“The basic idea is in 100 “trades” you are wrong about 70% of the time. You walk back to the dugout, often. Far less understood is of the 30 times you put the ball in play, you get a single, often. Thunderous reality: out of 100 trades, maybe 3 or 5 create most of your return.”
This is probably true of the style I am trading, and I have spent too much time trying to improve my success rate rather than coming to terms with the reality. A consequence of this has been that I have not traded my strongest views with enough conviction, for fear of losing money.
Here is an example. This is the December 2010 Eurodollar future. Basically, if central banks kept interest rates low over 2010, which has been my strongly-held view since before I started trading, this market had to move generally upwards over the course of the year. I tried to trade it a couple of times, but failed to get in.
One thing I have been thinking about in this connection is a way to use newsflow. Trading is fundamentally about two things: getting the direction of the move right, and having a good place to put your stop loss. It is hard to get into a trending market that doesn’t have strong breakouts — you try to buy on pullbacks, but you never know when a pullback is going to come to an end, so there is a big risk of getting stopped out. Waiting for the pullback to end before getting in seems like a clever idea, but as it starts to reverse there may be no clear technical signal, and the market could easily retest its low or make a new low before heading upwards. I wonder if this is a place where newsflow can help. In my recent EUR/USD trade, I entered when I sensed that the newsflow was turning against the EUR and a pullback looked like it might be reversing. Rather than a technical signal giving me a place to put the stop, a newsflow signal made it unlikely that there would be a short-term reversal, and thus gave me confidence to enter the trade with a stop a little distance away.
I am still not sure whether this way of thinking will work; but intuitively it should work, and it might have given me a way to get into this Eurodollar future.