In 2012, in one writing blitz I wrote a 65 pager for posterity,… here’s page 1. I hope it is illuminating to you as it is still to me.
“Notes to Trading (for the average Joe)
A trading system is merely a systematic approach towards the market place. A trading system with an edge is one that favors the probability of success more than failure, across the ever changing faces of the market space, over many consecutive trades – one that grows your equity base.
A trading system is not a fixed series of set ups. If it is so, everyone with a computer can do it successfully for a long, long time. It is a science of knowing what key variables to account for. It is an art in making sense of these key variables and knowing when they matter. Think of it this way, many traders want the wrong thing – a system that helps them trade profitably, rather than trade a system successfully.
The tools of objective setting, trade selection, trade and risk mgt, money mgt, set ups, psychology serve only as guideposts. At each guidepost, you have to make assessments on the situational variables and what the market is telling you, then decide on how to risk, what to risk, what targets may be. Trading is not merely about set ups and discipline, and blindly trying to group workable setups or indicators together and waiting for opportunities to appear. Trading requires you to know your edge based upon what the market is telling you, and what your strategies are. At anytime, if you are not sure what your edge is – you do not have it. To some this edge is fixed, eg. a set up given the “confluence of supporting factors” that are in line with the market action, for others -opportunities in the market may provide the edge – reliable inside information, extreme sentiments not backed by fundamentals, obvious price behaviors.
Trading is not simple. Here’s the one sentence kicker ….. A set up or a candle identification such as a hanging man, doji, hammer or a pattern formation is meaningless unless you read it together with the guideposts and the higher or lower time frames, thereby unrolling or extrapolating the right side of the screen, where possible price movements may be projected, based not only on technical analysis, but also the current behavior of the market (particularly the market makers), the news which have been absorbed in the market, what potential news may be, where stops are, where various participants’ entry and exit points are (eg. scalper vs day trader, those who miss earlier trades, those who use the market to hedge, the financial users vs the corporate users, the inexperienced traders), the volume flow of the market if possible, what recent price patterns were like, whether the prices have been range trading etc. It involves sentiments and logic as well as knowing your selected market well (what moves it, who moves it and any change in the microstructure). Did you get that?
In this sense we may get an idea how we should proceed and what set ups or strategy to adopt. It is understanding what the market has done, what it is doing, what it will likely do, and how we can participate in it. The list seems daunting, but an expert trader takes only a few minutes to assess and use these information. He is able to do so if he keeps abreast of reading, listening, thinking through and knowing the structure of the markets (how the market is organized, who the key participants are, and what they do). Much of the information is also readily seen on the charts and price action. Hence, anticipation is critical – leading one to plan his trade. Know what you know, know what you do not know, slowly get enlightened and know what you don’t know you knew, reduce what you don’t know you do not know. Again, It is not just waiting for setups to appear. It is not taking a set up simply because it appears. It demands screen time and lots more screen time if you are a beginning trader.”