see it go into profit, only to end in a loss? This is because the stops are too close and the Mr Market goes up and down clearing the whole lot out.

Now, if you put your stops farther , then, you have the direction wrong but you hope that it will correct. So you are between a rock and a hard place. Where the market takes out close stops is the "noise" area. That is acceptable and you should not put a stop there because it will go, nine times out of ten. If it goes outside of the "noise" then the direction is wrong and the trade is void.

This may sound daft but it's the way I see it.

 

[forker]

You just put your finger right on it. What's the point of having stops that are almost certain to be stopped? Haven't you ever placed a trade to see it go into profit, only to end in a loss? This is because the stops are too close and the Mr Market goes up and down clearing the whole lot out.

Now, if you put your stops farther , then, you have the direction wrong but you hope that it will correct. So you are between a rock and a hard place. Where the market takes out close stops is the "noise" area. That is acceptable and you should not put a stop there because it will go, nine times out of ten. If it goes outside of the "noise" then the direction is wrong and the trade is void.

This may sound daft but it's the way I see it.

I guess you and I will agree to disagree on this matter.

 

[Splitlink]

Everything said in this post is at complete odds with the opening post.

If you know that Mr Market operates in this manner ( likes to trigger stops, as many as possible ) Then you are not seriously trying to suggest that by having stops in the market, that you are somehow protecting capital. Mr Market is not taking this money...rather, this money is being given away.

How are these posts at odds? If the stops are inside the volatility, depending on the average bar length, isn't the trader virtually giving money away? You have to face two alternatives, as I said to Forker.

1) Have your stop outside the "noise".

but

2) If your stop is outside the noise your direction is wrong. You might as well cut it ASAP.

All this is one reason for the title of this thread.

Direction is everything. Stops are a necessary evil. I'm not preaching that traders should operate without them but I, personally, am out of a trade before I allow a stop to be hit.