Setup Series #1
[01/12/25]
I will save the debate surrounding the merits and application of technical analysis for another time/post, but a fitting starter for this series of trade setups is the use of lateral/horizontal support and resistance levels to dictate range breaks and identify trading opportunities. Exploring this foundational theory as I believe it to be a solid starting point, with no prior macroeconomic knowledge necessary. I am focusing on lateral support and resistance levels, as opposed to upward/downward sloping trend lines and channels. The logic is that the former are easier to recognise, are often strong signals and can be monitored clearly on either an intraday or closing basis. A clear strategy and parameters can be set around them, with little debate as to the levels.
One aspect to consider here is the mechanics of the setup, i.e. what is actually happening. At a certain price point, a single buyer(seller)/group of buyers(sellers) are transacting in a way that prevents a further movement in the price, which then reverses. There is no visual difference between a self-fulfilling setup (i.e. herd mentality of market participants and systematic traders aligning to engage repetitively with buying/selling of the instrument at a certain price point) and an orderflow setup (one large market participant transacting at a certain level - for example a corporate or central bank). Crucially - despite the pattern recognition, charting analysis and trade execution being identical and therefore differentiation irrelevant, it can be argued that you are more likely to successfully trade around the level if it is of the orderflow variety. A brief moment in the multi-trillion dollar market puzzle, in which activity is sufficiently large enough to unveil one piece of that puzzle. Therefore, important to know that when monitoring an index or basket into these levels (eg, BBDXY ‘dollar index’) it is harder to rationalise the continued rejection of a specific level as an ‘orderflow setup’. However in a single transacted product (i.e. EURUSD, single stocks, copper futures) or an equity index that is traded as a product itself in futures form (i.e. Nasdaq), then this mechanical orderflow can absolutely be the reason for the price congestion, followed by an impulsive break. There is, therefore, logical reasoning behind trying to identify these set-ups in specific traded cash instruments as you familiarise yourself with them, as opposed to baskets. A) the chance of identifying an orderflow-level is higher (more impulsive move through the level once the order is filled and B) the instrument to directly implement your trade idea is both liquid and accessible via most brokers, as opposed to trying to construct your own basket or synthesise the product.
Upon recognition of the level (3x hold of a single price point or channel, for example), trading setup can be take many forms, with the common thread being risk-reward. Let’s assume the level we are monitoring is a support level.
1) Buy ahead of the support level. Cut on what you consider to be a ‘clean/true break’ of said support level. Ensure the target take profit (TP) level ensures the risk of the potential loss between your entry level and your stop loss (SL) on break confirmation is worthwhile.
2) Wait for your confirmed break level to be breached, then sell through this level. Set a SL level where you deem the break of support level to be invalidated; this is your risk. Set an appropriate TP level and target for the trade.
3) Buy above; flip short beneath. This requires much higher confidence that the level is crucial. The first component of the strategy is a mean-reversion play. The former is a break-out play. The support level is the pivot for regime change and you’re approaching the market with the view that the level is SO important that either OR both strategies will work.
A great book on this is titled Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders. C Faith, 2007. It’s probably not worth reading the entire book (a trading reading list to follow), but I think researching a precis of this style of trading that is a very systematic and simplistic method of recognising and monetising range breaks would be helpful. The book, written by a subject of a 1983 systematic trading experiment, details the systemising of a simple trend-break strategy and demonstrates that this setup can be deployed with minimal financial markets background or cross-asset analysis. A rudimentary form of algorithmic trading strategy.
Workable examples:
EURSEK 11.12 lateral support break, followed by formation of 11.09 resistance. Strategy 2 effective.
USDJPY longer-term band of 139.57-140.25 holding 3x as major support. Strategy 1 effective.
USDZAR 17.50 pivot with 2x false breaks highlighted; otherwise holding. In this example, Strategy 3 would have been problematic.
Drawdown Management
[24/11/2025]
A few tips for psychlogical and risk management when it all feels like it's falling apart.
1] Flatten the book and rebuild. I've learned this lesson the hard way a few times. You're trading a hyper-liquid asset-class, so should be unafraid of using the cheapest 'eject' button of all. When a line item morphs from a plan to a prayer, it's time to regroup. Clear book; clear mind. Helps to eradicate unhealthy biases and instead of 'digging your way of out of a hole', the mindset can be 'starting again from... now!'.
2] Simplify the process. Return to cyclical trade lifecycle. A: Think, research, chart. Consider about the cross-asset rationale. Plan the idea and levels. B: Execute the trade; stick to the desired entry levels. C: Cut the risk; profit/loss. Ensure you preserved the risk-reward ratio as this is ultimately the only thing that will safe-guard your process as the data series builds. You're just experiencing a temporary probability distortion as the data series is not yet large enough. D: This, for me, is the most important and the quadrant often missed, which can interupt the cyle of deep thought. Closure. Analyse the trade; why did it work? What could've been done to improve it? Which of your trade-planning assumptions were correct and which were not? Journal this part; it can help minimize recency bias into A#2 and serve as an antidote to 'revenge trading'. Repeat.
3] Filter for half-baked ideas during Stage A. Use a star system. Only if >3/5 stars are satisfied; execute.
