The way most traders choose their trading approach often sets them up for endless frustration, disheartenment, and, ultimately, significant financial losses.
Traders typically go through two main processes. If you’ve already started in the markets, see if one of these resonates with you:
- They choose an approach that promises the highest returns in the shortest time.
- They select a method taught by someone they perceive as trustworthy, or someone who appears to have achieved significant wealth.
Every so often, one of these choices will pay off, much like finding the winning lottery ticket—it’s purely the luck of the draw.
However, the more probable outcome is wasting days, months, or even years with little to no progress, taking loss after loss in the market, and eventually resigning yourself to the belief that maybe you’re just a failure.
But here’s the thing… You are not the problem.
All your self-doubt and struggles would disappear if you adopted an approach best suited to you.
The truth is, your trading approach should be as unique as your thumbprint. Why? Because you’re an individual with unique strengths, preferences, challenges, and constraints.Trying to adopt a strategy tailored for someone else is like wearing the wrong size shoes—it's uncomfortable and only a matter of time before you fall flat on your face.
In this guide, I will outline the criteria needed to discover the trading approach that aligns with you, which will allow you to succeed as the trader you deserve to be.
Outline the Steps by Starting From the End
When people have big goals, they often plan their path to success by figuring out the first steps they need to take. They start from where they are now, thinking, “What’s the first thing I need to do?” and then determine what comes after that, and so on.
This approach is often flawed. Imagine climbing a ladder. You might progress quickly from one rung to the next, but if that ladder is leaning against the wrong wall, you’ll still won’t end up at your intended destination.
Instead, one of my guiding principles is to plan your route to success by reverse-engineering your goal. This means starting with the end in mind and tracing your steps backward from there.
That’s what you’ll be doing here. By defining what an ideal trading approach would look like for you, you position yourself better to identify the right starting point for learning and progress.
Your ideal trading approach is going to include a combination of factors. Some of these are non-negotiables for any successful trading approach, while others are unique considerations tailored to ensure the method aligns closely with your needs.
Here’s what we’ll cover in this guide:
- We’ll begin by identifying the non-negotiables for an effective trading method. This will help you eliminate unsuitable methods, so you don’t waste time exploring or learning them.
- Next, you’ll identify the unique factors that tailor a trading approach to your personal preferences and strengths. By doing this, you reduce potential future conflicts and friction when adopting the approach you eventually choose.
- Armed with these insights, you'll start the process of exploration to discover 'match quality' between a method and approach that resonates with you.
- Once identified, you’ll dive into deep learning to develop your ability to consistently and profitably execute your chosen trading approach. Throughout this phase, you’ll refine the approach to align perfectly with the criteria you set earlier.
The diagram above gives you a very rough high-level overview of the process.
You may be wondering about the difference between a trading method and approach. I’ll explain that as we progress through the guide.
Step 1: The Method is Based On a Meaningful Theory
A couple of weeks ago, I was on the phone with the legendary trader Andy Krieger. He told me about a group of traders who relied heavily on a technique that’s been popular for decades. The problem? They couldn’t see past the technique to understand the clear signals the market was giving them. They were stuck.
Andy told me, “The problem with many of these strategies and systems is that they’re not based on any solid theory of the markets. The theory should come first, otherwise, why do these techniques even matter?”
This was coming from a man who once set the record for being the highest-earning trader on Wall Street, and I couldn't agree more.
If you've read my guide on how and why price movements happen, you’ll realise that many trading methods (even the most popular ones) aren't truly connected to how the markets function.
So, what exactly is a trading method?
A trading method is how you read and interpret market movements. It should be grounded in a theory of why prices move the way they do, helping you anticipate where they might go next. To me, it's like a language in the markets.
If you didn’t understand that language, reading a book would be like staring at random letters. But by knowing the language, those letters form words and sentences, providing meaning and context. This understanding lets you interpret messages and predict what comes next.
On the other hand, a trading approach is about how you apply the trading method to take and manage trades. This involves the strategies you use, how you organise your trading sessions, and the kind of analysis or data collection you do.
To put it another way, a solid trading approach must be built on a valid trading method.
This leads us to a key requirement for a trading approach: It must be grounded in a method that's based on a meaningful theory of how markets work. You need a solid reason for the signals you're tracking and the price changes you're anticipating.
