Grey Area Trading

Many trades will be in a grey areas, where there is lots of confirming evidence but just enough contrary evidence that your trade will be in the grey area. In a world where reward is proportional to how much risk you are willing to tolerate, how a trader handles grey area trades is what separates a professional from a hobbyist.

Many trades will be in a grey areas, where there is lots of confirming evidence but just enough contrary evidence that your trade will be in the grey area. In a world where reward is proportional to how much risk you are willing to tolerate, how a trader handles grey area trades is what separates a professional from a hobbyist.

“In the very long run, your results at the poker table will approach the sum of all your opponents’ mistakes, less the sum of your mistakes” – Dan Harrington, 1995 World Series Poker Champion

In order to be successful in trading grey areas, first you need to learn to look for subtle changes in behaviour that tips the scale in favour of one side or the other. Nothing is every black or white, it is grey. Every situation can be interpreted in two ways, creating a constant duality between bullishness and bearishness. It is your job to make the case for both, the present a logical story for each and determine which is more likely to succeed. Variant perception is the key here.

Second, and more importantly is trade selection. Just because you see an opportunity to undertake a trade, it doesn’t mean you should take it. You should be working through the list of available trades, look at how much space you have available in your portfolio for new positions and make a decision about which are the best trades (if any) that will complement your portfolio.

Third, when things are a bit grey across the board, you should be tightening your stops on profitable open positions and trimming your maximum portfolio size so that your exposure is not so great.

Finally, when things are looking a really grey accross the board, perhaps because the market sentiment is very uncertain in its tone, then it is time to change trading tactics. For example, things can get a bit crazy when everyone is worried about a recession, the equities market has sustained a big loss and analysts are uncertain about wether a bear market is likely to ensue or if market players are going to “buy the dip” while stocks are cheap. In such markets, it is better to switch from a “trend trading” mindset, and temporarily put aside all assumptions about the fundamentals driving long term trends in the market and move to a “swing trading” mindset, in which you are purely looking for short terms hit and run style profits. Swing trading is a skill that is quite different from position trading and can take years to perfect, but it is a skill worth developing as the days of long running easily tradeable trends in the currency markets are long over.

Macrotactics is a blog devoted to recording a part time trader's journey into the world of trading currencies. In my day job I work as a manager in an Information Technology company. I live in sunny Queensland, Australia with my wife, a cat and a baby on the way. I have been banging my head on this trading thing for at least 3 years now and the deeper I dig into the topic of trading, the more I realise there is to learn. Trading for me has become... More