V.17:1 (27-37): The Tactical Trader by Walter T. Downs

The Tactical Trader

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 play: