The Biggest Variable in Trading is the Trader

Tech issues with my charting platform sent me to my list of non-chart critical backup topics. Before breezing past a non-market topic piece ask yourself, “Am I a discretionary or, mechanical trader?” This isn’t a gray area. Mechanical trading involves following a specific set of rules that has garnered a positive expectancy over the course of time. Discretionary trading is any trading that makes the trader a variable, whether through the interpretation of the signal’s rules, asset allocation and weighting to chart pattern and fundamental data interpretation. Most traders fall into the discretionary category when looked at honestly. This makes the trader the biggest variable in a given investment sector. We’ll take a look at the frailty of the human psyche as well as a perspective that’s ameliorated more than twenty years of trading for a living stress.

Let’s begin with the elusive task of methodology development. The first step in taking control of your own investing is developing or finding a methodology or trading system that makes sense to your own gut. Some traders aren’t comfortable with anything less than the latest in trading technology while others still prefer paper. The possibilities are endless. The key point here is that if the trader doesn’t trust the premise, it’s almost a certain they’ll bail at the most critical moment. Whether it’s cashing in open profits or entering a trade knowing the risk was too great, the trader will under perform the method’s ultimate performance metrics almost assuredly.

Personally, I prefer premise based methodologies. I need to be able to tell the story not just do the math. Knowing and accepting the premise upon which I trade allows me take advantage of the method’s strengths while accepting its weakness dispassionately. Furthermore, and just as importantly, knowing the method’s premise provides performance and behavior boundaries that can quickly alert the trader to something peculiar in an individual market. Our piece here last week pointed out that, “The Stock Market is at it’s Most Indecisive Levels Since 2008.” Clearly an important piece of record setting data for those who use the Commitment of Traders report in their methodology.

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This where the disconnect between the degree of certainty and the degree of accuracy begin to diverge at an alarming rate. The discretionary trader can look at record setting data and use it as growing conviction for EITHER side of the trade. How many times have the pundits on TV passionately argued opposing sides of record setting data? One side insists it’s a trend while the other sees no way it can continue. This is the battleground of the trend trader versus the swing trader. The point is that the data can be shaped to fit your view or your view can be shaped to fit your data but either way, the notion of “record levels” pushes the degree of certainty towards full investment as both sides disagree on the resolution of something that’s never happened before.

Successful trading and taking control of one’s own investments requires maintaining a big picture view. The object is to win the war while not any individual battle to equal total defeat. As a veteran trader and broker, I’ve seen the “single battle” wipe out what many smaller victories. Nearly each case involved the myopic focus on a single data point as the justification for the abdication of the behavior that had generated successful trading results up to that point.

COT column bannerI’ll close with a brief re-cap of my own trading over the last couple of weeks as a classic example of why we stick with the research behind the Commitment of Traders program. We’ve written extensively over the last couple of weeks that we didn’t believe the metals’ rally would hold. We just sold silver for the fourth time since February 1st. The winner was bigger than the two losers and we’re carrying an open short position. We’ve also sold gold and copper twice each over the same time period. Given the news these markets generate, it’s easy to swept up in the rhetoric of the day’s events and allow this to dissuade us from our primary objective….to be profitable overall. None of these six trades were home runs. In fact, due to proper leveraging and asset allocation, a short sugar trade has been our biggest winner in the last month. Choose your battles based on your preparedness to wage war. The victor can’t be certain but the risk must be assessed accordingly and the objective must remain clear.


This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.