Many successful traders trade multiple trading systems in multiple markets.    

Hedging in related markets is a technique frequently used by professional traders.    

Some successful traders frequently trade two or more trading systems simultaneously other than for hedging purposes.     Why?

If two trading systems are based on differing concepts and approaches, this can lead to the two systems having a negative correlation of returns.     This relationship can be exploited to reduce the traders maximum draw-down as one trading system tends to have profits when the other is in loss.
If both have positive expected results, the combined expected reward can be enhanced and the maximum draw-down reduced.    

Sometimes a market path approach is used to derive a trading system negatively correlated with market direction based trading systems.

When I began to do some of this thinking, it was the start of my education as a trader.     It helped me to start the process of stopping being a loser.     It did not help be to become a winner.     I had more preparatory work to do and several years of work before these ideas could be fully exploited.    

Some of these 'advanced' concepts turned out to be useful but not sufficient to become a consistent winner who kept most of the winnings.     It was only after I had moved further forward in my understanding and skills, and met and learnt from other traders that I realised I was ready to use some of these 'advanced' concepts.    

However there was one early concept that did help me become profitable and this is the concept of market path.

The majority of newspaper articles, interviews on radio and TV, training courses and books etc. about trading seem to assume that everyone tries to trade the perceived direction of the market price.    

It is assumed that everyone is trying to make a profit getting the direction of the market price correct.     Either by attempting to buy at a low price and selling higher somewhat later - one of the more popular strategies and another common assumption of writers - or selling at a high market price and attempting to buy back lower at a later time.

The assumptions are true in the sense that the majority appear to trade market direction and a majority apparently trade by buying first.

My education as a trader really commenced when I came across the results of a survey, many years ago, (Editor: mid 1980's) that projected that, purely based on number of traders participating in an equity market:

• 80% only trade market direction, exclusively by buying first,
• 10% only trade market direction, exclusively by selling first,
• 5% trade both market directions with no bias for selling or buying,
• 5% trade in another manner.

I do not know if this was a fair analysis, if it is still true, or whether it is applies to other types of market.     I suspect that the survey probably had an emphasis on investors rather than traders.    

However, what is interesting here is what do the last 5% do - those who do not trade direction.     This was the start of interesting thinking and research and to which I attribute a large part of my current understanding of market behaviours, such at it is.

In other words, this survey right or wrong, was the catalyst for a lot of thinking about how the markets really worked.

So what do the others do? I spent some time thinking about this question.     I feel I understand part of the answer.     I also feel sure that there are other answers to the question I am not aware of.

My understanding of the answer includes:

• hedging activities,
• trading on direction of implied volatility of options,
• trading of market path.

Hedging, if you think about it, is taking an offset position to reduce risk of market direction changes.     It is still essentially oriented towards market direction.    

Trading the path of the market rather than the direction of the market can be likened to the aphorism "Success is a journey not a destination."

Market path is the path of the market! It is the ups and downs within and between the directional moves.     It is, if you like, the curve on the graph, not the straight line joining the first price to the last price.     It is the journey not the destination.

Imagine you a cycle-based trader, you may try to trade the up part of the cycle after the down part or vice versa.     Your directional trading may be considered to have a path component to it.

If your trading system is based on pattern recognition, you are in a limited sense trading the market path - because you are waiting for a particular path (pattern) to emerge.     So your directional trading is based on recognition of a pattern and so may be considered to have a path component to it.

But to call such traders market path traders rather than market direction traders would be stretching the meaning.     From their perspective they trade market direction.

Market path traders include market makers providing a service over an extended period of time, taking the other side of the balance of trades of the outside traders.    

In this context market makers are effectively the buyers of last resort when there are more contracts or shares being sold by outside trades and seller of last resort when there are more contracts or shares etc. being bought than sold by the public.

They are trading based on the path of the market giving them:

• profits from the bid to offer spread,
• volatility profits,
• exit opportunities to make profits.

Together these profit opportunities allow them to make a return on capital employed.

They seem to partly rely on the normal retracements of most moves, typically about 30%, 50%, 60%, occurring time and time again, giving them a path sufficient for profits most of the time.

Below is a summary of typical attributes of market path traders and the typical attributes of market direction traders.     These attributes are indicative - for example some market direction traders pyramid their positions and so sometimes routinely take multiple positions.

Most market path traders expect to take multiple positions at multiple prices.     There is little or no directional bias in advance of a trade.     If market path traders have a directional view or prediction, they do not normally let it influence their trading.     As a result the focus tends to be equally on both exit prices and entry prices.     There is often little preconception of trade duration.     The conceptual framework tends to emphasise service provision rather than request for service.    

Many position traders take a single position at a single price.     If market direction traders have a view on market direction it is employed in their trading, in practice many such traders only trade if they have a predictive directional view.     Often the main focus is on entry price.     Sometimes directional traders have time targets - this is frequently true for option traders.     Market direction traders often have a conceptual framework of seeking service.

Trading market path is not for everyone.     It requires a mind-set somewhat different to most traders' perspectives.

Market path can be a good place to start to locate market behaviours that can be used to design a trading system with negative correlation of returns to market direction based trading systems.

Market path trading is a valid approach to trading in its own right.

Finally, understanding market path concepts can help develop a balanced understanding of the complementary perceptions of different market participants.     This in turn can lead to more and better understanding of market behaviours - a foundation of calm trading.