The Tao of Trading

Tao give birth to one

One gives birth to two

Two gives birth to three

Three gives birth to ten thousand beings  --Lao Tzu

If I were to describe my style of trading, the Tao would be a good place to begin.  In a nutshell I look for contraction/expansion cycles to trade a burst of momentum over a 5 to 10 day window.  The Tao is an example of a contraction/expansion cycle that begins with a burst as the Tao gives birth to one.  A recent example of this cycle is BIDU which had a burst after a prolonged period of contraction.

BIDU

Another recent example is LEAF.  This examples shows the benefit of abstracting our thought process and thinking in chunks.  Our time in the market and expectation after entry comes down to whether or not “one gives birth to two” and “two gives birth to three.”  If this does not happen, this is not Tao.  LEAF was clearly Tao over the past few sessions.

LEAF

Another means of abstraction of price movement after entry is to associate with a process outside of trading.  For myself I’ve been thinking more in terms of my opening repertoire in chess.  There is little energy or thought in my moves as they are memorized to the 10th move or further.  By chunking price moves in association with chess moves I’ve found it much easier to accept when a position is not going as intended and a surprise move has been played.   Applying this to LQ there is one situation in which price action moved in accordance to my repertoire and one when it did not.  

LQ

The only correct exit in trading is the planned exit. A great benefit of this is approach is that it assist in avoiding results oriented processing.  Another benefit of applying scenarios we have planned out and executed in other fields to trading is that it helps us associate the same neural networks we've chunked along with associating a set of procedures abstracted to price action which assist us in consistently analyzing post entry price action.  We can avoid micromanaging post trade price oscillations that are often detrimental to consistent results and move more towards thinking in terms of the Tao did not give birth to two so exit.