Trading-Part 3: The Search For Methodology (Market Sniper)

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This is the third installment in a series dealing with the development and the setting up your trading business. For your review, here are the links to the first two posts:

Developing A Trader's Mind Set

The Nuts And Bolts

The search for an appropriate trading methodology can be both rewarding and for some traders, very  frustrating. Most traders flit from one methodology to another in the search for the "holy grail" of trading. You will not find it in methodology. If this applies to you, review part one of the series.

There are two very basic methodologies, Fundamental analysis and technical analysis. If your trading time frame is long term, perhaps fundamental analysis is what you should be looking at as it usually  takes time for fundamentals to be realized in market price. Great fortunes have been built using purely fundamental analysis for trading decisions. The classic value trader should look at the classic by David Dodd and Benjamin Graham (Buffet's teacher) Security Analysis. Now available in pdf format  l You might also wish to pick up a hardbound copy as there have been many newer editions. Most shorter term time frame traders, however, use technical analysis for their trading decisions.

Methodologies in the area of technical analysis are dazzling in their number. Each has their proponents who sometimes insist that theirs is the trading method. There is no the trading methodology. We are all different. What resonates with me may or may not resonate with you and vis-a-versa. Resonance is crucial to you in your search for methodology. It must make sense to you. It must provide you with price points that will allow you to unambiguously enter and exit trades. It cannot create any internal conflict that would make you "up tight" using it.I also maintain that for a methodology to be truly robust, it must be applicable in any time frame you choose to trade and with any trading vehicle that creates a chart.

in your search, take a look at as many different methodologies as possible. May not trade many of them at all but you should become familiar with as many as possible. Otherwise, how will you know a "fit"? Look at RL, Pivot point trading, Elliot Wave, Gann, chart pattern recognition, volume/price analysis, various combinations of indicators, some may even look at astrology, etc. At least become acquainted with the various methodologies.

Become a student of market conditions of the vehicle your trading. Is the market trending? Is it in a tight range consolidation? is it trading in large range? You will need to know how any methodology's results will be under any market condition. If you are using a trend following methodology, for example, do not attempt to trade it in non-trending markets! There is always a market or a trading vehicle that is trending. Find it and trade it with that methodology. Sounds simple and it is. Many traders will attempt to trade their methodology under any condition. Not wise unless such a methodology allows for trading in all market conditions. It is your job to find out if that is the case before risking capital.

There is another way to trade that does not have an over riding methodology to it. There are many traders who just trade various trading setups. Gap fade traders is one that immediately comes to mind. They become proficient and expert at trading certain setups when they appear. To be consistent with this non-methodology requires extensive back testing of setups and knowledge of the long term expectancy of each setup. I personally trade with a robust methodology. I also have added tried and true setups that are not part of that methodology. If your trading by method, only add setups, indicators, etc. that are not part of the methodology that you trade only after mastering the methodology of your choice. Otherwise, confusion could reign.

In conclusion. Methodology goes to trading with a plan. How can you have a plan without methodology or, at a minimum, a proven setup? Find what works for you. Just because a trader you know is consistently hitting the ball out of the park does not mean that you will using the same methodology. So, take your time and shop around. The market will still be there when your ready. A last word: simple is better. Too many traders have so many indicators, it can lead to trader freeze. All the indicators do not line up. It is like a horse bettor. He may have nine specific pieces of information when he handicaps a race and makes his decision. Fifty more pieces of information will not create a "better" decision.

Yours in the continuing search for the trading edge, the Market Sniper.