I talk to traders all over the world and it surprises me how many “high probability” or “market neutral” traders don’t realize that they are making a statement with their position.
By making a statement I mean whenever you enter a position, you are defining the conditions under which you will win and which you will lose.
For example, when a trader buys a stock he’s saying that if the market moves up he is going to make money and if the market goes down he is going to lose money. He’s essentially betting on the market going up and he understands that if the market comes down then he’s going to lose money. That’s pretty easy to understand.
The statement about a position is becomes more difficult understand when we start dealing with market neutral trades, although it shouldn’t be.
When I ask many market neutral traders to define the conditions under which they’re willing to lose the trade, I get silence. It’s as if they’ve never even considered the possibility.
After further questions, I find out that they’re basically expecting to put on the trade and make money no matter what happens in the market. I will hear something like “I do this type of trading because I’m no good at picking market direction” which translates to me as “I do this type of trading because I’m not willing to learn how to analyze the market and identify market conditions”.
Don’t get me wrong there are many, many great reasons to choose market neutral trading over directional trading AND choosing market neutral trading for the sole reason that you’re not willing to identify and bet on market conditions is not one of them.
Here’s the challenge with that thinking, by putting on a market neutral position, you may not be betting on direction but you are betting that the market is not going to move too far in one direction or be too volatile for the duration of your trade. Let’s face it, you are betting on the market being somewhat neutral and you should expect to lose if it is not. That being the case, it would be beneficial to identify the market conditions under which you are entering the trade because a high probability trade isn’t so high probability if the market is probably going to do something that the trade can’t handle.
Therefore if you want to be profitable on a consistent basis, you have a much better chance of doing so if you understand what’s happening in the market, you understand the types of movements your trades can handle and you match your trading to the market conditions. That’s how you create a high probability trade.
For more information on identifying market conditions and creating high probability trades around those conditions to become more consistently profitable, contact me at [email protected] for more information on the M21 Trading System.
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