Trading Recipes
I love to
cook. If all
modesty (or what
little I
seemingly have)
were set aside,
I'm pretty darn
good at it. The
majority of
dinners and
meals in this
household are
left to me,
which is fun for
me. If I could
invite you all
over to join me
for a big,
home-cooked
dinner after we
whipped these
markets into
submission and
servitude, that
would be my idea
of a rockin'
great time.
But before I
managed to
become a good
cook, I was
naturally a bad
cook. Prior to
that, I never
cooked at all.
Natural order of
the learning
curve, correct?
In order to
evolve from
never cooking at
all to being a
bad cook, I had
to follow
recipes.
Anything
prepared by me
that you'd dare
eat had best
been concocted
using written
rules of
measure. A cup
of this, a
tablespoon of
that, a dash of
the other...
hey, what the
heck's a dash?
My paternal
grandmother
arrived here
from Sicily near
the turn of last
century as a
very young girl.
Many of her
remaining indoor
hours for the
next 80+ years
were spent
hovering around
a stove. My
grandma Francis
could bake and
cook like you've
never seen! She
was the envy of
her numerous
sisters and
sisters-in-law
as the premiere
kitchen queen
amongst a very
skilled culinary
group.
Grandma Francis
never followed
any recipe in my
lifetime.
Whatever she
made was
measured by
hand. A handful
of this,
two-hands full
of that, pinches
and dashes of
everything else.
She could read a
recipe by eye...
decades of
measuring
experience had
taught her that.
End result was a
table spread
with home cooked
foods (Italian,
German, Polish
and mixed) of
which I've never
sampled better
fare anywhere
since.
As you might
imagine, my
grandmother was
hounded for her
recipes by
everyone under
the sun. Most of
the time she
would shrug off
requests by
retorting that
she doesn't
follow any
recipe... she
just throws some
stuff together
by hand. Truth
is, that was
100% true.
What does this
have to do with
profitable
trading?
Absolutely
everything.
Measured Success
I've been
working with
individual
traders of all
experience
levels since
April 2000 in
some web forum
or another.
Lessons learned
about markets
and trader
behavior would
fill volumes of
written
material. Let's
focus on a major
lesson learned,
an undeniable
truth of the
markets.
Markets spend
roughly equal
amounts of time
moving sideways
or up and down.
The definition
of sideways or
up & down
obviously,
obviously
depends on the
specific
timeframe chart
we are trading.
Sideways on a
weekly chart can
be highly
volatile action
inside the five
minute charts.
Right or right?
Direction, trend
bias, trading
ranges, etc are
all relevant to
what a trader is
trading within.
Any 100%
mechanical
system is
designed to
trade either
sideways swings
or directional
trend action. It
is impossible to
code a single
computerized
system to handle
both sideways
and direction
markets. Several
can be blended
into one
approach, but no
single system
does it all.
Same for
pattern-based
trading methods.
A trading
method is by
my definition a
series of
patterns or
indicators that
signal
profitable entry
points over
time. A
trading system
by my similar
definition is
taking that
method two steps
further in
development by
adding risk
control exits
and profit
exits. One lone
method can
parent numerous
systems, only
variance being
stops and profit
targets after
entry signals.
To create a
system that is
rigidly rules
based, one needs
an exact recipe.
There must be
written,
definable rules
that the trader
(cook) can
follow closely.
If one
ingredient is
short or absent,
the trade
(recipe) cannot
be made.
New traders,
like new cooks
are adamant
about following
written rules.
After all, that
is their recipe
for success.
Experienced
traders who have
suffered thru
some bad meals
are likewise
attracted to
written rules in
"recipe" format.
Hopefully,
adhering to
written rules in
trading will
keep them from
adding too many
ingredients,
serving the meal
before it is
fully cooked,
overcooked,
whatever.
Same Analogy
I'm mixing
my subjects ~
metaphors here
for a reason.
The secret to
successful
trading is
neither written
rules or
hand-picked
selections. The
secret to
trading is one's
learned ability
to do either of
them well.
Regardless of
which it is, any
computer-driven
or human
interpretation
approach works
best in either
directional or
sideways periods
of price action.
