In this episode of Truth About FX, Walter talks about the art and science of trading. Should you stick to what your system’s rules or should you go with your instinct?
Walter suggests a little of both. He talks about “conscientiousness” and how knowing this can affect the way you approach trading.
Download (Duration: 03:43 / 4.25 MB)
In This Episode:
00:49 – strictest interpretation
01:21 – loosey-goosey
02:56 – personality test
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. How much of trading is art and how much is science? For example, if I see a Big Shadow but it isn’t quite perfect, should I take it or should I stick to the strictest interpretation of the rules?
Walter: What a great question, Hugh. What do you think? What do you say to this? I know what I think but I am just curious what do you think.
Hugh: My impression would be first, stick to the strictest interpretation of the rules, backtest that and see how it goes. See where you can put some of the art into it like bend some rules a little bit and, without a doubt, it makes sense. What do you think?
Walter: Yeah, totally. I think this is going to come down to personality. It is going to come down to your style. For example, some people just do not like breaking the rules. They are going to need to have a checklist, they are going to have follow a system. They want to have a framework.
Other people are going to be a little bit more loosey-goosey. They are going to allow for more interpretations. Here is what I would say, if you know that you are one of those people that, in Psychology, they call it “conscientiousness”.
I’ll put a link in the shownotes here. You can take a personality test — and it is not an IQ test so it has nothing about your intelligence which we all know the intelligence test in Psychology is absolutely awful. That is a totally different story.
The point is, take that test and see if you are high on conscientiousness. You’ve probably already know if you are. If you are, what that probably means is you need some defined rules.
For example, if you are going to trade a big shadow which is, of course, a special case of an engulfing candle, you might need to have a rule where you say “Look, if I am taking a big shadow trade, a bullish big shadow, the close needs to be in a top 15% of the candle.”
Likewise, if I am taking a bearish big shadow, the close of that candle needs to be in the bottom 15% of that candle. That would be my approach. If you are already asking yourself, “Should I take the strictest interpretation of the rules?” Then, maybe it means that because you are already questioning it that is not something for you.
Maybe, instead, you need to have like a template that you look at and go “Now, that is a big shadow. I am going to look for those that look like that”. It does not have to be within certain number of pips or whatever and all that sort of thing.
That is what I would say. I would say if you are unsure, take the personality test and just pay attention to your conscientiousness score. If you are someone who likes to question the rules, does not like the fall, and you don’t necessarily have to.
It’s just that you need to be aware that the reasons why you take certain trades may not be as apparent to you as it would be to someone who’s got that checklist and has that framework and just stick to it boom, boom, boom.
It depends on your approach. That is what I would say.
Hugh: That is really interesting. I’ve never heard that test before so I will definitely try that too.
Walter: Great. Let me know how you go.
Hugh: Yeah, okay. Thanks, Walter.
Walter: Thank you, Hugh.