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One of my Super Traders is almost finished with the program and just submitted his three trading systems for approval. His three different systems each trade a particular market under various conditions. There was nothing unusual about his systems until we got to his SQNSM scores — they were all in the “Holy Grail” range — mostly above 10. Now those results were based on paper trading and thus they could change considerably with real money. Actually, I am somewhat skeptical about him achieving those SQN scores in the live market. Nevertheless, I had him take me through his systems’ trades bar by bar and I was impressed. In the process of going through his systems, it suddenly dawned on me that he had developed “scaffolding” that supported his systems. I now believe that idea of a good scaffolding structure might be what makes the difference.
The idea of scaffolding comes from Dr. Ken Long, who has been teaching technical workshops for us for nearly 20 years. His Core Trading course and Swing Trading course are both available online as e-learning courses. He also teaches a number of workshops here with Day Trading and Live Day Trading workshops coming up in November. Two weeks back, he taught two new workshops — Advanced Adaptive Swing Trading and Systems Thinking for Traders. I mention all of these courses and workshops to show you the breadth of Ken’s trading knowledge as well as to point out that all of them are about trading systems except one — Systems Thinking.
Why did I ask Ken to develop the Systems Thinking for Traders workshop?
Ken has a unique systems thinking oriented approach to the markets and to trading. About 80% of the general population, however, lack a systems thinking mindset. I believe all of the Super Traders have the potential to develop their abilities in this area so that’s part of the reason I asked Ken to teach a workshop about systems thinking. Based on the insights I gained and based on the feedback forms, the workshop was very useful for helping the traders in attendance understand a systems thinking approach to the markets.
Ken is a true systems thinker. He earned a master’s degree in Systems Management and his Ph.D. dissertation was about decision making under uncertainty. During the recent three day workshop, he covered many systems thinking concepts but I want to focus on just one right now — the concept of scaffolding. Ken defines scaffolding as:
A structure that one builds to support other activities. Good scaffolding is light-weight, adaptable, flexible, durable, modular, multipurpose, cost-effective, and provides both structure and security.
Scaffolding is useful across a wide variety of typical problems or opportunity areas in business, education, the military, etc. In construction for example, scaffolding can be used to fix a roof, wash windows, paint a wall and all sort of other things. Using the metaphor in trading, you can set up various rules to serve as your scaffolding.
Here is one way that the idea of scaffolding might apply in the trading context:
- You can look at prior highs, lows, supports, and resistances on various time frames.
- These can be used to set up risk levels and targets.
- When you have both of those elements of a trade, you can make informed decisions based upon your potential reward-to-risk levels — which should be at least 2 to 1.
Ken constantly monitors the market type, the opening gap size, the daily range, and other statistics which help him develop probabilities for price to move to certain points. All of this data helps him make information-based reward to risk rules and decisions. We know that these concepts are just made up but they support strong decision making so they are very useful.
Let’s look at another example of some scaffolding you could create to help you manage your general reward and risk relationship:
- Never lose more than 1R,
- Attempt to make at least 2R in every trade, and
- In an open trade, never put yourself in a position in which your potential risk is bigger than your remaining potential reward.
So what’s the scaffolding here? Well, these three Tharp Think principles support your trading well and provide you some security. The Tops Tasks of Trading are another form of scaffolding — they help you prevent and eliminate mistakes. A structure that helps you define the specific reward to risk ratio in each trade is scaffolding also.
Here’s an example of that last point. About 10-12 years ago, D.R. Barton and Christopher Castroviejo taught a technical workshop on e-mini futures trading. Part of their approach was to build a ladder of critical prices using a combination of pivot points, Fibonacci numbers, highs, lows, and other signs of support and resistance. At the time, I thought the approach was too discretionary so we stopped giving that workshop. When you think about their price ladder as scaffolding, however, it makes more sense. That ladder gave them a framework to define their risk and their potential targets (potential reward).
So here is a new Tharp Think principle:
Develop scaffolding to support your trading, especially your decisions about reward-to-risk. Scaffolding might be the difference between a Holy Grail system versus a useful, tradable system.