KING - Trading setups are not a highly effective style of trading

My newest KING/George IV client is a fine man from UAE named Denis. He is also my first KING client in the Middle East, although I have some Israeli clients there too. Probably only one or two at most, but they have only bought George IV. One is a Polish Jew.

Denis is also a physicist and an astronomy buff, so we have something in common beyond our interest in trading that brought us together.

Before buying KING he asked a few questions and one had to do with how it was possible for me to take those fast trades, sometimes lasting only a few seconds, in a quick succession, which I can do on a volatile day. Specifically, he was wondering about the setups (and signals) I was using to enter trades like that.

To quote him:

"I can see some successive trades lasting sometime dozen of seconds and being one after the other one in a time frame of 10 minutes, how do you have time to get a signal or a visible pattern? does such a case means there was a persistant signal to open trade and you open and close each after 5 ticks because I cannot see how someone can react so fast?"

And here is my answer.

Discretionary trading, as I mentioned in my previous email, is really about skill and not signals or setups. You cannot be really a good, efficient discretionary trader if you rely on the latter all the time. That might be a good starting point, but you should try and graduate from this level. They are just crutches for someone not able to walk normally or training wheels you give to a kid not to hurt himself when he learns to ride a bike.

Patterns, that you mention, are a better way to approach trading, and as a discretionary trader you want to develop the skill of recognizing them and acting on them. Patterns represent opportunities and trading is all about exploiting opportunities, be it patterns or their combinations, or a strong momentum, which is really just another pattern.

These trades that you have in mind are the result of acting on such an opportunity (or even a few in a row, as it might be a case) in a strongly moving market. You don't need a signal for that and you may not even get one, but you need to be able to recognize that you are in a good spot and to act on it and to exploit it maximally.

I usually don't pay much attention to KING signals, because I often act before they develop, but I may use them as a confirmation. Using signals makes a lot of sense in mechanical trading, and that's all you do when trading mechanically, but in discretionary trading you don't need them, though you can use them as a beginner.

That was a good question that many people don't even ask, but may instead jump to all kinds of wrong conclusions. The thing is that these people are so stuck in their setup mentality that they will always be missing many opportunities that a truly skilled discretionary trader will not. While there is nothing wrong with setups per se, you definitely can do better if you do not rely on them all the time.

That explains many of my quick trades that I like refer to as quickies, and the fact that they often occur one after another. Nothing really mysterious here, unless you are a total trading loser to whom everything that is not a total blow to a trading account becomes suspect. If that's the case, KING will not help you. Neither will that guy who blew two of his day trading accounts and started a trading forum so that more can follow in his footsteps (right down a precipice). Not, it's not a joke. It's the sad reality of retail trading.

But that's not all yet. Not much later, just as I was about to post this article, I had an opportunity to address this issue in yet another way, from a slightly different perspective. Let me share this email (to C.J., a US-based KING student) here too.

Your question is answered in an article I am about to post on my site that I wrote recently but being a bit under the weather did not post it yet. Still, I will address it here too as this may offer a different perspective.

The thing is you seem to be assuming that it has to be some special reason for an entry. Not really. Simply the fact that the market is in a steady uptrend can be enough. Today I was taking long trades for a while based mainly just on that fact. Your timing does not have to be perfect, neither does have to be your setup and sometimes there is no need for any setup to trade at all: a good, steady trend is enough.

This is discretionary trading and not trading based on setups. These are two different things. The former can be much more effective; you can be getting better and better by relying on your intuition which is a powerful tool when based on experience and often underrated if not misunderstood. I don't think that's possible to the same extent with setups because you are really married to them.

In discretionary trading you construct trades out of various elements, that can differ from one trade to another, and every trade can be a little piece of art. Trading using setups is not like that, and often does not work because the edge you assume you have (often never tested for) is really not there. In discretionary trading, which is really skill trading, the sizable part of the edge comes from your skillful reading of the market and building your position properly. If you can learn how to read the market well when trading with setups, you may be able to do well too, especially if you couple it with proper position building, but then you will probably find out that you really don't need setups at all.

Discretionary trading, practiced as I do it, which is the right way, I believe, should appeal to creative individuals, not afraid to play, but those who tend to think in rigid ways will most likely struggle with it. Trading is a game and to win it you have to play it effectively. Since the market is certainly not very rigid, you may not be able to beat it unless you approach this task creatively. There is more than one way to do so, of course.

This is an art rather than a science, as I have said on my site too, probably in more than one place, but there is also some science (or philosophy, at the very least) in it.

Let me make something clear here, so that there are no doubts about what I wanted to say: you can enter your trade not only because of some specific reason, but also because of some general one. But, and perhaps even more importantly, you can also have both specific and general reasons why not to enter the market or why to exit it. You want to use all of those too. Sometimes, for some people at least, puting on a trade takes the center stage, which makes things a bit asymetrical. Entries and exits are equally important.

Posted on November 24th, 2014.