"New Year, New Me" and Other Bullsh*t
Recap on my holiday prep, I'm going to make the "Psychology" and "Technical Analysis" sections on Babypips a part of my daily routine. By making it an obligation to read the new posts under these two sections, it seems to have kept me in check. I reduce the urge to log directly into my trading account and bluntly take a trade.
I do think there's a purpose with each of the two sections I've listed. Straightforward as it sounds, "Psychology" ties into my development of figuring out what works for me and what doesn't. Specifically, I want to use this section to help me become more conscious of the trades I entered and why I took them. Furthermore, I see the potential of it helping me realize what I've been neglecting as a trader.
On the other hand, my goal for staying updated with the "Technical Analysis" section is to gain another perspective in the analysis undertaken. Sure, I plot my key daily levels. However, I'd have to watch them play out in real time. I've become wiser not to make the mistake of attempting to replicate the author's trading strategy/style. Instead, I'm going to leverage these sections to gain insights into refining my own analysis.
With that said, 2020 is not without a New Year's resolution. For this year, my focus will be on risk management. You simply cannot make money without money. While I've previously attempted to take a standard 1% to 2% risk per trade, it really isn't this simple. I've decided to take a dynamic approach to bet sizing as a response to the underlying market conditions. You'll notice that I used the term "bet sizing" rather than "position sizing" and that's just an opportunity for me to offer another poker analogy.
As I've gained a greater understanding of my trading style through playing poker, this is one of those learning moments. Admittedly, this isn't a perfect analogy, but I'll try to make it as accurate as possible.
When you have a strong hand in poker, what do you want to do with it? You want to maximize its value to the point of going all in and getting called. This will give you the greatest payoff. If you make a meager bet, it's more likely that you'll get called. However, you don't necessarily maximize value. Similarly, you might go for a cheap showdown if you want to have some skin in the game, but avoid a costly loss. In this case, you would control the action with fixed smaller bet sizes and just have the other player follow your lead and call. My point of this slightly less-than-perfect explanation is that the bet size is a measure of risk.
If I take a trade where the currencies may be driven by fundamental events for the week ahead, I may reduce my position size as opposed to a pair that paints a very strong directional bias. My goal, in addition to taking good trades, is to assess the risk and adjust my position size accordingly where no trade shall exceed 2% risk. As there are risks that I do not have control over, my objective could be to reduce to the position down to 1% or even 0.5% risk.
Another viewpoint I'd like to offer is this whole idea of looking at a reward to risk ratio. I mentioned this in a previous post, but I think it's worthwhile to mention it again. I think this metric is largely taken out of context.
People often say to target a 3:1 reward to risk ratio or better. I think this is flawed because if you set a stop loss of 50 pips, what's to say that this pair will go to 150 pips? There's no guarantee or control over this. If a pair goes over 200 pips, what's stopping me from riding it higher? The reward to risk metric is useful for assessing your strategy in relations to a win rate and win amount. I could take a bigger trade with a 2:1 or even 1.5:1 reward to risk ratio, but have many smaller losses and still come out ahead. I think the importance is to take good trades and control the risk. How this is done is entirely up to you, but there should be a much less emphasis on using the reward to risk ratio as a trade entry criteria. To hear my full rant on the R:R metric, check out my previous post here.
To conclude this post, I'd like to share a motivational article: https://nypost.com/2020/01/09/greenwich-hedge-fund-worldquant-axes-130-staffers-as-quants-struggle/
I'm quite surprised to see that quant firms are struggling to generate a profit. In recent years, we've seen and heard this talk that point & click trading is dead because trading is handled by algos and quants. Obviously, "algos" could span anywhere from high frequency trading to quantitative investing, but that's beside the point. This article gives me hope because it shows that the methodology isn't as important as how you develop and find your edge. Sure, setting up automated processes can help you uncover more trading opportunities via signals. However, it's important to realize that this alone isn't going to help you succeed. As I'm currently a point & click trader, I've often wondered if it's even worth it anymore. I think this is a good indication that manual trading isn't going away, but you do realize how you need to smoothen out the noise and adapt to interpret the signals produced.
Speaking on a personal note, I often don't hop down to timeframes lower than 4-hour. Even then, I don't even use the 4-hour timeframe much, if at all. All I see is chaos down on the hourly timeframe. Given my inability to predict price movements on an intraday time horizon, I simply adapt and look at longer term time horizons. While there may be fewer trading signals, that's just another reason to prioritize position sizing.