A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
You Can Never Have Enough Perspective
01/15/2013 4:36 pm EST
Traders shouldn't get lost in charts, nor should they ignore them, says Dave Floyd, who explains his three-step system of analyzing potential plays.
My guest today is Dave Floyd, and we're talking about perspective as a trader and why that's important to your success. Dave, I know you have a lot of experience in the markets, let's talk about kind of your overall philosophy of approach of the markets.
Sure, well, the overall approach that we have is a combination of technical analysis and fundamental analysis, and I think that's important because anyone of those approaches is what I would consider one dimensional and I think in a market, like, well, all market environments, you need a heavy dose of perspective. Combining those two is really a way to be more objective about your trading decisions.
In addition, I think having seen several different market environments over my nearly 20 years of trading can really help because a lot of times you'll get chart setups, they look intriguing on the chart but when you overlay in perspective on what other related asset classes are doing or just your general feel for what the markets are doing, that set up may not be terribly attractive when all is said and done. So perspective and having a multiple layer approach, a three step approach like we do, really helps in terms of making better trading decisions.
Yeah, talk about those three steps. What's involved there?
We base it on what we call the IPA trading period, which stands for inter-market analysis, which is the fundamental or the base of the pyramid and really what that is we want to look at what all of the asset classes are doing relative to one another. Now, since we focus mainly on foreign currencies, we want to know what the S&Ps are doing. What are commodities doing as it relates to the FX market? So that's the first step. We want to see what markets are driving the FX market or even what currencies are driving other related markets. So that's our first step, inter-market analysis.
Then we want to drill that down one more step lower, which is into pattern recognition, or for us, Elliott Wave analysis. Do the wave counts overlay nicely on top of the inter-market analysis? Does that support what we're seeing in terms of the overall big picture? If it does, great, let's go down one step further, which takes us to trade management and risk management. How confident are we in what we're seeing in terms of the pattern as well as the inter-market analysis? Because we base our trades on our conviction and again, it goes back to our perspective and our experience as traders.
If we see things coming together and it's a robust set up, we're going to want to go more aggressively. If we see things that are well, we want to be in the market, but our conviction is so so, we'll come back with a lower conviction type of trade. We're still in the market and I think at the end of the day, being able to discern between putting all of your chips in and just maybe putting a few chips in can really make the difference at the end of the year in terms of performance. So we package that together and call that the IPA trading pyramid.
Alright, so do you recommend that every trader have at least some sort of semblance of a step by step program to find the good opportunities?
I think so. You know, early on in my trading career, I was a day trader and a scalper and the perspective it offered was fantastic. I'll never regret going through that period. But I think as you push your timeframes out, which most traders do ultimately, you have to have something that's objective. It can't be by the seat of your pants, because we're all very emotional at times and if you can get past that with an objective process, that's going to help your trading immensely. It's not always successful. You sometimes do get the emotions involved, but as you go through it time and time again, you will learn to rely upon that objective process.
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