Sure You're Not Sabotaging Your Trading by Not Knowing About Themes?

Thursday was challenging.

But not because I was racking up loss after loss—my trading process takes a safety-first approach, so that's never a concern.

But I missed out on the primary opportunities. Why? I'll explain in a minute.

Can you relate?

You have a strategy that's working for you.

What happens next?

Let me share an email with you. As you read it, consider whether you could easily have sent it.

"I'm using the system taught to me by [redacted] I initially tested the methodology for profitability for three months before trading it live, and it performed well. I was breakeven for several months and hoped to build on that, but instead, I went on a run of losses and never bounced back. I want to be a profitable trader so badly. I don't know whether I just need more time or whether there's something I'm seriously missing, so I'd like to get outside help."

Back to Thursday

I couldn't capitalize on opportunities yesterday because a new theme was 'in play'. However, this doesn't mean the market is entirely different as if you're now trading a new instrument.

You can still identify the likely price movements that will occur—like seeing a completed jigsaw puzzle before you start fitting the pieces together. But what changes is how you approach it.

You know price can move many ways from A to B. Agree?

Playbook trades are like jigsaw puzzle pieces. Just as every puzzle piece fits into a specific spot, you select the playbook trade that fits the current market price behaviour as you execute your vision of the likely price movements that will occur.

When trading aligns with market behaviour, you can use extremely tight risk management. This allows you to increase trade size while limiting losses to mere 'papercuts'.

However, if you can't, you'll encounter these problems:

If you use large size with wide stops, you incur huge losses.
You'll need to set improbable profit targets in the hope your reward is greater than your risk.
You can overcome large losses by reducing size, but making a meaningful income from trading is restricted.

Note: I've written about the importance of sizing previously. Link to article at the bottom.

I don't always identify these new themes on the first day. While some traders can, I'm not one of them.

Typically, I can figure it out the day after trading, once I've taken a break from the screens.

But because they are unknown to most people until about day four, you can make the most of the following one or two days.

Once you're entirely familiar with the new theme...

You'll also be very early to spot when it ends, and the market returns to your known playbook trade.

Consider this

Not knowing themes you experience bruised confidence and a battered account.

But you start the following day with revived enthusiasm and optimism. You plan to make back those losses.

Yet once trading gets underway the next day, it's more of the same. After several additional losses, you do the wise thing and stop trading. While your account is no longer suffering losses, it won't be long before you experience why some people say the market is an unforgiving force. See if you know what I'm referring to in a moment.

The complacent ones

I refer to identifying where the market will move as a game plan. Following an evidence-based process and applying problem-solving, today's game plan initially has the price decreasing to 0.6535.

The chart below shows that the price has remained in a holding pattern for 8 hours.

This is a 'big-picture' view.

Viewing this chart on a much lower time setting highlights all the times the market 'nearly' rolled over only to ratchet up aggressively in price.

Due to this new theme, copious short traders repeatedly lost money trying to go short.

While you might think it's easy—just put your stop up above the highs—remember that's only the case if you trade small. And you don't make real money doing that.

The yellow-green rectangle represents a significant quantity of longs, and despite the price having reached them and even traded below them half a dozen times, they are complacently staying put. Hold that thought.

Day two of the theme

Friday's trading initially aligned with the current theme. Profitable? Yes. Anything to write home about? No. A 'few bucks' here and there.

Engagement does beautiful things

By remaining engaged, I was early in spotting an end to the theme—too early, in fact. You'll see my first attempt was a minimal loss.

But once the trade worked, I had no intention of taking partial profits. Instead, it presented a perfect opportunity to add to my position.

The biggest trades are those no one sees coming. The theme created an absence of short sellers in the market, leaving those who were short a bigger piece of the profit pie.

You also had the complacent longs who spent 8 hours feeling incredibly comfortable. That's a big group of traders to fuel prices lower if they discover their complacency is unfounded.

One final piece of the puzzle

There's another reason to add and double dip...

You know that big group of longs? Well, they were the reason a big group of shorts (red rectangle immediately below them) could not get onside.

It's not a topic I can dissect in an article, but when you have a huge wall of shorts onside, there's no way those newly underwater longs will get back into the money anytime soon.

Oh, and curiously, the theme returned again early into the European session and then stopped—to keep everyone on their toes.

Adam Fiske17 April 2024