Before I start today’s blog, I’d like to turn to a question Manish Shah, <manish.shah@centrum.co.in>, asked. By the way, I’d be grateful if questions are posted to the blog - that way, all benefit. Here’s the question:

I want to ask you a small question. I am not an out an out mechanical trader. But I have a few standard setups that I watch consistently. But there is always a discretion that is attached to the analysis. Is it okay to have part mechanical and part discretionary approach or you advocate a pure mechanical approach. Secondly which markets do you trade/track..

A Q1: Ayn Rand (http://www.aynrand.org/site/PageServer?pagename=about_ayn_rand_aynrand_biography) ‘taught’ me an axiom that has served me to great stead: words are capable of precise meanings.

I believe that there is a conceptual error that leads to great confusion - the belief that traders are either mechanical or discretionary. In fact there are three types of traders: mechanical, discretionary and subjective (sometimes also called intuitive).

1. A mechanical trader is one that ALWAYS follows the trading rules without exception.
2. A discretionary trader is one that has rules among which is a rule that says: “I need not follow my rules”. This allows a discretionary input.
3. A subjective trader is one that has no rules and trades purely by feel. Most successful pit traders I have met are/were subjective traders. Nowadays, this group is probably represented by the electronic scalpers. I say probably because to date, I have no direct experience to base this assessment.

So, in your case, I assess you as a discretionary trader and of course it’s OK. On whether or not I advocate being a mechanical trader: I believe the mode you ultimately choose is a function of your personality. I would add this: whatever your personality, in your training period, spending a time (even if it is a short one) as a mechanical trader will teach you discipline.

AQ2: I trade Futures: Stock Index, Interest Rate, Soybeans, Gold and Crude Oil

FX: The majors and AUDUSD, USDCAD, GBPJPY

——————

Now to tonight’s blog.

I love to read. Often I find ideas that benefit my trading in works from different fields. I have just completed such a volume: “Three Moves Ahead - What Chess Can Teach You About BUSINESS (Even if You’ve Never Played)”, Bob Rice. So for the next series, I’ll adapt some of the chapters and see how they relate to trading.

In one of his early chapters Rice argues that the ‘goal of a chess or business opening is to create a difference you can exploit later in the game’. I believe the same can be said about trading. What are the important first considerations in trading?

• Probability of Success of the setup?
• Normal size?
• Will the Ebb and Flow affect the normal size?
• At what price does the scenario break down?
• What has to happen to remain in the trade?
• What has to happen to exit the trade?

By developing the ideas ahead of a trade, we prepare for it. In this way, we avoid the trials of impulse trading.

Refer this blog post to a friend or colleague…