If someone's only justification for their trading method is, “It just works,” run away and don’t look back!
Step 2: The Non-Negotiables for Assessing Opportunities
As I explain in our Trader Masterclass, succeeding at trading isn’t about "finding profitable trades." We can’t predict the future with certainty, so we have no way of knowing whether an individual trade will be profitable.
Instead, successful trading comes from finding opportunities with a positive expectancy. I use a simple equation for this:
(positive outcome x probability of positive outcome) - (negative outcome x probability of negative outcome) = trade expectancy
Therefore, there are two pivotal components for assessing an opportunity: being specific about the potential outcomes and accurately estimating their probabilities.
When we view opportunities this way, we’re not trying to predict if the individual trade will result in profit or loss. We're saying, “If an opportunity like this was traded 1000 times, the overall outcome should be profitable.”
In other words, the profitable outcomes should outweigh the negative ones.
It’s possible to make a profit from an individual trade with a negative expectancy, just as it's possible to lose money from one with a positive expectancy. But as you take more trades, the overall results should align with the expected value.
Whether a trade ends in profit or loss doesn’t matter in the long run. Our success as traders doesn’t depend on individual trades, it’s the longer term results that matter.
I should mention that accuracy in probability estimates is also essential. Contrary to popular belief, this skill can be learned and improved over time, as supported by numerous studies. It's a topic I dive deep into in the Duomo Trader Development Program.
So, what does this mean for your trading approach? If you want to identify opportunities with a positive expectancy, your method needs two things:
- It must allow you to be specific about the size of positive and negative outcomes.
- It must enable you to estimate the probabilities of those outcomes.
To help you understand the importance of these points, let's go through some examples.
“When the indicator shows _____, you enter the trade because the price is about to move up. When the indicator shows _____, you exit because the move is ending. This setup has a 63% success rate.”
Issues with this:
- Without knowing how far the price might move, you can't calculate the trade's expectancy. You can't quantify the positive or negative outcomes, making it impossible to determine long-term profitability.
- Stating a 63% success rate isn't enough. It doesn't account for the uniqueness of specific situations. Within that 63%, there might be trades with negative expectancy that shouldn't have been taken. Probabilities vary and won’t be identical each time.
“When the indicator shows _____, it indicates a potential shift in activity, possibly leading to a breakout. This could drive the price to the next activity area, 30 pips away. Our stop loss is set just below the current activity area (15 pips) in case of a failed breakout. Based on the context of this situation, we estimate a 45% chance of a positive outcome.”
Here, our analysis provides specifics about potential price moves, allowing for more accurate probability estimates. This gives us what we need to calculate the expectancy of the trade.
“This is a reversal chart pattern, indicating the price might reverse, so we should trade short. The stop loss should be on the other side of the pattern (10 pips). If you want a 1:3 trade, target a profit of 30 pips.”
Issues with this:
- Many research findings indicate that traditional chart patterns don't have predictive value in the markets. Therefore, this setup is unlikely to be based on something meaningful in the first place.
- In this example, the positive outcome (or potential profit) is chosen based on a predetermined risk:reward ratio. It doesn't consider the specific conditions or activity currently visible in the market.
- There are no probabilities being stated. But since the positive outcome is chosen without relevant context, it becomes challenging to accurately estimate the probability of that outcome happening anyway. This undermines the trade's overall expectancy calculation.
You’ll often see chart pattern “cheat sheets” providing success rates for various patterns. This data can be misleading since the scale of the outcome varies each time. Is the provided success rate based on a 10 pip move or a 30 pip one? Is it based on a complete reversal of the previous trend or just a segment of a wave? The success rate becomes meaningless because trends might be smaller or larger, the patterns might be tighter or wider. Each situation is unique.
“This setup suggests a potential shift in activity, possibly signalling a reversal. If so, the next activity zone is 40 pips away. If the reversal doesn’t happen, it’s 20 pips to the one in the opposite direction. Given the recent price dynamics and surrounding activity, there's a 30% chance of a positive outcome. Therefore, this trade shouldn't be taken.”
In this example, outcomes and probabilities are derived from a clear method. We are quantifying the potential price moves and estimating the probability of them, leading to a more informed decision.
