• : September 12, 2021
  • : B. Krishnakumar
 
Every Decision Comes at a Cost
 
Though the headline might sound a bit philosophical, but it is relevant in trading as well as in life in general. Irrespective of what you do or what decision you take, there is always a plus side and a minus side to it. On many occasions, the minus side is either not that apparent or is so insignificant that decision making becomes too easy.

Let us consider the relevance of this topic in trading. The common question or mental block one gets into is about the buy-sell engine and its components. We are often confronted with questions such as:

● Should I use Point & Figure, Renko or some other charting method?
● Should I use stop & reverse or trend following or mean reversion
● Should I use EMA or SMA or single MA or dual or triple MA?
● What settings should I use for MA or Donchian Channel or any other indicator
● Which scanner or pattern is the best?
● Which is the best exit method?
● Which is the ideal box size or brick size?

These are some common questions that I encounter. Maybe you can add a few more. The point is that you can use any setting and there is no one correct answer to any of the above questions. The answer is “It depends” and this answer tends to put off newcomers. They feel let down when they hear that there is no perfect solution or answer to any of these questions.

Let me elaborate. Any decision relating to the above scenario has a plus side and a minus side. If you choose a shorter MA length for example, you will get an early entry. This is the plus side. But the minus side is it can trigger more whipsaws.

Someone asked me a question a few days ago. The question was “If we take trades based on the trend in the higher time frame, will we not miss out reversals? The logic was reversals would be captured first in lower time frame and then in higher time frame”

This is a logical question. But in this situation too, our discussion about the plus side and minus side is relevant. It is a fact that reversals would first be captured in the smaller time frame. But if participating in the bigger trend in your focus, you should not be worried about the short-term time frame because there will be lots of reversals that will happen in the short-term while the long-term trend remains intact.

Finally, when the trend reverses in a bigger time frame, the short-term time frame would have captured it earlier. So, if your focus is to trade reversals then you have to reorient your strategy towards that. If trend following is your focus, the savings resulting from avoiding whipsaws (by ignoring lower time frame) is the plus side while identifying the reversal a bit late is the minus side.

So, understand your requirements as a trader and choose your tools wisely. Understand the plus and minus side of your choice. This is essential as it would help you develop conviction and confidence in your system.