Trader’s Narrative

As much as trading seems complicated, or perhaps, as much as we fall into the trap of making it complicated, there are really only three types of trades you could ever put on. In order of difficulty, here they are:

With the Trend
Trading with the trend is perhaps the most common, and I would argue the easiest of the three types. Turtle trading would fall into this category, as would dummy trading, Linda Raschke’s “Holy Grail” setup and many others. When you trade with the trend, your thesis is to go along with the crowd and ride the emerging or existing trend. A break-out type play would go under this category, as would a retracement type play - since both are anticipating a continuation of the dominant & previous trend.

Counter Trend

The opposite is to go against the crowd and to anticipate a change in direction. Most would tell you to never “fight the trend”. Although I wouldn’t recommend it to newer traders, it is a legitimate way to trade and make money. Or as Paul Tudor Jones II puts it: “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”

Non-Directional

This is perhaps the most “advanced” form of trading and therefore the most difficult to execute. And for those new to trading, it is perhaps the most difficult to grasp. How can you make money if the thing just meanders??! You do so through the modern marvel of financial derivatives. Within a range of prices (blue lines), many option combinations allow you to make money through the sale of a ‘premium’. The simplest is a covered call position (or if you flip it around, a short put position). There are other combos that are incredibly complex and would make a PhD math student go cross-eyed. Do not venture into this territory without a good grasp of the greeks (delta, gamma, vega, etc.).

That’s it! So if you’re totally new to trading, or are a veteran trying to come up with a new strategy, it may be usefult to step back, wipe the slate clean and realize that no matter what kind of trade you put on, it will fall into one of these three categories.

Ahhh, the elegance of simplicity.