Essence Of Trading: Why We Love Picking Tops and Bottoms (Part 2)

3d small people - wave of money… continue from part 1

Insecurity Associated With Trading Confirmed Signals

When being stopped out, you feel a lot more painful on confirmed signals comparing to taking a relatively smaller loss should your extreme picking not going your way.

The root to this problem is the uncomfortable feeling associated with trading confirmed signals. A confirmed signal is usually quite far away from the extreme that has been established. Even though you may have learned from many sources that trading a confirmed signal is better, you do not feel better because of the comparative perception of bigger risk with confirmed signal against the smaller risk associated with extreme picking.

What our perception failed to do, however, is taking into consideration of the likelihood that the smaller losses are going to happen way more frequently than the confirmed signal. Thus, instead of having strong positive expectancies from your trade, your scalping style top and bottom picking would net you at best a weak positive expectancy if not out right losing money consistently.

Pure Top and Bottom Picking Works If You Are A Scalper

There is this old saying, "Once a scalper, always a scalper."

If you are truthful to yourself and understand that you do not really know whether the market is going to turn or not at the extremes that you picked, and simply close out the position for a small profit during the pause with very tight stop, you will be become a successful scalper. Keep in mind that you will always feel awful when you see some of those tops you pick turning into major reversals.

You do have a choice – stay being a scalper and perfect the scalping skill, or transform yourself into a trader who are comfortable with riding a move.

Notice that scalping may not be a great choice as bots are quickly overwhelming the markets doing just that. They can scalp faster and better than majority of the human traders.

Switching Over Is Difficult But Necessary

Another consideration that faces many traders is that we do grow old. As we age, our trigger fingers will not be as fast as we were 5 years ago. Maybe you can still beat the bots scalping right now, but what about 5 years down the road? Or 10 years later? Moving onto a slower and more profitable strategy is necessary and unavoidable.

It is very difficult to incorporate both scalping and riding style at the same time. It is always easier to stick to one style at a time. For example, you may choose to switch to scalping because market condition suggests tight range trading, but sudden the condition may change and you have to decide if you are going to switch to riding the moves instead. The additional decision making can be quite stressful because a mistake in identifying the market condition will cost you dearly in performance. It will not work well in the long run. Many successful traders who started out scalping eventually drop the scalping style completely because it does not worth the time and energy to switch trading styles frequently.

Start By Doing It On Sim Or A Very Small Account

If you have some success with scalping but you are convinced that it is better to trade the stronger swing based signals, then consider doing it in sim account. If you can afford it you can also trade with a separate small account to make the training experience much more intense. Due to the way swing trading off chart patterns and strong structural bias do not require that much focus all the time, it is something you can do while you are still scalping with your normal account.

You will notice by forcing yourself to not focus that much on the separate account, you will actually develop best practice in handling the riding style because you are forced to stay hands off most of the time. Eventually you will gain the confidence needed to switch over.


One Reply to “Essence Of Trading: Why We Love Picking Tops and Bottoms (Part 2)”

  1. I was vacillating about returning to day trading. This particular piece gave me some clarity in sticking with my attempt to move to swing trading using larger time frames and bigger capital deployment for a more relaxed trading. If I achieve even 50% of my day trading performance, I will have more than I ever need. For practice, I am using ETFs (SSO & SDS). This also lets me get used to the 9:30am to 4:00pm routine. Once consistent, I will move to the futures. Like you say, who wants to fight with the bots in the eighth decade of life. 🙂

    Thank you for the shared wisdom.

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