A Trading Epiphany

Asad Dossani
I stared at my computer screen in disbelief. At the time, I held a short position in a particular currency. Meaning, I was expecting to profit from its fall. Based on my analysis, I felt this country's macroeconomic fundamentals were poor. And my analysis turned out to be correct.

But my short position was another story. Day after day, this currency kept going up. Despite the stream of bad news I had predicted. The financial press was confounded too. Headlines such as 'Currency X goes up despite poor unemployment data' were common.

My initial observation of financial markets led me to an easy conclusion. Markets respond to news. So if I can predict the news, I can make money trading. The idea is intuitive and appealing.

This currency trade made me rethink my entire approach. If I had lost money because my macroeconomic analysis was wrong, it wouldn't have bothered me. The fact that I lost money despite my correct macroeconomic analysis prompted the rethink.

I thought to myself, let's take a step back and understand what's going on when news is released. The market price doesn't move on its own. Traders react to the news. That's what pushes prices up or down. And how traders react is anyone's guess.

Each trader can respond differently to news. Some traders may sell when confronted with bad news, thinking that the price is likely to fall further. Other traders may buy in the same scenario if they believe the market had already priced in the news. Still other traders might be making trades because they hold stop losses or profit targets.

So, to make money, I needed to predict not just the news, but also how traders would respond. Great, I thought, now all I need is access to each trader's thought process, and I'm done.

Needless to say, I needed a new approach. I went back to the drawing board. I asked myself a series of questions:

What is my goal? To predict the next movement in the currency market.

How do I do this? Think about what factors could help you predict the next move.

What kind of factors? Past price history is a good place to start.

This initial conversation with myself ultimately led me down the path of algorithmic, or system, trading. What is the basic idea behind system trading? We set ourselves a series of objective trading rules. For example, buy when the price crosses its ten day moving average.

The rules are determined by analysing various trading strategies on historical data. We look for the ones that have performed the best, subject to various robustness checks.

Once the rules are set, we just need to follow them. Doing so requires discipline and patience, but is something anyone can develop.

And it's something many people have already done. When we first introduced Alpha Trader, I pitched the idea of system based trading. My goal was to create a highly profitable trading system that anyone could follow. Something that would appeal to beginners and experts alike. We've come a long way since then, but our core principles remain unchanged.

That initial conversation was an epiphany. A light bulb in my head. A moment of clarity. Since then, my approach to trading has radically changed. But this didn't happen overnight...

Have you ever had a trading epiphany? What did you learn? Let us know in the Club or share your comments here.

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3 Responses to "A Trading Epiphany"
kumar
01 May, 2016
dear sir,thanks 4 ur advise,but advise the name of site where u can find out the brakeout stats as per my needLike 
MUKUND JAEEL
30 Apr, 2016
Hi, There are broadly three types of traders viz. 1) Those who analyse the trades themselves 2) Those who go purely by recommendation services and 3) Those who do it out of their gut feeling and take chances. What is the percentage do you think is of each category and how it affects price movements ? Thanks.Like 
Harish Nayak
30 Apr, 2016
The fact that I lost money despite my correct macroeconomic analysis prompted the rethink. YOU ARE JUST LOOKING FOR EXCUSES and MIND CONDITIONING. THIS KIND OF FALSE SATISFACTION DOES NOT MAKE US GOOD. NO BODY PAYS TO LISTEN SUCH SOFT STORIES AFTER FAILURES. Harish NayakLike 
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