Many traders ask what is the most important factor for successful trading and my reply is generally, "know what you are trying to do". There are several ways to trade markets profitably. There are pros and cons with each methodology. We feel that the strongest trading generally involves a synthesis that appreciates the strengths of the individual trader. Some approaches are more applicable toward discretionary trading and I will highlight my thoughts below.
1. Processing Based Trading
I've called this process based trading in the past. But, it doesn't mean following a process. It means focusing on processing the market data in real-time. Of course, a trader probably has a process but the key feature of this trading style is focusing on real-time market generated data. Tape reading and AlphaReveal are very strong compliments for this trading style. This is a demanding style. Mind and body need to be working in harmony. There are few rules in process based trading. Tape reading is about understanding and predicting the market. Because there are few actual rules, there is a stronger potential to profit from many marginal market conditions that don't offer obvious profits. The risk of this approach is a lack of rules. Some traders will appreciate the non analytical qualities of this style and the heightened state of flow awareness. I recommend at the minimum a daily loss limit and only trading during set times. But beyond that, there is typically minimal structure.
2. Structured Processing Based Trading
Structured processing based trading is similar to processing based trading except that the trader has defined a subset of setups or types of trades to focus on. This should reduce the total number of trades taken, increase the profit factor per trade, and may possibly decrease the net profit or increase it depending on how strong a trader is able to perform with minimal rules. An example of this style of trading might be watching for swing lows on a 1 minute chart and using AlphaReveal to read the tape for execution. The structure should decrease the probability of style drift and also reduces stress.The trader will trade specific time of day, look for specific patterns, and use discretion in their execution. The approach to type 1 but more analytical. On longer time frames, the trader may be able to synthesis and integrate more types of information into the decision making process.
3.Opportunity Based Trading or Speculative
Opportunity based trading is a bit different then the other approaches. The opportunity based trader will look to capitalize on unusual events. The opportunity based trader might, for example, buy a steep sell off overnight. The opportunity based trader can use our software to enhance their situational awareness but will likely have seen something or have some purpose beyond the tape to get into the trade. Style drift and lack of discipline are high risk with this approach. The risk per trade needs to be higher with this style. One benefit of this approach is that there may be less competition for these trades because of odd or unusual holding patterns.
4. Systematic Trading
Systematic trading is similar to structured trading except that very likely the edge of the systems is much higher and the trades will be even less frequent. The trader is basically trading a well-defined system. Systematic traders benefit from intimate knowledge of their systems. However, there are several consequences of a strong systematic approach. The trade frequency will be much lower and profit per trade should be likewise much higher. Systematic traders will rarely share their methods because the methods rely on intimate knowledge of a proprietary system. Systematic traders will struggle to improve performance. This is a result of the lower trade frequency and higher built-in edge per trade. A systematic trader might be prefer to trade in two accounts and only use minimal discretion on the systematic account. It is generally easier for a novice trader to trade a systematic approach with real money because there are fewer decisions to be made. Often, hedge funds and other sophisticated traders may be trading similar patterns. This can lead the wavelength shortening and increased competition. Some discretionary input may help the trader to adapt to such changes.
5. Mechanical/Fully Systematic/Quantitative/Automated
These traders will go the next step and fully automate or attempt to remove all discretionary input. As such, there are much higher requirements that the system has been sufficiently tested and a great number of scenarios have been considered. Because of the higher testing then there is higher confidence in achieving above average profits but lower trade frequency may still result in a less smooth equity curve. The trade off for the higher profit confidence is often a lack of robustness -- as such systems can experience steep losses when market conditions change -- and the trader may be less attuned the causes of the changes. The strategy trader will typically attempt to mitigate these issues by running and operating multiple systems.
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In summary, there is no right or wrong way to trade so long as one has a strong understanding of their approach. We feel the trader who can pull from more then one style has a higher probability of success. AlphaReveal is the premier tape reading and order flow software that can help traders in groups 1-3 and may even be used to derive insights and values for traders in groups 4 and 5.