Human nature is
designed to
expect reward
for effort
invested. We are
very big on
equality, too.
If we perform a
task for
x-amount of
hours we expect
y-amount of
reward in
return. In
addition to
that, we want
that reward to
be at least
equal to what
everyone else
receives for
same efforts
expended.
Greater reward
is accepted just
fine (we aren't
socialists, we
are greedy
capitalists by
nature) if that
so happens to be
doled out.
Traders who pick
a method/system
that profits
during sideways
action are more
than happy to
book a week's
worth of profits
in a single day.
Said traders are
even happier to
repeat the
process during
favorable market
conditions
several days in
a row. Who
wouldn't be?
However, let the
very same
traders sit thru
the same period
of time in
adverse market
conditions and
they often freak
out. Day after
day (or hour
after hour,
minute after
minute) of no
profits
following a
favorable period
of time is
intolerable.
Never mind that
they realized
above-average
gains before...
that is not a
consideration.
Extra is not
considered
extra... they
want rewards for
every minute /
hour spent "at
work" in front
of the screens.
Farmers make
good money on
grain crops
during normal
rainfall and
average temps.
They make good
money on rice
crops when it's
wet. Potatoes
grow best when
weather is cool
and slightly
wet. Alfalfa hay
yields are best
during hot,
sunny summers.
Any given farmer
could have the
same barns, land
and equipment
regardless of
what crop is
grown. It is the
determination of
crop that
dictates what
conditions are
profitable. No
farmer makes
equal amounts of
money each &
every year on
the same crop...
some are better
or worse than
average. On a
side note, many
farmers make no
money at all.
The old cliche'
about a farmer
who wins the
lottery when
asked what he'll
do with the
money replies,
"Oh, guess I'll
just keep on
farming until
the winnings are
gone".
Farmers are not
much different
than traders.
Many of them
lose money,
period. All of
them can have
the same
tractors,
computers, crop
seeds, charting
software,
fertilizers,
advisory
services, etc.
Neither group
should expect
paycheck returns
from such
entrepreneurial
ventures chosen.
This is a ebb &
flow (hopefully
not boom & bust)
profession.
Sideways Or
Directional
Whether we
trade by a
recipe of
specific written
rules or eyeball
chart patterns
is quite
irrelevant.
Knowing which
market
conditions are
prime for our
given approach
is critical. If
we target
directional
market action,
trying to profit
from within
tight range
consolidation
will not work.
If we trade
sideways market
conditions,
trying to sell
resistance or
buy support in
directional
swings or trends
absolutely will
not work. Make
sense?
Rather than
trying to curve
fit a method or
system into
handling all
market
conditions, the
easier path is
learning to
identify
favorable market
conditions for a
given trading
approach. When
ADX is flat,
sideways market
conditions
prevail. When
various moving
averages are
sideways and
serpentine,
sideways market
conditions
prevail. When
ADX is rising
sharply,
directional
market
conditions
prevail. When
various moving
averages are
rising or
falling and
spreading apart,
directional
market
conditions
prevail.
Trying to force
a sideways
approach in
directional
markets will
lose more money
than directional
approach in
sideways
markets. It is
easier (for
most) to wrest
profits from
directional
moves than
sideways coils
or chop. But,
there are valid
methods for
handling any
type of market
conditions...
just no single
approach that
handles them
all.
Summation
Reading
current /
pending market
behavior is of
much more
importance
versus which
method or system
is better than
another. Trying
to force one's
hand during
adverse
conditions is
like a farmer
cutting hay in
the rain. He'd
be much better
off to stay in
the barn and
handle some
other chores. If
the farmer feels
more productive
while mowing wet
hay rather than
staying out of
the field, he'll
soon feel
otherwise when
money lost is
the end result.
Trade when
profitable to do
so, abstain when
it is not. Learn
to distinguish
which is what
for your
specific method
or system of
trading. Press
the pedal during
good times, get
your foot off
the gas during
poor times. That
in itself will
do more for
contained losses
= methodical
profits than
most anything
else I can think
of. Hope this
helps!
Austin
Passamonte