by Walter T. Downs
Trading can be compared to the game of chess — a good
player wins by implementing a tactical strategy that entails
sacrifices when the sacrifice is justified. Here, a professional
trader presents some tactical trading concepts.
In chess, a good player is able to
accurately assess his position
on the board and gauge the psychological
mettle of his opponent.
Victory is gained by
implementing a positional and/
or tactical strategy. Positional
strategy is the accumulation of
small advantages in terrain and
the positioning of available
forces in advantageous locations.
Tactical play is a direct
assault on the opposing army, usually highlighted by sacrificial
combinations in which the attacking player is willing to
give up certain material in order to gain a decisive advantage.
Trading is like chess. In trading, a long-term trader can be
thought of as a positional strategist. He builds a strong
position and holds it for an extended period. Short-term
traders, in contrast, are the tacticians of the marketplace.
Their methods often revolve around a short-term sacrifice of
equity in the expectation of gaining an advantage sufficient
to gain back the equity risked as well as a reasonable and
consistent profit. Here are some key strategic issues for
tactical short-term traders.
THE TACTICAL TRADER
Strangely, many short-term traders take risks that a chess
tactician never would. The chess tactician is more than
willing to sacrifice material, but only when he is able to
calculate that the sacrifice is justified.
Of key importance to short-term traders is the realization
that tactical combinations -- sacrifices of equity -- are only
as good as the strategic validity of the calculations used (see
sidebar, “Statistical paradigms”). With this in mind, we can
design a four-part strategic guideline to ensure that we have
met the requirements necessary to validate a tactical market