Why every trader must follow the OODA trading method

Q. “I am looking to trade using the OODA method, do you suggest I apply it to my trading and how does it work?”

A. I haven’t heard this acronym for many years. Basically, OODA stands for:
Observe
Orient
Decide and
Act.

I believe all trading systems should apply the OODA method, as it makes trading more mechanical.

Let’s start with what it stands for and break down what each step means…

O – Observe

First you’ll observe or look for a specific market to trade. It can be any market such as a share, index, currency and so on…

O – Orient

You’ll then orientate yourself by identifying what direction the market is currently in.
Either it’s in an up, down or sideways trend.

D – Decide

After you know what trend the market is in, you’ll then decide, based on your trading system, whether the trade has lined up an entry level or not.

With Red Hot Storm Trader l decide using a 20 year breakout pattern strategy. Read more here.

A – Act

Once you’ve found a setup on one of the markets, you’ll then act by placing your order and put in your entry, stop loss and reward levels.

When you follow the OODA steps every time you take a trade, you’ll no longer need to question the system and you’ll find trading will be easier to spot trades.

Q.”What is the maximum number of open trades I should have in my portfolio at any one time?”

A. This all depends on your risk appetite.

Make sure you ask yourself, “what percentage of my portfolio am I willing to risk per day?” Then ask yourself, “what you’re willing to risk per trade”.

This will give you an indication of how many trades you’ll be willing to hold at any one time.

When I trade, I never want to risk more than 20% of my portfolio at any specific time.

If I only risk 2% of my portfolio per trade, this means I’ll make sure to never have more than 10 trading positions opened at any one time.

There is one exception though…

During unfavourable market conditions, I expect the trades I take to more likely hit my stop loss.

This is when the main market moves in a sideways range.

When this happens, I only risk around 1% of my portfolio per trade.

This means, if I only risk 1% of my portfolio per trade, I’ll be happy to hold up to 20 trades at any one time.

Q. “Timon I like how you found the Nikkei is currently leading the ALSI 40 at the moment. Could you tell me without any maths how you found it correlating to the ALSI more than the other indices?”

A. To find strong correlations with different indices will require a bit of your time and trial and error.

Basically, the way I found the ALSI 40 to have a strong correlation with the Nikkei, is by following these three simple steps.

Step 1: Choose a weekly time frame on your charting platform.

This way you’ll be able to see the general market trend over a number of months and years.

Step 2: Overlay the main world traded indices.

In this case, I overlaid the following markets on one chart of the ALSI, Nikkei, Dow Jones, SP500, DAX, FTSE, CAC, IBEX, STOXX and NASDAQ.

Step 3: Once you’ve overlaid the charts, you’ll see which markets are outperforming which.

Now I’ve done this hard work for you and found that the Nikkei and the ALSI 40 showed the strongest resemblance (Correlation).

You may repeat the process every six months and you’ll be well on your way to making strong predictions using indices…