A principle I adhere to my coaching is to attempt to fit a plan to a trader’s personality. It’s not as easy as it sounds but it’s nevertheless an important step. Once we have bedded down a degree of consistent execution, risk management, as well as the other habits of success (e.g. learning from mistakes through journaling), it’s time to consider fulfilling our trading potential.

Whoa Ray, take a step and consider the first time reader of your blog!

OK, for the first time reader:

  1. I believe that newbies fail because they focus mainly on getting the plan right. I define a newbie as anyone who has not consistently made money over 3 years.
  2. I believe that the plan is the least important mandatory element for success. It’s not hard to devise a plan with some sort of edge.
  3. I believe newbies fail because they fail to manage risk and fail to learn from their mistakes.
  4. I believe that by learning a simple plan (mechanical rules), trading small and learning to consistently execute the actions I call habits of success, we increase the probability of long-term success.
  5. I believe that fulfilling our trading potential ultimately means we need to use a plan that suits our personality.

So, we are at (5): we have some measure or perhaps a great measure of discipline and risk management. It’s now time to ramp-up our trading plan. For this blog, let’s assume that our personality dictates a discretionary, intermediate, visual plan (ahem that’s my type of trading). What does this mean if we have been using a simple mechanical system?

It means we need to understand the market from the perspective of our nature. For example, as an intermediate, visual trader, neither Buffets’ approach (numerical perspective, long-term) nor for example the digital approach taken by Rob Hanna (http://quantifiableedges.blogspot.com) would suit me.

Don’t get me wrong. Rob does some great work and I subscribe to his service; but I use the information as an adjunct to my analysis which is based on chart patterns.

In case some readers aren’t familiar with what I mean by digital analysis, here is an example: “After “x” consecutive down days, and a ‘y%’ drop, with ‘z%’ volume, what is the probability that the market will bounce?

Long-time readers of this blog and my book, ‘The Nature of Trends”, will know that my mind does not work in that fashion. Instead I will ask:

  • What is the trend, is it likely to continue or change?”
  • What is the line direction, is it likely to continue or change?
  • Are we in a zone?
  • Do I have a setup and entry bar?

The difference between the two is Rob’s approach is primarily driven by number crunching, my approach is a pattern-recognition method, augmented by number crunching. Both approaches are valid (if they suit the trader’s personality) and invalid (if they don’t).

One last point for tonight. Just because an approach does not suit our personality does not mean we can’t use the information. For example if Rob comes up with a pattern that produces a strong statistical edge, I will certainly take note of it. If it goes against my intended action, I’ll re-examine my analysis to ensure I have not missed a contrary perspective; if it agrees, I re-examine the analysis to determine if it should be greater than a normal size position.

There are many ways to make money in the market. One element of importance is to adopt a plan that suits our personality AFTER we have the habits of success under our belt.

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