“Based on my fundamental analysis, prices will rise after they announce _____. Everyone expects this announcement.”
Issues with this:
- Traders often confuse the likelihood of an event occurring and its value as an opportunity. The thought process often goes, “the price is likely to move up/down from here, so I should trade that.” However, just because you believe an event is probable doesn't mean the trade holds a positive expectancy.
- It's essential to explicitly define potential price movements and their associated probabilities. This step is often overlooked, especially by those who heavily rely on fundamental analysis.
- Those focusing on fundamental analysis tend to assume that their primary goal is to predict the next market move and position accordingly. They often neglect important considerations: is their prediction already reflected in the market price? Does the broader market also anticipate this move? How would alternative outcomes impact the market, and what are their probabilities?
- Occasionally, the event with a lower likelihood can be the better opportunity if it has a significantly more positive expectancy, despite being less probable.
“From my fundamental analysis, if ______ gets announced, the asset's fair value will be ______. If not, it should be ______. The current price suggests the market has already factored in some of the announcement. Considering various factors, I estimate a 75% chance of the announcement.”
In this case, we’re not just stating “the price is likely to move up” or “this event is likely to happen”. Instead, we’re clearly defining the potential outcomes and the likelihood of each occurring. This distinction allows us to determine whether there's an opportunity for a trade.
In the case of fundamental analysis, there may be many alternative outcomes. I would recommend using techniques like the Analysis of Competing Hypotheses (ACH) to help you with that.
If you’re learning about all this for the first time, it might seem complex or time-consuming. However, that's not necessarily true. Much like any other skill, with consistent practice, it becomes second nature and more efficient.
Now that you have clear non-negotiables, you can filter out inappropriate trading methods that would waste your time. If they’re vague about their opportunities, and don’t define the outcomes or estimate the probabilities, they might as well be throwing darts blindfolded.
If a trading method is genuinely meaningful and effective, you can usually adjust it to fit different approaches to trading. It's not just about blindly following some strategy; it's about understanding how the markets work. When you get that, you can trade in a way that feels right for you.
How the Duomo Method Fulfils the Non-Negotiables
The Duomo Method is based on the Duomo Market Theory, which my team discovered and developed over ten years ago. It explains why price movements happen during steady-state activity (the periods when the market is not disrupted by major events that lead to low liquidity conditions and changes in asset value). The method is based on a synchrony effect we’ve observed and confirmed through extensive testing. When the market is in synchrony, it’s possible to anticipate what may happen next.
We can identify areas where shifts in activity might occur. These become the start and end points of the deterministic price oscillations (waves) that arise when the market is in synchrony. Therefore, we can predict potential future outcomes of price movements, which fulfils one of the non-negotiables we previously discussed.
We analyse various aspects of the markets when assessing an opportunity; these are what we term the ‘context’ of the market. This insight allows us to understand what has happened previously and interpret the current situation. Armed with this information, we can estimate the probabilities of each of the potential outcomes we’ve assessed.
In the Duomo Trader Development Program, you'll learn to undertake all these tasks regardless of the market situation. We also guide you through the process of estimating probabilities using a proven method. Initially, your accuracy in these estimates might not be perfect, but you’ll go through a calibration process to improve them. Results from our members show huge improvements in their opportunity assessments over time.
Step 3: Defining Your Criteria
Now that we’ve covered the non-negotiables, let’s dive into the variable factors that can make your trading approach more personalised.
There are many factors you could consider when tailoring your trading. I’ve found the most practical starting point is to reflect on the questions below. Once you've established an approach based on these, you can then refine other minor details to better suit you later.
If you're unsure about the answers to the questions below, don't stress. We’ll cover this in the next section.
How much time can I spend trading each day?
You can extend this question to, “and want to.” But the reality is, most people have practical limits on their time rather than it being about their preferences. If you work a 9-5 job, have kids, or other commitments, you'll have limited trading time.
It’s essential to determine a routine you can maintain. Even if you have a lot of free time, it doesn't mean you should use all of it for trading. It may work to begin with, but eventually, it may become unsustainable.
Your available time will help determine your trading approach. For example, if you only have an hour each day, a more active approach like scalping isn’t going to be suitable. Instead, more of a ‘set and forget’ approach, where you monitor trades less frequently, might be more appropriate.
