Mastering the Minimum

In contemplating strategic alternatives to implement his view, a trader will, for the first time, begin to examine something other than historical data and future projections. The bridge between the known facts of the past and the presumed trajectory of the future is a never-ending series of small events occurring in the present. All forms of trading are immersive, but directional trading demands the most intense focus on the current operational environment. The trader must observe and interpret the day-to-day, hour-to-hour, and minute-by-minute fluctuations of the market in response to each incremental piece of information that will, in aggregate, influence the perceptions of the participants and motivate them to action. 

The relative simplicity of directional trading reduces the number of moving parts while dramatically increasing the relative importance of each remaining variable. By definition, every position is a trader-constructed subset of the total market risk-reward space. A directional position is unique in that it creates an unmitigated exposure to the totality of the market’s price movement, unlike the inherent exposure limitations of an option or the self-hedging characteristics of a spread. Directional trading is about control and execution, and requires a degree of engagement and commitment not necessary with other, more limited forms of exposure. 

Good directional traders are extremely skilled at the basic, unglamorous blocking and tackling that, while not flashy, is often the determining factor between winning and losing. For this reason, many of the basic topics covered in this chapter will be assumed as prerequisites for the sections on spreads, options, and quantitative trading that follow. The more complex strategies allow the trader to express subtler, more nuanced views of the market, but all either retain a directional component to their performance, or can also be used to express directional views. 


From Chapter 8 - Directional Trading Strategies, Page 284.

To read more, click here. To purchase Trader Construction Kit, click here. To see future updates about new Excerpts, follow @TCK_JRubano on Twitter.

Excerpt from Trader Construction Kit Copyright © 2016 Joel Rubano. All rights reserved. No part may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by reviewers, who may quote brief passages in a review.