The 2 Essential Trading Skills

JDW1411

Newbie
4 0
In this blogpost we will discuss two types of strategies
that every trader or money manager needs to have in place
in order to be successful: offensive and defensive strategies.

A week ago I was playing a match against a friend in San Francisco.

The first set I lost 4-6.
In the middle of the second set when I was behind 3-4,
it occurred to me that I was losing a lot of points on
my second serve. I changed my strategy.
I decided to swing for it hard with my first serve
and use a reliable but slow second serve.
As a result I won that set 6-4, to go on and
went on to win the following set 6-0.

Success!

Game, set, match.

That simple tweak in my game had a huge payoff.

The same principle applies in trading.

In essence, the task of every trader is two-fold:
maximize your profits AND minimize your losses.

Usually most traders are either good at one or the other,
but in reality we need both to win.

Two different sets of strategies are required,
and they deserve an equal amount of focus and developed skill.
In the past, I was always good at maximizing my profits
and had developed the right mental and technical skills
to implement those strategies; yet my defensive strategies
were not fully developed. I had to consciously work
at improving that part of my trading arsenal.

Let’s now look at examples of offensive and defensive strategies in trading.

Offensive Strategies

Offensive strategies are designed to do one thing: increase your risk exposure.
They are powerful because they create the opening
for profits to accrue, and let you maximize on existing opportunities.

Examples of these strategies include:

Initiating a position when your methodology signals it.
Adding incremental risk exposure to a winning position (pyramiding down).
Increasing the holding time of a profitable position.


Defensive Strategies

Defensive strategies are designed to do one thing: decrease your risk exposure.
They are crucial because they keep you out of trades with unfavorable risk/reward profiles,
minimize losses, and help to protect your accumulated profits.

Examples of these strategies include:

Staying out of the markets when the methodology isn’t generating any signals.
Exiting a losing position when your edge has been negated.
Taking some profits off of the table on a winning position.
Banking the entire profit in a winning position.


You might notice that I have not included tightening of stop losses, trailing stops
and hedging as defensive strategies, as they
can in my opinion actually increase the risk of loss.

Have you developed your defensive and offensive strategies? Both are equally important in trading.
Once you know when to deploy each of them and have mastered both, you will get to feel satisfied with your trading results.

Futures trading involves substantial risk and may not be suitable for everyone.

Source:psychingOutTheMarkets.com
 

tomorton

Legendary member
8,127 1,209
Possibly not an original post, but this highlights a key issue for traders.

I see people in the world as divided into those who wish to save money (i.e. those who seek to minimise the amount of the outgoings by bargain-hunting etc.) and those who wish to make money (i.e. the entrepeneurs, gamblers and speculators).

The money-savers vastly outnumber the money-makers. Money-savers are seen as frugal, prudent, wise investors, who know how to get the best out of their honestly- and hard-earned money. Money-makers are seen as feckless work-shirkers and dreamers if they lose, and reckless, selfish, parasitical capitalists (or i.e. bankers) if they succeed.

Being a money-saver as a trader is a powerful (but sub-conscious) handicap. It drives the trader to over-concentrate on the TA of the entry, getting the best price, the surest TA signals and the best possible timing, to ensure a 'bargain', to avoid losing. And we should all recognise that an obsession with avoiding losing can tend to make traders ignore their stops and lose even more.

Having a money-maker attitude in trading will allow you to see that it is the exit which is key to success, not the entry. And the management of the trade to ensure you get to a profitable exit is much more important than the TA that denotes the entry to the 2nd decimal point.

I would suggest that this attitude polarity is the reason why most traders fail. Its nothing to do with SB firms or market access or trading platforms or the wrong chart formats. It is because most peope have found being a money-saver more secure, more emotionally rewarding and less risky, than being a money-maker, and few will have ever even tried money-making before trading. Very few will realise a transition of attitude is needed, and very few that do will pull it off.
 

mdszj

Newbie
8 0
JDW/Tom

Good posts - I have just completed paper trading a new swing strategy I developed and am about to use real money on it. It uses a 2 lot system for exits, i.e. sell half at a 5% profit target, and sell the other half at the end of the trade (next day open following the next trade signal). I have been thinking that this will address both offensive (letting profits run on a good trade) and defensive (taking some profits off table, which could then act as a hedge if the second half of the trade goes red). I think this should more than make up for the extra commission costs.

Just wondering how many profitable systems out there use multi-lot entry or exit systems. ANy thoughts appreciated.
 
Last edited:

tomorton

Legendary member
8,127 1,209
Hi mdszj - Good approach. Its good for any system that is going to outperform to have a possibility of exceptional gains, no matter how well backtested.
 
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