Directional strategies are just Gambling

Joined as a day trader in a small prop firm since my last post in this sub and the experience there has taught me quite a lot. So wanted to share some of my learnings with you.

At the start of my job we were thoroughly trained to avoid any sort of trades that don't have an edge to them. And one of the example given to us was Directional trading.

So lets say you have a strategy that has shown a really good edge in backtesting over a period of time and you decide to deploy it. The strategy generates a buy signal and you enter the trade. Your probability at the time of taking the trade even with all of the research and backtesting is still 50%.

So if the trade was to go against you the only thing stopping you from blowing your account is STOP LOSS and your BETTING SIZE. Even if you think you have an edge in the trade you actually don't.

At the same time there might be a different strategy or system generating an opposite signal. The winner will always be one. The probability of you winning is exactly equal to a coin flip. You are a gambler who is hoping you become lucky just so you make money.

Does that mean Directional strategies are just a waste of time.

NO.

Directional strategies can be useful when you have a strong catalyst in play. For eg: XYZ Company promoters caught in a scandal, ABC Company earnings fell by 10% this quarter.

Scenarios like this are the most suitable for directional strategies as the Risk:Reward and probability is always skewed in you favour. So if you were to lose 10$ you might be making 200$ in such a scenario. The best example of such a trade is the George Soros: Bank of England Trade where it was the catalyst that made him money.