The Six (6) Sigma Trading Principles in Foreign Exchange
Practise and Discipline
The Six (6) Sigma Principle (SSP) is a ' thought-driven process method ' designed to focus on ' Design, Measure, Analyze, Improve and Control business management decisions. In this particular case ' trading decisions in the Foreign Exchange market and its relative performance by recognizing specific areas of a strategic plan and methodology.
Only by calculating and careful analysis can be made to find out what an investment traders' sigma level and skill in the course of trading the FX market during times of volatility. In additon, to know what areas of responsibility would need to be improve and verified that can only be seen through the trading results every step of the way.
In the Sigma principle, there should be no more than six (6) deviations in attaining a positive end-result in the process. The smaller sigma numerics would indicate a high degree of skill and level of expertise over a specific period of time. It is not in the amount of money made, but how it was achieved is what counts the most. In essence, the overall trading perspective should define, measure and limit the ratio of ' Risk Tolerance ' with the proportionate reward relative to the time-frame of exposure for the allocated and leveraged amount of funds that was marginalized in the market in the first place.
The overall objective can be achieve through several transactions and should not be attempted in any single trade but spread into several trades and / or positions in a given period. However, in a point of engaging the market; the goal and objective is to limit the inherent risk of loss and avoidance of volatility. As the market can swing rapidly in any direction specially during market capitulation. With that said, it is prudent and necessary to have a wait and see attitude until the market tames itself from the volatility until the next predominant opportunity presents itself again in a different fashion.
As a brief background on history; these same principles were found in a the chronicles of the infamous General Sun Tzu of the 6th century BC - ' The Art of War ' the compilations of these writings were captured in several books on the subject matter by other financial writers and by a super-trader as some have called Dean Lundell who happens to apply such techniques in his own trading style.
It is to no surprise that the former Chairman of General Electric - Jack Welsh have also been practising these very same principles in managing the company and the likes of IBM, Toyota and Dell just to name a few. Today, well renowned universities and colleges are providing course training and certifications on the Six Sigma Principles as part of their newer discipline and curriculum in line with the course materials of top corporations allowing students to qualify better when applying for positions in their company.
Applying these same very dynamic principles incorporated in the Foreign Exchange trading can only mean achieving better discipline in trading and the relative rewards that comes along with it. Here are the guidelines that should be considered.
Basic Discipline and Practise Principles :
DEFINE - market conditions in all possible angles.
Fundamental Factors affecting market prices such as economic news, Trade policies & treaty, Political and Governmental regulations, Central Banks monetary policy on current issues, Financial news and overall market sentiments by investors and by active major market players. After considerable deliberation; identify the major trend and the subsequent near term trend that may be taken to determine the trade position. Needless to say that such methods are quite effective with both the Forex and commodity futures trading as it follows certain market cycles and patterns that may not be distinguishable in the technical tools available to the trader and can only be found in the market behavioral price changes.
MEASURE - Risk Proportions and Reward Ratio
Depending on each individual investors ' Risk Tolerance ' levels would be the primary criteria as to how much in percentage shall be properly allocated for any single or multi-trades on a given market condition pertaining to margin requirements, amount of net exposure and coverage, a defined time-frame and a predetermined probable loss at worst case scenario and on execution of settlement of trades based on the projected profit objective whenever prices have reached its initial price support or resistances. The most basic and acceptable proportion would be a 3 to 1 ratio on profitable objectives as against a a loss of one. Over- Leverage is a NO- NO!
ANALYZE - Technical Factors
The most and widely used trading platforms has incorporated the technical tools and market indicators into their individual platforms as a basic feature for the investors / clients to use for their trading. Some others have offered managed accounts that define the kind of technical skill levels and who manages the accounts in behalf of the investors. Although, as a word of precaution it would really depend on the investors final decision to choose this kind of service which the investor may or may not have the full control on his account. Besides these technical tools are suppose to be guidelines to determine market directions. Having a better understanding on technical knowledge would be very helpful for investors.
IMPROVE & INNOVATE
Once the Strategic plan is done , it would not hurt to take a second or third look at it. To improve any plans , it has to be looked at from the outside looking in. Thinking and developing an independent mindset can only differentiate a well thought of plan from a market bias sentiment. A strategy made independent from the influence of any financial news and reports will only be justified upon completion or settlement of the trade. Timing the market on exact points of entry and/ or exit prices can be close to impossible to achieve but closest to those prices can be probable than possible. It is how one trains to upgrade the skill and knowledge to have the sustaining power and endurance in staying in the market.
CONTROL / VERIFY & MANAGE
Controlling the market is close to impossible ! The Hunts brothers tried and failed to control the silver market during those days. However, controlling when to and when not to place an order is under the control of the investor / trader at all times. Whenever the above stated principles are in-syncwith one another and upon verification of market conditions, only then investors can manage the trades more significantly and shall be confined within the set limits of its risk from the trading plan. And see how results can outlast the best systems in the industry today.
This process may take some form of discipline and training the mindset of the trader / investor to become more of a STRATEGIST than a trader. As experience may well play a more active role specially whenever trades are booked on a day to day basis and analyze at the end of day transactions. This form of training would lead to an applied procedure that defines correct points of execution and mistakes are noted and remembered for a long time.
Some people are meant to trade and some are not. Working on one's strength is better as it strengthens one's weakness along the way! And looking at a glass as half full is better than saying its is half empty. It is the outlook and what one believes is important.
So, efficiency from quality and reliable source of information in making a strategic plan is the key element in any investment decision. The disicpline and practise from a thought driven process is a methodology on its own where one only discovers & knows how far they can reach.
