Business Plan—Trading Methodology

Most people have some sort of trading methodology, i.e. they buy or sell on moving average crossovers or when there's divergence. Readers of this blog know that I use a range of methods but that buy or sell decisions usually require at least three pieces of evidence. For example, I've taken many a short when a pair has reached resistance, there is negative divergence with RSI, and the candle behavior is bearish, i.e. a doji. This doesn't guarantee success but my experience and knowledge tell me that this is a high-probability trade. In addition, my stop can be tight. So using three pieces of evidence is one approach I will continue in this year's trading plan.

Another part of my approach (that is in my business plan) is the research I do. At the end of each week, I do a weekly analysis of the currency pair; at the end of a month, I do a monthly analysis. This helps me in identifying potential trade set-ups, particularly concerning support and resistance or pattern behavior. I have no plans to change this approach. It has proven successful. It requires work, yes, but that's the price of good trading.

One thing I'm formalizing in my plan this year is to identify harmonic patterns on a more rigorous basis. These range from such things as the simple Gartley to the more esoteric bat, crab and butterfly patterns. I'm not sure these work but the reality is that I've been dabbling in them—sometimes I make a conscious effort to look for them; sometimes I don't. That haphazard approach does nothing for my trading because I have little confidence in the patterns when I see them. Only if I begin to track the results of these patterns, will I be able to say whether I believe they're useful for me or not. I'm also introducing more rigorous analysis of cycles this year. Sometimes I refer to cycles in my blog but it has been random. Cycle analysis is either useful or it isn't. This is the year I'm going to do the work to see which it is for me.

Similarly, I'm going to stop bothering with such Gann techniques as eighths in price moves and things such as this. Honestly, if you do enough calculations you can prove any number and that makes the whole mess a waste of time. Fib numbers do seem to have some validity—or maybe it's because they're well-known and so traders tend to respect them. The 50% rule seems to have some validity. These things are easy to calculate—I have the spreadsheets set up or I can draw them on the chart. They're worth doing. But the more esoteric techniques—they're not worth it.

Such things as the Gann wheel also seem to be a waste of time in the spot Forex market. I wasted hundreds of hours this year and last fooling with this and it never helped one pip. I'm dumping my wheel in my office cleanup this week. Let the people that use it produce a valid statistical study. Believe me, they won't because they can't. Notice that I'm excluding it for spot Forex—I've not tried it in any other market.

All of this has to do with time management in one sense—how can I best use my valuable time. It also has to do with methodology. I've found things that work. Those deserve my time and attention. It doesn't mean I won't continue to study and learn but that comes under the section of my plan I devote to education. I've also found things I want to try and incorporate this year so formally determining these goals and allowing the time to do so is important to my plan.

One thing I'm adding to my plan this year is a discussion of different approaches for different markets. Trending markets behave differently than sideways markets; quiet markets behave differently than volatile markets. I intuitively know this and adapt on the fly but I'm going to give more thought to how to assess this and list the approaches that work best in each.

© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.