I was talking with a trader friend of mine yesterday about trading systems.  He is a retired pilot and entrepreneur.  In the conversation we were discussing trading systems in some detail.  In particular we were talking about this move that he likes to call an ATP.  I think that if I use the term “dollar cost averaging”, you might understand what I’m talking about a little better.  An ATP is basically adding to a loosing position expecting the market to return in your favor at some point.  I thought that what I shared with him might help someone along the way, so I decided to post it.

Though I personally don’t like the idea of adding to a loosing position (I learned this the hard way), I do think that if you are going to do this, there is a way to do this so that you stack the odds in your favor.  Since we are Forex traders I will keep my explanation in terms of the Forex market.

Before explaining how I think you can stack the odds in your favor, I want to answer the question:  Are ATP’s a good tool to use?  Well, it all depends.  There are literally a thousand ways to profitably trade the markets.  You can use moving average systems, you can use fibonacci systems, you can use trendline systems, you can use support and resistance system… (I think you get the point).  Are they any good?  For the most part I would say yes.  There is some good to them, or they would have died a long time ago.  At the very least they would have been left on the fringe with most of the esoteric trading systems.  So, if they are quite prevalent there is a good chance that they are good systems. 

Why haven’t you been able to make money with them?  I’m glad you asked.  The simplistic answer is that most of the time you are undisciplined when applying these systems.  You are either undisciplined in the execution, the money management aspect, or the psychological aspect of the trading system.  But sometimes the system just gets applied in the wrong scenarios because of a lack of understanding or just simply too much eagerness to profit (some call this greed).  Be careful that you use the trading tools at your disposal in the proper way.  Would you ask a fighter pilot if a 747 was a good plane?  What do you think he would answer?  It depends.  A 747 is great to move large quantities of stuff.  It sucks in a dogfight against a Russian MIG (If they still exist).  The opposite is true as well.  It will take you several trips to fly 200 people from point A to point B in a fighter jet.  The same applies to trading systems.  The same applies to ATP’s.  Watch out for this.  I have found myself dropping perfectly good trading systems because I was disappointed in their results.  I never realized that I was trying to use them or apply them in an improper manner.

How can you set the odds in your favor when using ATP’s in your trading strategy?  The best way to use an ATP is to have it tucked away in your arsenal.  The second best way to use it is pay attention to price action, support and resistance levels, and average true range.  Keep track of the 5, 10, 30 and 180 average true range for the market you are trading.  Make sure that you only add an ATP when price action is near a support or resistance level (based on previous price action levels) that is beyond the 10 or 30 period average true range.  Do this everytime you are thinking of adding an ATP.  Will this guarantee you no loss?  Absolutely not.  It will merely increase the odds that price is going to reverse because it will most likely be overextended against you and it will have a difficult time breaking past the support or resistance level, and may even turn around in your favor.  Do not simply add an ATP because it travelled a certain number of pips.  That only has meaning in terms of average true range (read this twice).  Twenty pips within the price action of a chart that has a thirty period average true range of one hundred and thirty is not the same as twenty pips on a chart that has a thirty period average true range of sixty (read this twice too).

Having said all of this, I have to mention that ATP’s are the perfect way to blow up your account.  I can’t think of a better way to do it.  If you can get away with out using them, then do it.  It will be the best thing you did for your profitability.

Don’t just learn a trading system.  Learn when you are supposed to use it. More importantly, learn when you are NOT supposed to use it.  Some systems work in trending markets, some systems work in sideways markets, some systems are counter trend, and some systems are pro-trend.  Don’t miss out on this great business because you were using a great system the wrong way.

I wish you happy pipping!