Shaltrade.com - Effective Trading Concepts

Hey folks – Today I’d like to talk about a form of trading called grid trading – and how it relates to guerilla warfare. Guerilla warfare – or “little war” in Spanish – relates to using unconventional methods to take on a much bigger, conventional army. They involve a series of small-scale, surprise attacks on the flank of the larger enemy and eventually bleeding its capabilities. Some examples of the successful use of guerilla warfare against much larger and sophisticated military were practiced against Napoleon in the Penisular War, against the British in the American Revolution, and against the Americans in the Vietnam War.

Traditionally, an army has a target – to meet and defeat the enemy in a decisive battle, force a surrender, and obtain favorable peace terms. The army engages the enemy in a specific location – where the generals strategize with a series of maneuvers to put the enemy at a disadvantage and eventually trap or checkmate it into submission. Time is of essence, since the longer the war drags on, the more demoralized the soldiers become, and it becomes a war of attrition. Besides, forces need to be concentrated so a mortal blow can be delivered on the enemy. A large army has overheads, a rear and a flank to protect, supply and communications lines to maintain.

Guerillas use sort of the reverse logic. Their aim is to be small, light and dispersed – and to deny a larger enemy any fixed targets. They operate in small bands –and make a series of small surprise attacks to demoralize a much larger, and superior, enemy. They don’t maintain cumbersome supply and communications lines. Guerillas generally live off the land, and have low overheads. In fact, most of the time, survival depends on stealing the enemy’s supply. For a successful guerilla warrior, war is a continuum – and time is a friend, since more time means more pin pricks to the enemy, and hence more bleeding. This way the guerillas can redefine the game, even though they don’t make the original rules.

So how does this relate to trading? Well, trading is a form of war – since it’s a zero-sum game most of the time. Every time you win, someone else is losing – and vice versa. Thankfully, unlike war, instead of blood only money is shed. A retail trader is pitted against big institutions, banks, hedge funds and of course, other retail traders. Now who sets the rules? The big guys do, of course – because they move the price. They have the money, the tools, the sophisticated techniques and first access to relevant information. They are the large, sophisticated army you have to take on. In fact, it’s usually more than one sophisticated army – some are BULLs and some are BEARs. So, to make money in a consistent way, one may want to look at some guerilla tactics. Grid trading is one such tactic.

Grid trading involves exploiting the natural back and forth motion of the markets. Markets spend most of the time in a range. What goes up – must come down – and vice versa – until a breakout or breakdown happens – after which price will start moving in a different range. Observe any chart for a week – particularly for the indices and the currency market - and one finds this drunken zigzag motion 70%-80% of the time. It’s the constant, never-ending battle between the BULLs and the BEARs that causes these movements. To live off this battle, one may put on a guerilla’s hat of unconventional thinking. What if one could zig while the market zags? And take in profits when the market eventually zags? This is exactly what a sophisticated grid trading system does. The grid trading system that I am familiar with is called the “Checkmate” system. This system establishes a grid of trades around a center line. It sells as the market goes up in the range – and collects the profits on the way down. Similarly – as the market goes below the center line – it buys into the position –and collects profits on the way up.

Checkmate incorporates adjustable money management techniques that consistently lock in profits from the natural movements of the market. The philosophy is to diversify over multiple markets - both to minimize drawdowns from the occasional breakouts, and to maximize the frequency of profits from ranging movements.

I shall be going into more details of the grid trading system and the Checkmate philosophy in the second part of the series. In the meantime – if you are curious about the performance of the Checkmate system, you can check it out at the Winning Trader’s Association website. I am currently running it on a private server on 19 currency pairs and I am so far impressed by its ability to lock in profits.

As an illustration of what the Checkmate trades look like – I am showing above the trades on one currency pair. You can click on it to get a bigger picture. The blue arrows are long trades, while the red arrows are short trades. Notice how the Grid of trading orders is distributed all over the price movement. I shall go into more details of the Checkmate Grid trading system in my next blog post.

In the meantime, if you are interested in the Checkmate system, feel free to to visit the site. If you decide to purchase the system, you can use the code CMS_5OFF to get a 5% discount.

Before I end, let me mention that this article is for educational purposes only, and I am sharing what I am learning. Trading in any form involves risk, and I would encourage you to look at the entire page on the WTA website , including the Disclaimer at the end.