But what I thought was more important or valuable was understanding the various components of the system that makes it a good one. And these are fundamental concepts that can (and should) be present in all systems:
- Markets – What to buy or sell
- Position Sizing – How much to buy or sell
- Entries – When to buy or sell
- Stops – When to get out of a losing position
- Exits – When to get out of a winning position
- Tactics – How to buy or sell
A good strategy minimally has Entries, Stops and Exits. And a good strategy should help you to identify good (i.e. low-risk) trading opportunities with good risk-reward ratios.
A good money management plan tells you the maximum amount you can to buy and sell each time. (Note: That doesn't mean that you should trade the maximum amount each time.)
But what I think I'm missing (and perhaps many other people too) from my strategy is a concrete, well-thought and written out plan for scaling in and out of the markets for a specific trade idea.
Allow me to illustrate what I'm talking about. In my earlier posts on EURUSD, I indicated that I was gong long at 1.26 if it reached that level before rallying. Prices did eventually rally, with lots of whipsawing. While I did scale in and out of the markets, taking profits for smaller rallies, and re-entering on retracements, I didn't quite put it down on writing exactly how much I should scale in and out each time. Meaning... it was done pretty intuitively.
I was reading some of Van Tharp's materials, and am now thinking of how I can enhance my existing strategy (based on EW) to maximise profits and minimise risk. One of the ways mentioned was pyramiding, and some of the guidelines were:
a) Never add to a losing position (known as averaging down)
b) Add only when your trades are profiting, and if adding doesn't increase your potential losses.
There is one danger to pyramiding. One is that it builds up a significant position at the end of the trade, that a reversal can result in wiping out a significant portion of the trade that you had taken some time to build. Imagine building a position for 2 weeks, only to see your profits wipped out in 2 days!
I believe that there's some value in adding a pyramiding strategy to the existing one, but I think there are some finer points to understand, and that I should be able to quantify the potential gains and lossess before this becomes an integrated part of my strategy.
P.S. I'm still short on EURUSD, and am somewhat cringing that prices are still holding around 1.337 level. Markets had been moving sideways (although through a rather wide range), and seems to be waiting for some significant news next week. One of it would be the Fed rates announcement on Tue (actually, its Wed 3.15am Singapore Time). Good luck for your trading!
