What Is Your Strategy?

I have been at FP Markets but a brief while, and a question that I have been continuously asked is, "What is your favorite trading strategy?" and "how do you approach the markets?” No doubt these are key questions and beyond the confines of one blog post. I do think it would be invaluable to produce a series of posts giving these questions more weight and introducing strategies one by one to clients and readers. In this post, I want to give a brief summary and introduction to some of the things I look at. 

The reality is that there is no "correct" way to approach and analyze the markets. It took me countless hours of study, application and real life trading hours before I came to a realization of what works for me. They say that experience counts for everything and I couldn’t agree more. I have almost 10years of screen time, and no doubt have made many mistakes along the way, which have all served as a learning lesson. The most important thing is to develop a trading plan that fits your own personality and own beliefs based on real observation and study of the markets. 

Books such as the Market Wizards series by Jack Schwager are particularly enlightening. The traders interviewed in these books show a diversity of styles and techniques whether it is fundamental or technical, short or longer term. However, common themes always emerge such as the importance of developing a trading plan and quantifiable edge, as well as the adherence to risk management principles. Too often I see traders without a concrete trading plan and this is their undoing.

So to reflect on my own personal experiences, here is a brief outline of some of my favored strategies. These setups include:

i)          Retracement Trades. These include buying pullbacks into a strong uptrend; shorting rallies into a confirmed downtrend.

ii)         Breakouts. Trading breakouts from solid congestion or base patterns. Using confirmation rules can enhance their effectiveness.

iii)        Climax Patterns. Exploiting weakening trends through climax patterns e.g. double tops/bottoms, ending wedges and candlestick reversal patterns.

AND

iv)         “Failed patterns”. These trades try to take advantage of the herd and fade classic chart patterns once it is clear they have failed. I wrote about these setups in a separate blog post here: http://fpmarkets.blogspot.com.au/2012/08/the-most-important-rule-in-chart.html. These are often some of the most powerful technical setups out there.

Here are some real life examples of these setups that I have shown throughout my morning reports. It is all there in print. My intention here is not to gloat but to illustrate my thinking behind these strategies.

Retracement Trade: NCM

Price broke out of a clear base pattern above $25.00 and began a new uptrend with momentum. Price pulled back into the upward sloping averages and previous support zone thus offering a low risk long entry into the uptrend. This trade took advantage of a retracement back into the uptrend and a great zone of support. 

Breakout from Consolidation: MML

Strong breakout from a multi month consolidation pattern. The trigger was a new swing high and strong closing price candle. 

Climax Pattern: CBA

Price tested the top end of the range and the $58 resistance level. Most importantly, price broke out of the Bollinger bands which implied an "overbought" move and climatic extreme. The trigger for shorts was a close back into the bands and confirmation of selling.

Failed Pattern: BHP 

Price tried to breakout above the 33.00 level and clear consolidation pattern in August. However, this breakout uncovered no additional buying and when the stock closed back below 33.00, breakout traders were forced to cut positions leading to a very quick sharp sell off. The stock has subsequently recovered but a very quick profit was made for nimble traders.

These strategies work on all time frames. However, most of my analysis begins on the Daily chart and this is where I gain most value. This is the most powerful timeframe to me as the Daily chart filters out much of the intraday noise and randomness, and represents the whole days trading in one simple bar. The winner of that intraday battle is clearly revealed. This bias has a tendency to continue going forth.

Any strategy must compose the following components:

i) A setup

ii) An entry trigger

iii) A stop loss point

iv) A target

I could write chapters on each of these topics but in this post I just wanted to give a brief overview of the “setups”. To me trading is all about finding low risk/high reward setups. If you can keep finding these patterns, you are placing the odds in your favour over the long term. Most of us are not fund managers- we are traders. Thus we are looking to use volatility, liquidity and patterns to our advantage.

To be continued.........................

Thanks

Austin