Trading System and Trading Strategy: They are the same thing just different words… right?
Not really… I have come to believe through my own experiences that a trader, or a person in general even, is at the greatest risk of peril when they are without a strategy. Even a simple one like get up at 7:30, be to work by 8:30, come home at 5:30, wash rinse repeat. That’s an executable strategy. It will work over time.
In that case, the “system” is the job, any job, but the strategy is how that person goes about performing that system.
For example, lets say there are 100 people that clean carpets in a city. The system would be the same for all of them right? Show up, move furniture, clean, replace furniture, leave, repeat. (cleaning methods may vary but system for making money is the same)
So what differentiates those 100 people? Strategy!
Customer service styles, advertising, business model, appearance. These are all very personal and variable factors that make up strategy.
What is the difference in trading?
SYSTEM: What a trader does to enter and exit trades. The trading “job”.
STRATEGY: How you manage the variables around those entries
The greatest cause of stress in any traders life is the lack of a strategy. Waking up and facing the FX market on a daily basis is like walking in front of a firing squad everyday, except some days they have real bullets and sometimes the gun just shoots out a little flag that reads “bang” and you get to live until tomorrow. There is so much risk out there and yet somehow our human nature won’t let us focus on it. We want to blindly and obediently submit our subconscious to the power of the probable. No different than buying a lottery ticket most times. In fact, a lotto ticket may be better, at least the risk is defined up front.
Trading accounts die without a proper strategy.
Think of it this way. When you and I were working our jobs, or are still working our jobs, what do we do? We show up to work and execute on a strategy, whether we realize it or not and our success at that job is undeniably and unabashedly attached to the execution of that strategy. All good and all bad performance comes from execution of a strategy.
When I worked as a business development manager for a mergers and acquisitions firm, I either performed well or performed poorly depending on whether I executed the strategy I had come up with. It takes patience. It takes doing things I didn’t necessarily want to do. But it was very simple: either you do it and succeed or don’t… and don’t succeed. It doesn’t get much more straight forward.
Like I have said before, trading is the most difficult job in the world, not because it’s hard to understand, in fact its probably the easiest job in the world to gain knowledge about. Price moves up and down. Buy low sell high. Simple simple simple. The problem is that the trader runs up against so many daily obstacles that prevent them from executing properly on their strategy. If all traders were able to execute on their strategy, there would be no money to be made. Everyone would do the same thing.
Malcolm Gladwell in his book “David and Goliath: Underdogs, misfits, and the art of battling giants” discusses this very thing. The use of strategy in the wake of insurmountable odds. The first chapter of the book is the story of David and Goliath, but from the perspective that David was an amazing strategic thinker, not just lucky. The chapter discusses two very important factors for why the battle of David and Goliath isn’t just a simple underdog story.
“On one level, the duel reveals the folly of our assumptions about power. The reason King Saul is skeptical of David’s chances is that David is small and Goliath is large. Saul thinks of power in terms of physical might. He doesn’t appreciate that power can come in other forms as well- in breaking rules, in substituting speed and surprise for strength. Saul is not alone in making this mistake…. But there is a second, deeper issue here. Saul and the Israelites think they know who Goliath is. They size him up and jump to conclusions about what they think he is capable of. But they do not really see him.” (Page 12-13)
This should pump us up as small account traders. What if there is a way to use the markets “giant” like qualities against it? What if there is a strategy that we could execute on that would give us the upper hand and make the market the weak player in the game? Man, that would be sweet. Now understand, it doesn’t mean there won’t be a fight. The fight will still occur every day, but the strategy will give the upper hand.
I haven’t figured this one out yet. I am a small player in this game, at least by account size. That needs to be overcome immediately for two reasons: 1) I just want a bigger acct obviously, and 2) bigger account, more inventory. So most of my work over the next small period of time will not be focused on taking risky trades and hoping for the best and that the system will work this time. I will be working on my way of developing a David like strategy. One that will make even the biggest giant flinch a little when I walk in the room.
Double check your trading strategy today when you have some free time. Are there holes? Are there times when you feel out of control to whats happening on your chart? Spend more time developing your strategy and less time trying to play the lottery. What have I said all along? I’m a strategic planner that has a part time job pushing buttons. It’s time to act like it.
Confidence comes directly from reliable strategy. David knew exactly how to use his sling and he could charge the battle field. Enough said.
Happy Trading and have a great weekend everyone.