This will guide the time frames you focus on, the time horizon of the opportunities, and the average duration of your trades. Determining these factors will help you be more focused with your analysis and be able to filter out inappropriate opportunities. More focused trading leads to better results.
What duration am I comfortable holding positions for?
If you’re new to trading, you might not have an immediate answer. And that's okay, it's something you can aim to figure out.
Just like with the amount of time you have available, the trade duration you’re most comfortable with will guide the opportunities you look for.
Some traders prefer to hold for longer durations as they don’t make good decisions under pressure. Inevitably, the shorter the duration, the more pressure there is to make quicker decisions.
On the other hand, holding trades for long durations may cause some traders to feel bored or anxious. This can lead to them acting impulsively and taking actions to cure their boredom. Their need to feel productive can become self-sabotaging. Therefore, they’re more comfortable with trades that have a shorter duration.
The more specific you can get with this, the more suitable your trading approach will be. Even if you feel you can trade any duration, there’s likely to be a sweet spot that’s most optimal for you. Your approach doesn’t have to limit you to only taking trades in that sweet spot, but it can be geared towards taking more of those opportunities than others.
How comfortable am I with risk?
Over the years, I’ve observed that most new traders gravitate towards the extreme ends of the risk scale. Some are risk averse and struggle to pull the trigger on trades, whereas others love the thrill and become too trigger-happy.
Try to determine where you lie on that scale. There are various online risk profile assessments which can be helpful, although they’re usually geared towards long-term investments and don’t always apply directly to trading. Studies have found we all have different risk tolerances depending on the type of activity we’re doing. Ultimately, it all comes down to how much control you feel you have in the situation.
To avoid this question being too vague, let me give you some context to help you understand the relevance of it.
A trader not so comfortable with risk can structure trades in a way that allows them to de-risk as soon as it’s logical to do so. This might mean closing part of the trade while keeping the stop loss where it is, so the profit taken on the closed portion covers the risk on what’s left. Alternatively, they might move their stop loss into a profitable or break-even position as soon as they can.
On the other hand, someone more comfortable with risk could let profits run a bit longer. Beyond a certain point they may even scale into the trade and be more aggressive.
These factors are usually part of your trading system, but they dictate the type of opportunities you look for. In turn, this will influence the way you analyse the markets and how you spend your time during a trading session. Therefore, it affects your overall trading approach.
Many traders get this wrong by applying these actions regardless of the opportunity. I’m sure you’ve come across traders who preach the benefits of moving your stop loss to break-even immediately on any profitable positions, “to make it a risk-free trade.” But doing so could negatively influence the expectancy; it needs to be the right sort of opportunity to suit that approach.
Another mistake is believing you should be aggressive with all trades to make bigger profits. In the right situation, this may be true. But over the years I’ve seen that the quickest way to make profits is by trading in a way that’s most suited to you, whether that’s with an aggressive or a more risk averse approach.
How comfortable am I with temporary drawdowns?
A drawdown is a decline from a peak in your account balance. For example, if I have an overall return of 10% and then lose two trades which bring my return down to 8%, it means I have a 2% drawdown.
Of course, we want to avoid drawdowns as much as possible, but they’re inevitable. The question here is about how comfortable you are with them, not how much you want them.
In other words, when you’re in drawdown does it affect the way you trade? Does your decision-making change? Is your mindset altered? Or are you able to trade in the same way regardless of the previous trade outcomes?
This is important because there are different ways to approach your trading based on this.
Some of the most successful traders intentionally trade in a way that actually increases their drawdown most of the time. They’re willing to take frequent small losses in hopes of catching occasional huge profits that push their capital to new highs.
For example, it might be the case that you attempt to catch the start of new trends. When you succeed, you ride the trend until its terminal point and accumulate a large profit. However, you also accept that you’ll experience a lot of false starts. Sometimes the timing will be wrong and the price will hit your stop loss. On other occasions, you might begin to build a profit only to see it reverse against you. This is an intentional decision, as you’re willing to sacrifice small profits while you attempt to catch the much bigger ones.
But if you’re not comfortable experiencing drawdowns and it changes the way you trade, you wouldn’t be able to execute that sort of approach. If your decision-making changed after experiencing a series of losses, you’d reduce the possibility of catching the bigger moves that the approach is intended for.
