What’s most important: Trading psychology, money management or edge? [Video]
|Look: If you haven't got edge, the best psychology and money management won't prevent losing money. Making edge the most important. Yet: Edge seems surrounded by confusion and misunderstanding, right? So, how do you get edge?
First start with a thesis for a catalyst
What's going to move price? Which direction will it move? And by how much? Take AUD/USD: It's a Thursday Asian trading session. Price has risen massively last 24 hours. But there's so much aggressive selling below current level? It's obvious to everyone a short covering rally is coming right?
Think: Do markets move in obvious ways? A little unknown is relative value for the Asian session is lower than current prices. But higher than what most think "a discount" represents. (relative value is where large buyers will enter) End-of-month is when dealers and commercials in AUD/USD rebalance inventory. The aggressive selling was inventory rebalancing. But most will think it's new short traders who are currently offside and the target of a short squeeze.
First thesis: Long traders exit their trades at a loss fuelling a move in price to relative value levels. First catalyst: Market makers manufacture a price increase enticing new traders to buy. The new buyers are the fuel for a move down. As they exit their losing trades, prices falls to relative value levels.
What does trading it look like? 1st: attempted short scalp = paper cut loss. 2nd: U̶n̶d̶e̶r̶ ̶N̶D̶A̶ playbook trade which includes scaling-up. Plus… 3rd: repeat of last playbook trade 4th: failed attempt to add another leg to above trade 5th: Premium U̶n̶d̶e̶r̶ ̶N̶D̶A̶ playbook trade:
Plus:
Notice one idea milked for all it's worth when you have a catalogue of strategies with edge (a playbook)? And this isn't even the most exciting development... The market didn't move as low as the relative value level. Appetite for the long side is so strong buyers are willing to "pay up" for it. When this happens - look at the steep price increase!
Which brings you to your Second thesis and catalylst. The market aligned with playbook trades on the longside. Developing a thesis and recognising catalysts is vital to your success. You develop these skills trading at a professional firm. Or you can work with a mentor to replicate their skills and subsequent edge.
That's everything. For a 1 minute recap in a live trading setting, see the video below:
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