Recently, I was asked a very interesting and important question: “What mindset do you think current and potential VantagePoint users should have?”

My answer is very simple: Traders should be able to say, “I am a skilled craftsman, using the right tools for the job.”

The logical next question along this path is, “Ok, so how does one get to be that ‘skilled craftsman’ trader?”

Again, my answer is very simple: “Know yourself, know your tools, know your market(s) – and trade accordingly.”

As we know, VantagePoint is quite a unique tool in a trader’s toolbox. The ability to use predictive indicators that take into account very dynamic and sometimes very complex global, cross-domain, intermarket relationships should give one a solid leg up towards trading success. VantagePoint provides a number of predictive and non-predictive indicators that a trader can use – so many, in fact, that “information overload” and “paralysis by analysis” are certainly very real possibilities.

It is by following the advice above that a trader can avoid or reduce these pitfalls and “trade accordingly,” aided by the insights VantagePoint can provide. But make no mistake, this takes time to develop. Rome (unfortunately) wasn’t built in a day, and successful traders are indeed “made” and not “born.”

This article will describe the thoughts behind each of the “requirements” stated in my answer above. In future articles, I plan to work through some examples of applying these principles to choose a trading strategy.

Knowing Yourself

This simple concept represents probably the most difficult of the four guidelines to achieve. Every trader has his/her own personal patience, time available, risk tolerance, and analysis capability. To be most successful and happy with trading, a trader needs to employ a trading strategy that embraces and remains in synch with these very key characteristics.

Traders who have no patience for letting things evolve in a trade might find themselves on constant pins and needles trying to use a long-term, position-trading strategy. A trader who has little time or desire to do any kind of detailed analysis could easily become frustrated trying to observe and assimilate the clues presented by a number of different indicators.

Every trader should decide, either by “just knowing” or by “experience,” what type of trading she/he would like to engage in – day-trading, short-term swing trading, position trading, etc. – and what their tolerance limits are in terms of risk and time. Knowing these key elements provides a foundation from which other choices and applications can be developed and judged.

Knowing Your Tools

A trader has many technical analysis tools available. VantagePoint is unique in its ability to provide predictive insights based on expected intermarket price action, rather than indications based only on past single-market price history. VantagePoint provides indicators in each of the following categories:

(1) Moving averages (MAs) – actual and predicted
(2) Predicted differences – based on short-, medium- and long-term MAs
(3) Predicted high and low prices
(4) Predicted technical analysis (TA) indicators – RSI, stochastics, MACD, TSI
(5) Predicted neural index (PIndex) and strength – based on a predicted 3-day MA

By learning the details behind each of these, understanding what their movements indicate, and observing their behavior relative to price action, a trader can develop a sense of what to expect based on the picture presented by these indicators, either singly or in combination.

Additionally, there are many ways that each indicator can be used and should be considered. For example, the crossover of predicted and actual MAs can be used as a signal, but so too can the crossover of predicted MAs, or the position of daily closing price relative to a predicted or actual moving average (i.e., closing above or below an MA or a set of MAs).

Difference indicators can be used individually or in concert with PIndex and/or each other. Divergences in difference indicator movements or TA indicator movements relative to price movements can be used to filter signals from other indicators. TA indicator movements as confirmed by difference indicators and PIndex movements can be used.

And the possibilities go on! A trader should spend sufficient time with the tools to become familiar with their actions and interactions and to develop some personal preferences for those on which to rely.

Knowing Your Market(s)

Markets are similar but different. We can examine price action in any market relative to a set of chosen predictive, non-predictive, and TA indicators and see that each market has its own character – its own idiosyncrasies. Some are much more volatile than others; some settle into a direction and go (trend) for awhile; some range widely in a day but move only slowly in any direction day-to-day; and the list goes on. To be most effective, a trader needs to study his or her market(s) of interest to learn the nature of each.

By learning how a market typically behaves and observing what is historically “common” for that market’s behavior, a trader can develop insight into which indicators (i.e., “tools”) provide repeatable signals to assist and inform trading decisions. This is where backtesting of trading decisions based on price action and indicator behavior comes into play.

By applying trading rules the trader believes to be reasonable for the market of interest and a set of chosen indicators, performance of the chosen approach over some significant period of time can be generated. These can then be examined to decide if the rules or indicators utilized should be modified, dropped, replaced, or used as is. After backtesting and reaching a satisfactorily successful set of indicators and trading rules, these should be documented and kept in a prominent place for review and reminder.

Trading Accordingly

After all the above is accomplished, the plans must be put into action. A trader has to trade at the hard right edge – that is, place trades based on indications and trading rules – relying at best on predictions of what the future may hold. This is where the trading endeavor becomes quite a test of mental and emotional toughness. It is widely agreed that markets trade based on emotions – namely, fear and greed. These emotions can affect even the most seasoned of traders, and this is the part of the trading success equation that is the downfall of many.

When the indicators and rules indicate that a trade entry, or an exit, is warranted – the trader has to have the toughness and discipline to act accordingly, even when his or her emotions or thoughts may be feeling, telling, or even shouting, otherwise. It is in these times that reviewing the details of one’s trading rules, and the results of one’s backtesting, can bolster and renew a trader’s confidence. Realistic backtesting of a successful approach should indicate that losses indeed can and do happen. But so do wins, and if wins outnumber losses and/or win size exceeds loss size – ala, the well-known “Profit Factor” equation – the overall trading results will be positive.

An Update

In earlier articles, I described a trading approach utilizing only the PIndex for trade entry signals in the USD/JPY forex pair. Since the last article, four trades have been signaled, two of which were profitable and one of which reached the 100-pip profit target. This brings the performance statistics using this simple approach in 2009 to 33 trades, 26 wins (79% win rate), and 21 of the 26 wins reached the 100-pip profit target.

Other Strategy Examples

For comparison, a backtest of a strategy relying only on price action relative to VantagePoint’s medium-term MA crossover was conducted. The rules of this strategy are that a trade is entered when the predicted medium-term MA (P4EMA+2) crosses the actual medium-term MA (A10SMA); additionally, once a crossover has occurred and continued and a trade has been exited per the rules, a new entry is signaled if the price closes on the “wrong side” of the predicted MA and subsequently closes on the “right side” of the predicted MA.

Exit rules are the same as those utilized in the PIndex-only strategy – exit at a 100-pip profit or the first profitable daily close, whichever occurs first. A 20-pip stop loss is placed above/below the analysis day high/low depending on whether entering short or long. Once a trade is underway, no interim trades are placed, regardless of signals that may occur.

The performance achieved by this approach thus far in 2009 is 21 trades signaled, 15 wins (71% win rate), and 10 of the 15 winners reached the 100-pip profit target. The chart below illustrates some instances of these trading rules in practice.

As a comparison, entering trades based only on the predicted and actual medium-term MA crossovers (P4EMA+2 x A10SMA) and using the same exit and stop loss rules, 8 trades were signaled thus far in 2009, with 5 winners (63% win rate), and 4 of the 5 winners reached the 100-pip profit target.

As another comparison, entering trades based only on crossover of the predicted and actual short-term MAs (P2EMA+1 x A5SMA) produced 26 trades thus far in 2009, with 19 winners (73% win rate), and 13 of the 19 winners reached the 100-pip profit target.

An additional dimension that could be added to this analysis would be a “pip production” or “profits realized” statistic. While tedious, it is this kind of strategy results comparison that each trader needs to go through to reach a choice that fits his or her trading style and perspective.