4] Actively eradicate human bias. Stare at the price panels with a neutral mind. Write all of the support/resistance levels out with equal effort attributed to all instruments. Don't resort to the products you've had your biggest wins with or are most familiar with. Your adge is in your identification of asymmetry and opportunity. Sure, you've got to be comfortable, but these multi-trillion dollar markets are sufficiently liquid and populated that you may be overestimating your single-instrument edge.
5] Take time away from the screen. It is unlikely that the next 4/5* idea, for which youve thoroughly completed the quadrant A process above, will present itself to you within hours of you just taking a large loss. Even days. The benefit of you approaching the next capital deployment with a clear mind and lower absolute stress level will by far outweigh the opportunity cost of the hours or sessions spent spectating vs participating. 'Chopped up' is the devil.
6] It happens to everyone. Every risk taker, every asset class. The difference is in the humility of the response, in my experience, as well as how far it's left to run before step 1 occurs.
7] Don't forget to breathe. I've planned to write a post with this title, and will do. Relaxing into it; realizing most of the pressure is coming from yourself and the desire to succeed in what youre pouring all of your waking energy into. Above all else, realising you've not yet lost your seat and you’re still in the game. It doesn't take much to get back on track!
Drive the perfect race
[28/08/2025]
Three quotes/concepts that were revelations, in hindsight.
(1) A bank market maker once described trading as an endless quest to drive the perfect race. Formula 1 fan or otherwise, it’s difficult not to relate to this as a risk taker. The analogy is apt - essentially a complex sequence of (mental) movements, timed to perfection, supported by technology and with a heavy layer of participant/peer behavioural psychology and game theory, in order to win what is essentially a competition on repeat. All while battling every human bias in the book.
The reason this explanation sat with me is not because of the sporting comparison, but the second derivative. The psychological traits required to participate and the psychological impact of pursuing a perfectionist endeavour that is knowingly as good as impossible. The asymmetry of outcome satisfaction becomes apparent and can be dangerous. How does a driver (trader) feel when winning vs losing, when the win-type is imperfect. Is the payoff of short-term self-flagellation net-beneficial when it dilutes victory satisfaction, with the life-long aim of sharpening the skill to eventually ‘drive the perfect race’? Are the losses meant to hurt and the wins meant to buzz in equal measure? What is the enlightenment-akin happiness payoff expected, if/when achieved? Is satisfaction possible without it?
"Shokunin" (職人) is a Japanese term that signifies a craftsman or artisan, but its meaning goes beyond a simple job title. The term signifies the life-long pursuit of perfection; a person who has dedicated their life to mastering their craft; possessing a high level of technical skill and knowledge gained through years of rigorous training and apprenticeship.
(2) The comfort-zone is defined by a number of parameters when professionally trading within an institution. Non-exhaustive: product suite, peer performance norms, end-goal management/career aspirations, relative exposure to industry high performers, salary/bonus split, time of year, team/individual VaR budgets and expectations, intra-firm politics, lifestyle expenses, tenure in role. I’d defy anyone preaching that they are constantly pushing the envelope, but I recall a conversation that changed the way I thought about trading during an interview. The interviewer, who had traded on both sides of the buy/sell-side fence, and whom I looked up to, told me that 15 years into his career, he actually started trading to win. What he meant by this was that he had forced himself to transition from majority-market-making, where you’re often trading intraday from a position of strength and attempting to enhance and leverage an expected ‘book value’, bound by many of the parameters above, to a mindset of trading to maximise absolute returns. With that came additional drawdown risks and a profound shift from a defensive to an expansionary mindset, accepting the seat-insecurity that accompanied such a shift and the career uncertainty that followed, but targeting and harnessing the uncapped progression and gains that can accompany a successful transition. The reason this concept stuck with me was the notion that the learning doesn’t finish, which dovetails nicely with Shokunin.
(3) Finally, a trifecta of thoughts for all participating in the field. An ex colleague, when training me, often repeated the mantra “discipline wins the day”. Whilst not mutually exclusive from quote (1) above, I believe that in a world of endless styles and horizons, this is the pillar of trading that is fundamental for long run success. I’m very often guilty of ‘sloppy’ phases of play. In its rudimentary form, this can mean hesitating with a stop-loss, sizing-up too quickly or getting greedy with an idea. Distilled: not planning, or not sticking to the plan. The quote “the person who does best is the one with the panic button furthest from his keyboard” (Chase Coleman, Tiger Global) can, if followed, elicit moments of brilliance (limiting market involvement/position liquidation amidst times of stress and dislocation), but in the same way as a vol-selling or mean-reversion strategy, it works until it doesn’t; sometimes with disastrously unlimited consequences. I don’t share this for fear-mongering purposes, but as a simplification model. In a binary world, the ill-disciplined aforementioned approach makes for a stressful and emotional existence, requiring faith and calm above all else. The polar opposite is a highly disciplined and downside-protected approach, whereby losses are an expected part of the game, trades are planned and plans are adhered to. I’ll leave you with one final quote - incidentally from the same mentor and former colleague: “there are old pilots and bold pilots, but no old, bold pilots”. Do with that what you will!