Strategy

If I have seen further it is by standing on the shoulders of giants. – Isaac Newton

The Origin of a Superior Strategy

I’ve studied for years profitable traders to see if they have anything in common. Names like Jesse Livermore, Nicolas Darvas, William O’Neil, Stanley Kroll, Ed Seykota, George Soros or Bruce Kovner are synonymous with big trading profits. What I have discovered is that although their trading spans over one hundred years and several asset classes from stocks to commodities, there are at least a couple of major similarities in how they managed to achieve super-performance. Firstly, robust risk control. Secondly, pyramiding of profits.

Strategic Pyramiding – SP

SP is a discretionary trading strategy that I’ve developed (and continually fine-tune). It has at its core the old trading maxim ‘cut your losses short, let your profits run’. SPS focuses on first identifying trends in currencies, commodities and stock indexes and then on pinpointing low risk, high reward entries and levels for profit pyramiding. While the stop loss is always defined before a trade is entered, there are no fixed targets for the trades that are profitable. Given the dynamic nature of the markets, I believe it doesn’t make sense to limit the upside potential of a trade to an arbitrary level. Put differently, the main tenet of SPS is preservation of capital while at the same time being ready to capture windfall profits (like in the example below) when the market offers them.

Building Blocks of SP

1. Trend: No matter what time-frame one uses for trading, the price has to be trending in order for the strategy to achieve its maximum potential.

2. Classical Charting Patterns: geometric configurations such as double or triple tops and bottoms, triangles, head and shoulder tops and bottoms, flags.

3. Price Action

An Example of SP Strategy in DAX30 :

DAX

Entry1: 8992 SL: 8980 -> Risk:12p Entry2: 9005 SL: 8998 -> Risk:7p Entry3: 9036 Sl: 9026 -> Risk:10p Exit: 9160. Final R:R 1:47

GER30H1

Bird’s eye view

I’ve written several strategy related articles so far that I’m sure will give you some food for thought:

1. About risk control here and here

2. About the importance of developing your own strategy here

3. About the edge and logic of a strategy here and here

4. The thinking process behind a trade (a losing one in this case) here

5. Diagonal versus horizontal chart patterns here