What Is Defensive Trading?

What Is Defensive Trading? Defensive Trading is a Risk Management system to trading any asset in the Financial Markets; be it Forex, Stocks or Cryptocurrencies.

The Defensive Trading approach is a system that focuses on the combination of a thorough Fundamental and Technical understanding of the asset and rigorous Risk Assessment Calculations for your personal trading circumstances.

If this approach is followed exactly, it will ensure that you are always in control of your trade set-ups and the trading decisions that you make, irrespective of what the markets do on any given trade. Afterall, no one can predict the markets all the time, but you can always control your decisions – no matter the outcome on any trade.

Defensive Trading can be explained in two simple steps. 
1) That your Technical Analysis agrees with your Fundamental Understanding before taking that position. 
2) That you have followed the detailed Defensive Trading risk assessment calculations for your account size and chosen asset (Defensive Trading Risk Assessment).

The Components of the Defensive Trading Approach

The Defensive Trading approach can be broken down into two key areas of specialisation; one is the identification / selection of the trade, and two is the risk assessment and management of this trade.

The first is essentially dependent on a fundamental understanding of the market, no matter what it is, Cryptocurrency, Stocks, Forex, etc. The second is dependent on precise risk assessment calculations that must be performed by each trader for each trade prior to risking real capital on that opportunity.

By using this two-step Defensive Trading approach to trading, you will be able to understand and control almost every aspect of your trade and therefore be able to respond quickly and decisively when the market presents you with the opportunities to do so. This may mean when entering, exiting or riding out certain trades with confidence.

Let’s take a closer look at these two steps now.

Defensive Trading Technical and Fundamental Analysis

Defensive Trading combines all available elements of Trading Technical and Fundamental Analysis together so that the trader may have as much information available to them as possible.

While Fundamental Analysis is dependent on the asset that we are trading, Technical Analysis is highly transferable from asset to asset. However, due to the sheer amount of Technical Analysis approaches and indicators available it is a personal decision as to which combination a trader prefers to use.

Irrespective of which forms of Technical Analysis one chooses to use, when we come to open a trade we are required to confirm that 3 of the preferred indicators (such as a support or resistance level, a chart or candlestick pattern, an oscillator or a moving average indicator) give a certain reading (buy or sell).

If these Technical readings agree with our Fundamental Analysis, then, that is the position we take. However, it needs to be apparent on two consecutive timeframes. Depending on the style of trading you are interested in undertaking, these timeframes can be as short as 5 or 15 mins up to 1 month.

It needs to be said, that this process does not render a 100% success rate, as often times, the markets behave unpredictably. However, in the majority of instances this process will help us do 2 key things. 1) To be very thorough with our assessment of every single trade we enter, and 2) force ourselves to look at both sides of the argument in a pragmatic way that takes time to undertake, preventing us from making a ‘gut instinct’ decision on what position we should take.

What Is Defensive Trading?
What Is Defensive Trading?

Step One of Defensive Trading – Fundamental Understanding

This can be generally described as the context affecting the market or markets that you are looking at. It can be the Microeconomics or Macroeconomics and the inter-related nature of the various markets, for example, what effect does an increase in inflation have on the stock market? Or, why do certain currencies appreciate while others depreciate when the global economy experiences the same factors?

This first step of the Defensive Trading approach is the more general of the two when we consider that there are literally hundreds of people right in this moment are analysing the same asset or market as you and they are using the same logic to do so.

If you are not already well acquainted with this approach to assessing and understanding the markets, then it is essential to become so familiar with it. It doesn’t matter what kind of market or asset you are interested in trading, Stocks, Cryptocurrencies or Forex, a solid fundamental understanding of that Market and any others that relate to it is absolutely essential.

As a new trader, gaining this understanding is going to seem like a herculean task, however, once we break down all the moving parts of the markets and how they relate to one another, you can simply take the process one step at a time. We would also strongly encourage you to apply the learning to real world examples so that you can take what you learn out of the theoretical realm and apply it to a real scenario where you can see how accurately your modelling resulted in real life.

Being able to do this will provide you with a huge amount of understanding and confidence, which will allow you to build upon the knowledge and understanding more quickly and efficiently.

While the process of performing Fundamental Analysis is essential in all asset classes, the forms of analysis will differ slightly from asset class to asset class. Generally speaking, these forms of Fundamental Analysis for specific asset classes can be described as follows:

  • For Forex it is a combination of microeconomics and macroeconomics with a heavy interest on monetary policy and Central Banks.
  • For Stock Market it is microeconomics and macroeconomics in addition to industry specific and company specific analysis.
  • For Cryptocurrency it is a macroeconomic factors, industry specific and currency specific factors.

Step Two of Defensive Trading – Risk Assessment Calculations

The second step in the Defensive Trading system works to manage your risk by performing bespoke calculations for your account size and style of trading. Used in combination with the first step of Defensive Trading, Fundamental Understanding of the market, you can both prevent yourself from entering losing trades, and protect your capital if you do.

