Do I need a general methodology when I trade, or could this be detrimental?
Being too rigid in your trading style can be as much of a problem as being too flexible. I have often said that people are far too quick to pigeonhole themselves. The benefit of having a trading methodology is that you have identifiable reasons behind your trades. But the drawback comes when you refuse to see beyond your given method.
There are lots of different ways to trade:
- Swing trader
- Fundamental trader
- Momentum trader
- Trend trader
- Contrarian trader
It really all boils down to how long you hold your trades for. If it’s longer than a day then you have more of an investing mentality. This is why we have day trading and investing: they are two very different things.
If you day-trade then it doesn’t really matter what you call yourself. You are looking for degrees of time in your ‘momentum’ trades. Short-term momentum is a scalp, longer-term momentum is a trend trade. You are just trying to figure out the direction of a market for an allocated period of time and take money out of the markets.
So do you have to have a methodology?
I would say that the benefit of identifying your trading style is that you can repeat it. It’s like playing tennis: eventually you will play the same shot if you hit the ball enough times. With trading the markets you might think every trade is different but eventually if you trade enough you will buy or sell the same prices and get the same outcome.
When trading, the planning is typically something the trader puts a lot of effort into only to forget the moment the trade is placed. When emotions and money are added to the mix your methodology can go out the window. You lose focus on what you are trying to achieve and focus solely on the P&L: how much more money are you willing to lose or how much more do you want to take?
The difference between consistently profitable traders and the average retail trader is that they can control their emotions. This comes from doing the same thing over and over again. In its very essence trading is methodical. You examine lots of information and make a decision to buy or sell an asset class. It’s always easier to deal with emotions if you can refer to the reasoning behind the decisions you made.
For my own trading I have learnt many things from the ways I react to both winning and losing trades. I used to let losses bother me and get angry. Now (after many years) I don’t really care. I am in control of my emotions. If I lose money it’s by my actions, my decisions, my fault. There is no one else to blame for you losing trades. Once you find a way to get to this place you’ll find your trading becomes a lot easier.
By having a framework or way that you consistently come up with trades you can measure their relative success quite easily. You can also learn from your mistakes by identifying the reasons why you came up with your trades in the first place.
Chief Market Strategist
The content of this article is the personal opinion of the author and not Intertrader. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.