Day Trading Tips and Tricks

February 27, 2012

Erich Senft

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The Fall Classic and Forex…Really?

Baseball and Day TradingYes it’s October.  More importantly, it’s late October.  The Boston Bearded Boys are taking on the Scrappy Red Birds in the World Series (PS, I can’t stand the Cardinals as I’m a DIE HARD Cubs fan…but I have much love for their fans as we have the most respectful rivalry in baseball) after VERY intense NLCS and ALCS!  Both teams led their respective leagues in wins during the regular season, but during the playoffs, things like that don’t matter very much and anyone has a chance to win.  Both the Boston Red Sox and the St. Louis Cardinals almost didn’t make it to the World Series during some very tough postseason play, but managed to get it done with both amazing pitching and some EXTREMELY clutch hitting (including a couple of historic grand slams for the BoSox).

WAIT A MINUTE!  “I thought this was a forex article”.  What am I pulling here?  There’s lots to learn from postseason baseball to apply to forex.  After trading for these years that I have, I often look outside financial circles to find lessons within them.  As an avid hold em’ player, I have found many parallels there although few of them have to do with gambling.  But that’s a discussion for a different time.  What has the competitive, quality play of postseason baseball taught me about trading forex?

  • Make Moves in the Off season and Work Towards the Post Season:  As in baseball, there are different “seasons” to trading.  The true “off season” in trading is during the holidays especially second-third week of December through second-third week of January.  This is the best time to make major changes to strategy and the best time to study since you shouldn’t be trading.  Once the next “trading season” hits, you should stay the course you have decided while making little corrections along the way like the way baseball managers make some trades and lineup changes.  As you approach Fall, you should be thinking about the “postseason” which to me is that time period for trading.  It’s the best time of the year to trade generally speaking due to the heavy volume and better moves normally found during this period.
  • Great Pitching Beats Great Hitting:  What strikes me most about the postseason this year was the quality of the pitching. To a true, old-school baseball fan, there is nothing better than a 1-0 pitching slug fest with tons of strikeouts.  Both League Champion Series were stuffed with these types of games. Classic offense (hitting) vs. pitching (defense).  In forex, I see this as risk and account management (defense) vs. entries and exits (offense).  A trader will last MUCH longer and be more successful if they are better at defense than offense.  In fact, a trader great at risk and account management will normally gain much more with worse entries than someone who is great at picking entries, but lacks in the defense department.
  • But a Home Run Can Be the Difference Between Winning and Losing:  In almost every single game in both the NLCS and ALCS, the long ball played a huge part in the outcome including David Ortiz and Shane Victorino Grand Slams, and some very clutch single home runs during those aforementioned pitcher’s duels that resulted in 1-0 finishes.  In forex, a giant win can eat up a ton of losses in a hurry and “right the ship” quickly.  This is why understanding reward/risk ratio in relationship to potential strong support and resistance is so crucial to long-term success.  When we set ourselves up to potentially grab much more from the gain than we would from the loss, we can see a few home runs even in an account laden with a heavy number of smaller losses  in profit and sometimes deep in profit overall.
  • Don’t Live and Die By The Home Run:  Although this may seem to contradict the last point, many teams in baseball find themselves leading the majors in home runs and not making or going deep in the postseason.  I will admit that I have met some very successful traders who rely on primarily very big trades to keep them profitable, I think as a general rule, we should not over-focus on the “big trade”.  Why?  Because on a week-to-week basis, there are very few giant moves that would produce this result.  In addition, focusing on only grabbing huge pips on each winning trade can certainly lead to seeing many trades go in your favor before reversing and hitting a stop.  I believe we must strike a balance between consistent smaller wins, and the occasional big run. The easiest way to accomplish this is always aim for a bigger trade, but don’t be afraid to close out 50-75% of the trade at an intermediary point, while letting the rest run for the “big trade” potential.  By banking profits early, you will likely feel more comfortable with your stop at a break-even position which will give you more opportunity to let the trade “breathe” and eventually move for a big win, versus trailing the stop closely so that you get “something” from the trade. How many times has your trailing stop been taken out, only to watch the pair run fast and big in the original direction of your trade? On the other side of that, it can be frustrating to see a trade move deep into profit, only to come back and take you out at break-even.  Taking a nice chunk of the trade off when you have a decent victory, can prevent this reversal from stinging so much.
  • A Great Team Beats Great Individual Performances:  From my experience watching baseball all these years, it always seems the common thread among all the great World Series wins is a team that plays well together, in spite sometimes of having less than stellar individual performances.  Look at the Red Sox and Cardinals this postseason.  A few of their big-name sluggers batted less than .200, BUT came up big when it counted by working so closely with their team to create opportunities.  In forex trading, this can be viewed a couple different ways.  First of all, your “team” really consists of a multitude of different skills and techniques working together in harmony to produce successful, profitable results.  By over-focusing on any single aspect of trading and neglecting others, it becomes much more difficult to stay consistently productive.  The second view of team comes through the fact that I highly doubt too many traders have ever been “natural” and inherently possess all the skills and traits needed to be successful.  It takes a team of people:  educators, mentors, other traders in a variety of interactions like forums, and supportive family members in addition to yourself to really make it in this business.

As many times happens in life, we can draw comparisons between things that might not initially seem correlated, and find out much about one from the other.  I hope that you do the same and have enjoyed this little look at how postseason baseball is like great trading. May the best team win and may your trades be filled with pips!

February 27, 2012

Erich Senft

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