Jump straight to the Principles of Defensive Trading.

If you follow this system exactly, you are able to safely enter the positions. Once you have completed the Risk Assessment Calculations applicable for your account size, trading experience and for the asset selected.

What Makes Defensive Trading Different?

Defensive Trading is a long-term and safety-first approach founded in the knowledge that there will always be more trades just around the corner. It is based in the concept of trade quality over trade quantity. The idea is simple: to protect and keep a) your initial capital, and b) any profits gained. This is done by taking a very defensive approach to what the next market move will be.

Defensive Trading covers in specific detail essential information of Fundamental Understanding and Risk Management which includes Technical Analysis. Once mastered, this unique trade assessment process will ensure every trader will not only make but, more importantly, keep profits.

The dynamic Defensive Trading approach will guide the trader safely through various assets in constantly changing market conditions.

If there is one thing that any experienced trader knows for a fact, it is that nobody can predict the market. Maybe you might get it right a certain percentage of the time, but not anything like 100%. So, does this mean that trading is akin to gambling? Well, how could it be? When Investment Banks and professional traders make regular and dependable profits from trading the markets every year?



Warren Buffett

What Is The Secret To Trading Successfully?

Traders who make consistent profits from trading must be doing something different to the average Joe, right? Right.

Firstly, which is a bittersweet pill for the new traders, experienced traders have one key thing: experience. The professionals in the marketplace have an abundance of experience to draw upon which helps them to see the likely future movements of any asset. This forms a huge part of the first step in the Defensive Trading strategy which is Fundamental Understanding of the asset.

It is worth noting, however, that the way that most traders became experienced is through a mixture of successes and mistakes over the years spent trading. As any trader will tell you, it is certainly the mistakes that have chiselled them into being the resilient operators that they are today.

This is Tip 1: Learn from your mistakes, but don’t give up or you will never master trading.

The second point of difference is Risk Management approach. Any experienced trader will highlight that it is not so much what you do when things are going your way that matters, it is what plan you have in place for when things go against you that really counts. Or as the Oracle of Omaha, Warren Buffett eloquently put it: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

That is where step two in Defensive Trading comes in. Learning to protect your capital is why you live to fight another day, even after you have been roughed up by the markets (which happens!). If you can protect yourself consistently then you will always be able to stay in the game no matter what the markets through at you.

That is Tip 2: protect your capital at all costs.

Why is Defensive Trading Preferable?

Defensive Trading is the best approach to participating in the markets because dramatically lowers the risk associated with trading.

This is especially true if you are a new or novice trader.

By using the detailed Defensive Trading Risk Assessment calculations in combination with the Fundamental Understanding approach, no matter the asset you are interested in trading, you will only enter positions that are high probability trades and you will only risk money you are comfortable losing.

This does, however, mean that you are going to have to sit out quite a few okay trades. Though, by doing so, you will also sit out the trades that you thought looked okay, but ended up being losers.  

Don’t miss out related post, Ray Dalio on Defensive Trading.



Ray Dalio

What Are the Principles of Defensive Trading?

The principles of Defensive Trading can be broken into two steps which are essential for every trade. These steps are;

  1. That your Technical Analysis agrees with your Fundamental Understanding before taking that position.
  2. That you have followed the detailed Defensive Trading risk assessment calculations for your account size and chosen asset (Defensive Trading Risk Assessment)

Why Doesn’t Defensive Trading Focus on Technical Analysis?

Defensive Trading definitely uses and encourages the use of Technical Analysis in every trade, however, it is not highlighted as being part of the system directly for two reasons.

Firstly, because Technical Analysis is not very reliable. While this may be contested by many pro-technical traders out there, it is true. The amount of times that the price of an asset has crashed through trend lines or key levels when the fundamental factors caused it to do so are innumerable.

The second is that performing Technical Analysis is a very bespoke and personal process. What one person feels may be helpful on a chart set up may not make any sense to another trader. Some people prefer numerous indicators on their screens at any one time, and others prefer cleaner and simpler charts to avoid getting conflicting readings.

This is why at Defensive Trading we teach all the various forms of Technical Analysis ranging from simple chart or candle stick patterns ranging to specific strategies such as Bill Williams or the Elliot wave. This way each trader is able to make their own personal decision on what Technical Analysis set up they prefer.

What are the Challenges of Defensive Trading?

This is actually very obvious, but is still quite a surprise to most traders. The only difficult thing about this process is letting many trades pass you buy. Of course, in some cases from time to time, a whimsical trade decision can turn out to be a good one. However, over the long term, that system (if you can call it that) does not sustain.

However, being a Trader and not trading can be quite frustrating at times. However, making money is not so that’s why this approach works.

What is Defensive Investing and how is it different from Defensive Trading? Check out our post on Defensive Investing for more.

As always, if you have any questions, we would love to hear from you in the comments box below. Happy trading!

Defensive Trading
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