WHAT TYPE OF TRADING STYLE GIVES YOU YOUR BEST CHANCE FOR SUCCESS?

You want to trade, are making efforts to learn to trade, but don't know where to start. What type of trading style is best? What markets should you focus on? What style do you want to use? What interface.....etc., etc. There are many questions.

I thought about this as I was reviewing a recent issue of STOCKS AND COMMODITIES MAGAZINE and came across an article by Carley Garner from DeCarley Trading. The article was entitled FINDING THE BEST METHODS and was in the September 2011 issue. Read her one page article here.

Ms. Garner makes her case that countertrend trading will give the trader his best chance for success. There may be some credence to this, depending on how one classifies trading methodology. For example, if the "Across the box" trade that just happened in the Dow is classified as countertrend trading, then I think I might agree. (see that trade described here)

When I got started in trading one of the first books I read was Nicolas Darvis' HOW I MADE 2 MILLION DOLLARS IN THE STOCK MARKET . This book is a great read, full of laughs as well as information, and really was the epitome of the William O'Neil (founder: Investors Business Daily) methodology, before O'neil described his thoughts. It is a great story, true I presume, of how an average guy made lots of money by investing in stocks that Went UP. You can see some information on Darvas here.

Darvas was able to recognize stocks in balance, and breaking higher out of balance before charting was in fashion. His strategy, and that of William O'neil, is nothing more than a break from balance strategy where the trader goes with the breakout.

Most of you have probably heard of Darvas, and all of you of William O'neil. The first time I read O'neil's material I thought that I had found the holy grail to stock trading. Wow! It made incredible sense. Why had I not seen this before? I went to an Investors Business Daily presentation in Atlanta, watched slide after slide of stocks breaking higher that .........did what? Went higher still of course. This was incredible and I simply knew how much money was soon to come my way.

Unfortunately, Once I began to trade I recognized that Mr. O'neil might have left a few slides out of his presentation.........the ones that broke up, then went DOWN.

That is the issue with breakout trading. Price may break out, but then back in,.......then back out....or not. Ms. Garner references these type of issues (mildly) in her article. She leans towards countertrend trading as if it does not fall subject to this same issue. But it does.

I trade the long bond. I love the market. It has incredible liquidity and trades in what is usually a more regular, less volatile fashion than equities. Bonds, like every other instrument, go through trends, balance, and trend again. No doubt that deciding when to get on board with a trade for a trend trader can be quite difficult. The same is true for break from balance as described above. Yet, it is also true for countertrend. I have seen many instances when the bond price would move higher, much higher than I anticipated. This has happened during intraday trading, but also longer term (like 2 weeks ago). When it occurs, and you KNOW that price has moved too high, too fast, and want to trade in a countertrend fashion.....you still have the same issues.

So what do you do? Do you initiate a short simply when you think price has gone TOO HIGH (picking tops)? If you do, then you have no defined stop and you WILL lose money. If not, then you have to wait for the market to begin its reversal before initiating the short. How long do you wait? How much time has to pass? How much volume has to be traded for you to be sure that the market will reverse and your countertrend trading will be successful? I cannot tell you how many times in many different time frames, I have seen the long bond go higher than IT SHOULD faster than it should. So I think COUNTERTREND. I watch the trading. I look at reference levels. I measure volume. I watch trading in sympathetic markets. I do all this, and still sometimes I am wrong.

So what then is the answer?

The answer, Unfortunately, is what no one wants to hear.
The answer is time, practice, self analysis, and a (slow) developing intuition. I hate even using the word INTUITION because the implication is something far different than what I am referring to. The implication is that intuition is a gift, a talent, something one is born with, a perception of the correct answer without deduction, as if a great trader could be born that way. But the truth is that intuition is not that at all, or at least it is not what most people think. (Please take a moment to read the tradernovice section on INTUITION).

Intuition may in fact be the act of finding the correct answer without reasoning or rational thought. But this makes no reference to where it comes from. It is developed only one way, by repeated (correct) practice over a variety of circumstances in a variety of settings. It is EXPERIENCE.
(Please take a moment to read the story under "experience" in the trading essentials section here. Also Please consider reading Sources of Power, a fabulous book on this topic).

Yes, once a trader develops intuition he may correctly assess a market situation, but that is only because he has seen it thousands upon thousands of times before. He has made mistakes. He has had successes. He has seen the situation he is confronted with and many, many other similar, but different situations..... AND STILL SOMETIMES HE IS WRONG. (Take a moment to look the books entitled SOURCES OF POWER, and Book Reviews).

With all due respect to Ms. Garner and her article, the point I am trying to make is that regardless of the choice of methodology, a trader will have to put in countless hours of work to even begin to understand the nuances of the market. It is possible. It can be done. But it can never be done with certainty (thus the need for stops, or pre defined trades) and it can only be done, whatever the method, through hard work and countless hours of screen time.

I do think that there are situations where traders risks can be significantly reduced, by recognizing a limited upside or downside, but I think that this can happen with any methodology. More importantly, with time a trader likely needs to use all of the three methods described, just each at the most appropriate time.

Work. Prepare. Self-Analyze. Develop you intuition!

Your proper TRADING STYLE will follow!