Therefore, someone not comfortable being in a drawdown would be more suited to catching small profits and smaller losses. Aiming for less ambitious moves in the markets. This type of approach would lead to a smoother P&L curve, whereas the other would lead to one that’s more ‘lumpy’. Although, it would be intentionally lumpy, as opposed to unintentionally lumpy which is often a sign of bad trading.
What other relevant weaknesses or strengths do I have that may influence things I should or shouldn’t be doing?
This is a deliberately broad question. As you try new things in the markets, you'll discover what resonates and what challenges you. Of course, it’s always worthwhile working on your weaknesses, but it’s better to not adopt a trading approach that relies on them.
This could include aspects of analysis, ways of making decisions, particular assets, or even certain market types. It might be that you work in an industry that gives you an advantage with specific assets through your knowledge and insights. It really could be anything that has an influence on your trading performance.
As a beginner, it’s important to not label unlearned skills as weaknesses. There's a learning curve to trading, and some areas will naturally require more effort. The objective here is to identify specific strengths or challenges that are likely to persist despite your best efforts.
Step 4: Exploration
There are two questions you may have on your mind at this point:
- If you don’t have answers to some of the questions above, how will you figure out what the answer should be?
- Once you’ve defined your approach, how do you find one that meets your criteria?
The answer is exploration.
Rather than being like other traders who stumble upon a trading approach and decide to start learning it, you’re going to explore and test out different things.
David Epstein, author of “Range: Why Generalists Triumph in a Specialised World”, explains that research on peak performers reveals this process. Instead of solely going through 10,000 hours of deliberate practice in a single area, they actually start with a broad “sampling period.” This is a time for exploration and discovery. They’re trying out different things before they find their 'match quality', which is when the skill or approach aligns with their personal needs and wants.
You might think this will slow down your progress, since you could be spending that time mastering one particular approach. But, according to Ofer Malamud, an educational economist, statistics show that “the benefits to increased match quality are sufficiently large to outweigh the greater loss in skills from specialising early.”
In fact, even if we look at brain research, we see a similar conclusion. The chart below is named the Pyramid of Skill Mastery, and it showcases what brain research has discovered as the process for developing a skill to a level of mastery.
You can see, highlighted at the bottom, the first step is exploration. It isn’t just practise, or planning, it’s truly mindless exploration—trying out different things.
This is what you need to do as well. You have your list of non-negotiables, so you can immediately eliminate trading methods that don’t suit your requirements. You also have your initial variables decided, so you can ensure what you’re exploring aligns with them.
Then, for any variables you haven’t figured out yet (as mentioned in the previous step), you can go through exploration until you arrive at a conclusion. By testing various methods, you’ll figure out your preferences, strengths, or weaknesses.
Eventually, you’ll begin to find match quality with a certain approach, signalling the time to deeply focus on learning it. Committing to deliberate practice and designing a learning plan will then pave your path towards the trading approach that promises success. This is something we’ll discuss in more detail in a guide on the 3-phase learning approach.
I always recommend setting aside a specific amount of time to focus on each promising method and approach. For instance, consider dedicating six months to this exploration, breaking it down to study one particular method or approach each month. Even if you don't find the perfect 'match quality' with a method, the process will equip you with valuable implicit and explicit knowledge that'll be beneficial throughout your trading career.
I'd suggest using a trading simulator during your exploration phase. This allows you to condense a large amount of 'market time' into a relatively brief real-time period. For example, if you dedicate a month to a specific approach, the simulator lets you experience years' worth of market dynamics within that time frame, giving you a genuine feel of its effectiveness. Remember, the goal here isn't to master the method but to determine if it aligns with your needs.
You can find my recommended simulator here (use code DUOM10 for an additional 10% discount).
The Duomo Method allows you to customise your approach to perfectly suit you. You can use it to address any of the variable aspects we’ve discussed, and it’s built on a solid and meaningful method. Each of our members can adopt a completely different approach and still achieve outstanding success in the markets. In the Duomo Trader Development Program, I detail step-by-step how you can tailor the method to fit your needs, ensuring you have a fully customised approach. If you decide to learn the Duomo Method, the exploration phase will then be about trying different approaches, rather than also trialling different methods.