It has always been my contention that trading is not rocket science, but more like the sweet science. Just like a boxer steps into the ring to fight a larger, stronger opponent, a traders sits down in front of his screen(s), and faces what is arguably a much tougher and more formidable opponent. At times the trader’s opponent is very predictable and easy to hit, but the majority of the time, his opponent is extremely unpredictable and elusive.
A good fighter will recognize the type of opponent he is facing that night by gradually sizing up his opponent's strengths and weaknesses, and then “take what’s given him”, and a good trader will analyze the market’s price action, and do the same. Just like the fighter, the trader will know his opponent’s tendencies and have a plan, and just like the fighter,the trader will ultimately rely on his instincts and his ability to analyze the type of market that is confronting him currently, and adjust accordingly.
The boxing analogy to trading was never more apparent to me than last night, as I watched Manny Pacuiao pick apart the much larger and stronger Tony Margarito. It was all there on display:; skill, technique, pacing, discipline, and patience. Manny took advantage of what was given to him, and exploited Margarito’s weaknesses, while staying away from his opponent’s strengths. He took the fight to Tony and pressed at the right times, and when the openings weren't there, he pulled back and rested.
Good traders share the same attributes as good fighters. They know and understand their opponent, and don’t take anything for granted. They don’t underestimate their opponent, leaving themselves vulnerable to a “knockout”, and they don’t overestimate their adversary, rendering themselves intimidated and tentative.
There are times when the market is only giving you scalps, and there are trend days or event driven moves, where there might be +20 points in a trade. A good trader will recognize the difference and know when to go for the knockout. Successful traders control their risk, but when the opportunity presents itself, they will hold, press, and add to their winners.
You can scalp and make money, but it’s a lot of work. It may also appear to be less risky, because you are taking smaller losses, but you are also going to be taking many more losses. And there is too much emphasis on “tools” for trading, and not enough emphasis on developing an intuitive feel for the market. Do traders really need an indicator, to tell them when the market is choppy? Quite simply, if you can accurately interpret price action and you have a good money management methodology, you are going to make a lot of money.
I find there is a very strong positive correlation between my P&L and the amount of time I am in a trade. I am not concerned with my percentage of winners, but more concerned with the size of my winners relative to my losers and my hold time. I’ll risk 5 or 6 ticks on 50 bonds, and sit with the trade for 4 hours or more, if there is a high probability I can take a point out of the trade. Just like a boxer must learn not to be afraid to get hit, a trader must learn not to be afraid to lose money. In fact, I much rather risk 3-4 points in the ES, to make 10-12 points, then to risk 1 point to make 3 points. I am going to get stopped out much less, and I am going to make much more money. Of course, you need markets that are moving, and that have much larger ranges than we are currently experiencing to execute this strategy.
As Bill Eckhardt remarked, you can go broke taking profits, if those profits are too small. IMO, the only way to make a lot of money trading electronically, is to hold your winning trades for a longer period of time. This will allow you to to trade with wider stops, which will result in getting stopped out less. It’s O.K. to pick your opponent apart and win the contest by outscoring him, but if you want to take it to the next level, you have to know when to go for the knockout and the big win.