The Six (6) Sigma Principle (SSP) is a ' thought-driven process method ' designed to focus on ' Design, Measure, Analyze, Improve and Control business management decisions. In this particular case ' trading decisions in the Foreign Exchange market and its relative performance by recognizing specific areas of a strategic plan and methodology.
Only by calculating and careful analysis can be made to find out what an investment traders' sigma level and skill in the course of trading the FX market during times of volatility. In additon, to know what areas of responsibility would need to be improve and verified that can only be seen through the trading results every step of the way.
In the Sigma principle, there should be no more than six (6) deviations in attaining a positive end-result in the process. The smaller sigma numerics would indicate a high degree of skill and level of expertise over a specific period of time. It is not in the amount of money made, but how it was achieved is what counts the most. In essence, the overall trading perspective should define, measure and limit the ratio of ' Risk Tolerance ' with the proportionate reward relative to the time-frame of exposure for the allocated and leveraged amount of funds that was marginalized in the market in the first place.
The overall objective can be achieve through several transactions and should not be attempted in any single trade but spread into several trades and / or positions in a given period. However, in a point of engaging the market; the goal and objective is to limit the inherent risk of loss and avoidance of volatility. As the market can swing rapidly in any direction specially during market capitulation. With that said, it is prudent and necessary to have a wait and see attitude until the market tames itself from the volatility until the next predominant opportunity presents itself again in a different fashion.
As a brief background on history; these same principles were found in a the chronicles of the infamous General Sun Tzu of the 6th century BC - ' The Art of War ' the compilations of these writings were captured in several books on the subject matter by other financial writers and by a super-trader as some have called Dean Lundell who happens to apply such techniques in his own trading style.
It is to no surprise that the former Chairman of General Electric - Jack Welsh have also been practising these very same principles in managing the company and the likes of IBM, Toyota and Dell just to name a few. Today, well renowned universities and colleges are providing course training and certifications on the Six Sigma Principles as part of their newer discipline and curriculum in line with the course materials of top corporations allowing students to qualify better when applying for positions in their company.
Applying these same very dynamic principles incorporated in the Foreign Exchange trading can only mean achieving better discipline in trading and the relative rewards that comes along with it. Here are the guidelines that should be considered.
Basic Discipline and Practise Principles :
DEFINE - market conditions in all possible angles.
Fundamental Factors affecting market prices such as economic news, Trade policies & treaty, Political and Governmental regulations, Central Banks monetary policy on current issues, Financial news and overall market sentiments by investors and by active major market players. After considerable deliberation; identify the major trend and the subsequent near term trend that may be taken to determine the trade position. Needless to say that such methods are quite effective with both the Forex and commodity futures trading as it follows certain market cycles and patterns that may not be distinguishable in the technical tools available to the trader and can only be found in the market behavioral price changes.
MEASURE - Risk Proportions and Reward Ratio
Depending on each individual investors ' Risk Tolerance ' levels would be the primary criteria as to how much in percentage shall be properly allocated for any single or multi-trades on a given market condition pertaining to margin requirements, amount of net exposure and coverage, a defined time-frame and a predetermined probable loss at worst case scenario and on execution of settlement of trades based on the projected profit objective whenever prices have reached its initial price support or resistances. The most basic and acceptable proportion would be a 3 to 1 ratio on profitable objectives as against a a loss of one. Over- Leverage is a NO- NO!
ANALYZE - Technical Factors
The most and widely used trading platforms has incorporated the technical tools and market indicators into their individual platforms as a basic feature for the investors / clients to use for their trading. Some others have offered managed accounts that define the kind of technical skill levels and who manages the accounts in behalf of the investors. Although, as a word of precaution it would really depend on the investors final decision to choose this kind of service which the investor may or may not have the full control on his account. Besides these technical tools are suppose to be guidelines to determine market directions. Having a better understanding on technical knowledge would be very helpful for investors.
IMPROVE & INNOVATE
Once the Strategic plan is done , it would not hurt to take a second or third look at it. To improve any plans , it has to be looked at from the outside looking in. Thinking and developing an independent mindset can only differentiate a well thought of plan from a market bias sentiment. A strategy made independent from the influence of any financial news and reports will only be justified upon completion or settlement of the trade. Timing the market on exact points of entry and/ or exit prices can be close to impossible to achieve but closest to those prices can be probable than possible. It is how one trains to upgrade the skill and knowledge to have the sustaining power and endurance in staying in the market.
CONTROL / VERIFY & MANAGE
Controlling the market is close to impossible ! The Hunts brothers tried and failed to control the silver market during those days. However, controlling when to and when not to place an order is under the control of the investor / trader at all times. Whenever the above stated principles are in-syncwith one another and upon verification of market conditions, only then investors can manage the trades more significantly and shall be confined within the set limits of its risk from the trading plan. And see how results can outlast the best systems in the industry today.
This process may take some form of discipline and training the mindset of the trader / investor to become more of a STRATEGIST than a trader. As experience may well play a more active role specially whenever trades are booked on a day to day basis and analyze at the end of day transactions. This form of training would lead to an applied procedure that defines correct points of execution and mistakes are noted and remembered for a long time.
Some people are meant to trade and some are not. Working on one's strength is better as it strengthens one's weakness along the way! And looking at a glass as half full is better than saying its is half empty. It is the outlook and what one believes is important.
So, efficiency from quality and reliable source of information in making a strategic plan is the key element in any investment decision. The disicpline and practise from a thought driven process is a methodology on its own where one only discovers & knows how far they can reach.