Learning to Trade New Products

Building Edge in a New Product:

Once traders have been involved with the same product for a period of time, a natural inclination can be to become interested in trading other securities. In my view, the most important thing when considering a new product is to first:

Realize what your motivation is, are you bored with the product you’ve been trading? Has its daily range compressed so much that there are far fewer opportunities? Are you frustrated with your recent performance?

When discussing their reasons for looking to new products to trade, probably the worst I’ve heard from traders is because another product “looks easier to trade.” If you fall in that camp, I can save you some time and probably a lot of frustration: I don’t believe there are any “easier to trade” securities. Sure, some are more volatile and sometimes might look more straightforward than what you’re trading now. But in the end, there may be different influences on their price action—but they all trade in a similar fashion, with the goal of facilitating trade by matching buyers and sellers. Period.

So, you’ve decided you’ve reached a level of competence with your current product. How do you decide on a new product, and develop an edge in it? There are some key components that go into choosing a product, including the hours it trades daily, its tick value, what the underlying components are, what influences its price movements and so on. In my view, there are six logical steps to mastering a new product:

1. Learn at least the basics of the security, including whether its price is derived more from earnings (such as in equities) from government policies (currencies) or fundamentals (as in government bonds), which will give you the direction to look for more clues to follow like economic releases or company earnings.

2. Watch the product from its Pre-Open through its Close for at least a week, to become familiar with any certain characteristics it has.

3. Create, or refer to statistics on the usual measures, such as how often it breaks both Initial Balance High and Low, what its average daily range is and the like. Paper trade it for another week, using both the time you spent watching it, and the statistics you’re using, to determine if you are in alignment with how the product trades.

4. Develop a Trading Plan – or at the minimum – what your risk per trade, unit size and Daily Loss Limit will be.

5. When you feel that you are ready to begin live trading, do so using a small unit size.

6. Daily, compare your actual results with the work you’ve already done in terms of stats and risk plan, and make any changes to your plan as a result of live trading. In my view, doing the work and being structured in your approach will give you the best odds of success in trading a new product.

– Ken Katzen (@LongShortorFlat, a Head Trader at Convergent Trading)

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