2 Trading Approaches Reviewed

Trader's Mindset

Dec 13

I review 2 approaches to trading below.

Technique: Low frequency, Multi-market

In this approach, the trader scans many markets for the best trades, ranks the best trades, and only takes the best trades in the best markets. This approach is often adopted by professional equity traders.

For example, this last week I found that Natty/Natural Gas was making a lot of sense for me. It was respecting technical levels, and I felt the market showed a clear intent as to the purpose. I don’t know anything about Natural Gas but the market was making sense to me.

While individual variations exist, the basic approach can be summarized:

  1. Scan a set of markets for opportunity
  2. Identify the markets with most opportunity.
  3. Pre-select those opportunities.
  4. Focus on those markets to identify the specific opportunity.
  5. Rank the opportunity.
  6. Trade the best opportunities only.
  7. Manage the opportunity (OODA loop).

Questions/variations:

  1. Will you identify the opportunity before start-of-day or seek to scan for opportunity throughout the day?
  2. Will you only take quantified or discretionary setups?
  3. Will you hold positions in multiple markets at the same time or only focus on one trade at a time?
  4. Will you focus more on the management of opportunity or the entry selection?

Advantages:

  1. Method will typically involve fewer trades per market. This reduces risk of taking many losses in a row.
  2. Risk is typically managed in a more generalized way. Traders will often choose a rational stop or % based stop or simply close the trade when it isn’t working. This is likely to lead to more robust results as there isn’t as much specialization.
  3. The wider opportunity set allows one to focus on markets where there is understanding and greater opportunity.
  4. Psychological benefit of “moving on” after a win or loss is easier as don’t have to study the same market/charts.

Risks:

  1. Product risk (reports, volatility, liquidity).
  2. Opportunity frequency mismatch risk
  3. Lack of specialization/focus risk
  4. Consistency is likely to be more variable as it is going to be harder to recover from a loss on the same day. However, profits can be very significant on winning days as most likely riding a winner until EOD.

Technique: Higher Frequency, Single Market

Trader employing this approach will typically specialize on a single market. The trader will typically attempt to get into trades with very tight risk. They may look for one or more setups or trade with discretion. Trader may focus on a specific bar or chart type, i.e. 10 range bars or 5k volume bars.

Advantages:

  1. Focus. You only have one market to focus on should mean for less surprises.
  2. Consistency in winning percent days. If both daily profit objective and risk limit are setup properly, it should be possible to achieve very high consistency in the percentage of winning vs losing days.
  3. Risk per trade can typically be less as specialization is increased.
  4. Standard deviation of trade should be lower.

Risks:

  1. Biggest risk is need to take multiple losses in a row– makes it more likely to go on tilt or have psychological problems. Requires a stronger ability to “dust off” losers—however, must be disciplined not exceed loss limits. Because of the competing conflict in dusting off losers and also being able to stop before losing too much– external risk controls are more important.
  2. Very low volatility may make it hard to find adequate opportunity.
  3. Very high volatility may make it risky to trade or moves may come too fast.
  4. Specialization more likely to lead to fragility.
  5. Harder to incorporate multiple factors meaningfully.
  6. Requirement to trade in all conditions means one will be required to trade more mediocre opportunities and may be harder to get a meaningful edge at times. May need to trade when “understanding is poor

While not exclusive to single market approaches, the multi-shot or scalping entry approach is more common with single market traders and the biggest benefit is that if your standard deviation per trade is high– then you might be able to scalp out the expected value easier then achieving the expected value in statistically reliable terms. However that’s also the danger because you can lose a lot more too.

While previously a proponent of the single market focus, I think I have officially shifted too favoring the multi-market approach and am more skeptical of single market focused traders.  I would hazard that majority of professionals are multi-market traders whereas single market focused participants seem to more often struggle. That’s not to say there aren’t those focused on single markets that can do well for a while– its just over the longer term that it seems less common.

So, my advice if you are a new trader– try to learn one market well but also try to expand out as fast as possible to being able to trade several markets.  I think it is similar to systems– there simply are not any trading systems I could ever trust with all my capital. So why trust one market to produce for you?

About the Author

The author is passionate about markets. He has developed top ranked futures strategies. His core focus is (1) applying machine learning and developing systematic strategies, and (2) solving the toughest problems of discretionary trading by applying quantitative tools, machine learning, and performance discipline. You can contact the author at curtis@beyondbacktesting.com.

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