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The 2 Essential Trading Skills

In this blogpost we will discuss two types of strategies
that every trader or money manager needs to have in place
in order to be successful: offensive and defensive strategies.

 

As some of you might know, I enjoy playing tennis.
A week ago I was playing a match against a friend in San Francisco.

The first set I lost 4-6.
In the middle of the second set when I was behind 3-4,
it occurred to me that I was losing a lot of points on
my second serve. I changed my strategy.
I decided to swing for it hard with my first serve
and use a reliable but slow second serve.
As a result I won that set 6-4, to go on and
went on to win the following set 6-0.

Success!

Game, set, match.

That simple tweak in my game had a huge payoff.

The same principle applies in trading.

In essence, the task of every trader is two-fold:
maximize your profits AND minimize your losses.

Usually most traders are either good at one or the other,
but in reality we need both to win.

Two different sets of strategies are required,
and they deserve an equal amount of focus and developed skill.
In the past, I was always good at maximizing my profits
and had developed the right mental and technical skills
to implement those strategies; yet my defensive strategies
were not fully developed. I had to consciously work
at improving that part of my trading arsenal.

Let’s now look at examples of offensive and defensive strategies in trading.

Offensive Strategies

Offensive strategies are designed to do one thing: increase your risk exposure.
They are powerful because they create the opening
for profits to accrue, and let you maximize on existing opportunities.

Examples of these strategies include:

  • Initiating a position when your methodology signals it.
  • Adding incremental risk exposure to a winning position (pyramiding down).
  • Increasing the holding time of a profitable position.

Defensive Strategies

Defensive strategies are designed to do one thing: decrease your risk exposure.
They are crucial because they keep you out of trades with unfavorable risk/reward profiles,
minimize losses, and help to protect your accumulated profits.

Examples of these strategies include:

  • Staying out of the markets when the methodology isn’t generating any signals.
  • Exiting a losing position when your edge has been negated.
  • Taking some profits off of the table on a winning position.
  • Banking the entire profit in a winning position.

You might notice that I have not included tightening of stop losses, trailing stops
and hedging as defensive strategies, as they
can in my opinion actually increase the risk of loss.

Have you developed your defensive and offensive strategies? Both are equally important in trading.
Once you know when to deploy each of them and have mastered both, you will get to feel satisfied with your trading results.

Futures trading involves substantial risk and may not be suitable for everyone.



Disclosure: no positions