Detailed trade write-up: Case study in crafting unique strategies setting you apart from the crowd [Video]


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Let's dive in...

First

We want the trading to align with the core business - providing liquidity to unsuspecting traders who find themselves offside and forced to exit losing trades.

What next?

We need a unique trade idea the crowd isn't aware of. An idea people are unsuspecting of that leads to them urgently having to exit losing trades.

The idea

Early into the trading session, there's an eagerness for the long side as per the comparison between aggressive buyers and sellers.

It makes sense because the positioning of commercial longs vs. speculator shorts are at relative extremes, and the September contract is days away from expiry

So many traders must exit September positions. But who comes off second-best when forced to exit? Speculators. Agree? /p>

Conclusion?

A short rally is likely, but going long 'right now' isn't unique. Keep that in mind.

Further observations

  1. Pending is a related influential market open.

  2. Breaking down the 23-hour trading session into trading times aligned with overlapping markets lets you see the different audiences who come and go based on other market hours.

  3. In the image below, a value gap (see white rectangle) won't fill when a specific audience is trading. It suggests an opportunity for relative value players seeking non-directional trades at lower levels. We've identified a reason for a short-term bearish view..

Chart

Combining the above, we see the opportunity for new longs finding themselves on the wrong side of the market and urgently exiting. 

But what's the catalyst?

Every meaningful move needs a catalyst.

The catalyst will be the pending related market open - creating the necessary downward pressure for relative value players looking to secure lower-level business.

Executing the idea

Below is the same image but with the playing fields marked in.

As per the idea, areas marked '1' and '2' are areas for short trades. Why? If the price reaches these levels, numerous validations for the long side will have failed.

(Note: Always consider where other people's line in the sand is - that point that will trigger them to exit.)

Chart

Trading works within boundaries, much like playing fields in sports:

  • Price within bounds. Here it's okay to trade based on your idea.

  • Price out-of-bounds. Regardless of your conviction, avoid trading when price is out-of-bounds.

This concept minimises poorly timed trades, improving trading success.

Colour coding for the win

Large groups of people use concepts such as support and resistance. And yet, the problem with consensus approaches is they don't give you a chance to achieve distinctive returns. Correct?

By contrast, the different coloured lines are colour-coded according to their representation - relative value, inventory positioning, market-making themes, etc. Importantly, these are concepts not used widely. 

As such, they provide a robust framework to the execution of your trading. See how in a second.

Below is the chart with the executions for the idea we covered.

See how the trading is within the playing fields?

Chart

It's not foolproof

The trading below is from the same day. 

  • Different idea. 
  • Different catalyst.
  • Same playing field.

Chart

Reviewing the first image, you can see a playing field boundary identified at 0.6441

Notice how a short trade occurs when the market can't exceed this boundary. But you also see the initial attempt resulted in a loss, akin to a 'false start'.

False starts are common in trading. When combined with bad trades, they're detrimental to your trading account.

Therefore, a framework with playing fields reduces the risk of bad trades and guides entry and exit points.

Crucial because it safeguards you against the substantial negative impact of combining false starts with bad trades.

From trading August 23

Below is a trade that worked. 

But what you don't see are the six! false starts beforehand. 

Chart

And yes - some of those 'false starts' were unforced errors (poor timing or trade location choices) - emphasising the importance of using parameters like playing fields to reduce unforced errors.

In summary

We covered three essential contributors for crafting unique strategies that set you apart from the crowd.

  1. All trades start with an idea (hypothesis) based on collating data the crowd isn't aware of. This is fundamental to finding an edge.
  2. A catalyst starts the move.
  3. And the rationale for entering into trades is based on unique evidence the crowd isn't aware of. 

Dr. Brett Steenbarger - performance coach to elite traders - offers valuable insights into trading strategies. He emphasises the importance of avoiding consensus thinking, stating:

"There is no edge in being consensus. If you are part of the herd looking at the same charts, regurgitating the same narratives, there is no way to achieve distinctive returns" 

Thoughts?

Taking a moment to reflect on what you've just read, what are your thoughts on:

  • The concept of "playing fields" in trading? Have you used a similar framework?
  • Dr Brett Steenbarger advises against following consensus thinking in trading. How do you differentiate your trading strategies from the crowd?
  • What's the most significant challenge you face trying to implement unique strategies?

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