Mapping the Trade Selection Process
The process of trading needs to start well before you focus in on the right side of a chart. Before you can take an overview, and focus on set-ups and signals, you need to have an ordered process where you are assured a market’s direction, and be able to quantify any directional shift which may have occurred since you were last on the screen. Something I heard a long time ago that I now know to be true, is the human brain is going to start to experience difficulty somewhere around the 5th or 6th simultaneous operation. Something else I’ve learned is that the brain can better serve us when we slow down and allow it to provide us with definition before we make an actionable decision.
Along with being able to project, the mind is an effective play-back device, which every now and again pauses in the now. As important as past price history is to the market and your own past is to you, and as influential as all the news events are, and your own expectations and aspirations, you have to have a process in place, where your decisions are based only on where the market is now. The chart below shows the flow of the decision making process which we will be teaching at trading-u.com.
The process of trade selection ends in one occurrence, a trigger, and one decision: yes, or no? Before it can come to that question though the trigger type needs to be categorized. For us it’s either trend, or a counter-trend. For “trend” let’s say there are 2 types of trend triggers, and for counter-trend triggers 4. Once the trigger is defined there is one last refinement before the trade is entered. There are 2 determinants based on a market’s stance, and momentum, where we would not take a signal. If the trade in consideration is not disqualified by one of those, the trade is entered.
In this process from “Overview” to “Enter Trade” we had 4 steps where the last two needed refinement. Keep in mind a step is not a decision, and a refinement is a definition. It’s interesting that for a “counter-trend trigger”, there are 4 definitions — no wonder 70% of counter-trend trades turn out to be losers when managed as trend trades.
There is only one set-up so it is is singular for us.
The overview, where we determine which direction price is pointed in on current and higher frame charts, is more for reference than action, though it clarifys which signals we take on which time frames for a trade to be trend, or counter-trend, which is critical information. A shift in the overview is significant.
What is noteworthy here is the lack of actual decisions made until the yes, or no of entering the trade. When taken step by step like this, it actually looks rather simple.
Jay Norris is the author of Mastering the Currency Market, McGraw-Hill, 2009 and a Trading Instructor at Trading-U.com and a Senior Market Strategist with BrewerFX in Chicago. To see details of Trading-U’s available course work go to Trading Course�
To schedule a complimentary, interactive tutorial with Jay on determining market direction and hear more about “Live Market Exercise” go to One on One Tutorial
DISCLAIMER: Futures, options and Forex (off-exchange foreign currency futures and options, or “FX”) trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures, options and Forex may fluctuate, and, as a result, clients may lose more than their original investment.