By: Nikolaos Akkizidis
There are people who have been trading markets and products for many years, looking for the perfect trading system. They are the kind of traders who wake up in the middle of the night because they think they have discovered the perfect trading system. Although it is good to have dreams and high expectations, trading success does not depend on finding the perfect trading system. In fact, it depends more on the application of a trading method that meets specific criteria such as the following:
Criteria No 1. The strategy must be based on fundamental market principles.
The point is markets and products have specific characteristics that are inherent, and they almost never deviate from them. Inherent characteristics include, for example, that a low volatility market is preceded by a period with high volatility. Or prices, when a trend is strong, may have periods of correction, but they always follow the main trend. Or, when the market is strongly bullish, it closes at the highs of the day, while when it is strongly bearish, it closes at the lows of the day. As a trader, in order to improve performance in trading, you must always choose trading strategies that will certify the inherent characteristics of the market or the product you trade. So, no matter how complex or simple the trading strategy you follow, you must never apply strategies that deviate from the inherent characteristics of the markets and products you trade.
Criteria No 2. Trading on the “Edge”
A trading edge is a technique that creates an advantage over other market players. Anything that adds a few points to the winning side of a trading system builds an edge. In trading, the edge goes to market makers who buy on the bid and sell on the offer.
As a trader, your strategy should generate some sort of edge. Some traders believe that using a particular indicator they invent gives them an edge over other traders. But a trader must understand that an edge can produce high returns and then enter a period where the edge no longer works. So, the edge you should follow needs to be consistent, and it must be understood that an edge cannot contain any magic thoughts.
The edge does not have to be big. Even a few percentage points of performance are enough to create an effective edge. This edge is able to make your system extremely profitable when the edge is systematically satisfied by the strategy that produces it.
Criteria No 3. Be ready to manage the “Extreme Conditions”
Everyone can benefit from the market when market conditions are normal. The fact is that the conditions of normality are much longer in time than the extreme market conditions. However, when conditions of extreme arise, then most of the traders are collapsed as they lose a lot of money or are unable to meet their financial obligations.
When a trader is in a trade, he believes that extreme conditions will never happen when he is in this trade. But the reality is somewhat different. Extreme conditions happen all time and cost a lot. To manage the extremes, a fundamental strategy is to always put protective stops and must always adjust your trade size to reflect current volatility.
In summary, as a trader, you should have in mind that you cannot trade simply by having a general approach to the market. You need to know the inherent characteristics of the market and products you trade, should develop an edge in your trading system, and must be able to handle extreme market conditions.
Since as a trader you are looking for the best, the best is invented when we look at things from the point of view that is unquestionably different from what we thought until today. The difference and simplicity lie in following criteria applying fundamental and specific rules. That is the way for traders to “think outside of the box”: to think simple and different. This is easier said than done, but only then will you find yourself in the small handful of traders who make profits on trading.