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Developing a Plan: The Trading Journal

The Trading Journal

In order to succeed at trading, you must have an edge. Your edge begins with the knowledge you gain through your research and testing that a particular price pattern or market behavior offers a level of predictability and a risk to reward ratio that provides a consistently profitable outcome over time. Without it, one is just "playing" the market in order to have something to talk about on message boards. To get it, you have to know exactly what you're looking for and what to do with it once you've found it. This process is what the journal is all about.

The journal goes through several stages depending on where you are. Once you've decided where you want to concentrate your efforts (at this level, the journal may resemble a diary), then you begin the process of developing a system (or method, strategy, procedure, whatever you want to call it). Here the journal takes on a different character. Once you've developed a tentative/preliminary system, you begin testing/trading it, and the journal adopts a still different character.

The first step is to decide what kind of trader you want to be.

What do you want to accomplish with your trading? Is it recreational? Supplementary income? A part-time job? Do you want to make a living at it? Even the greenest of the green knows whether or not he wants to make a living at it, trade only part time, trade for recreation, trade for the action, trade to have something to talk about with other traders (for whatever reason), trade only long enough to earn money to do or buy X.

Do you have any idea what sort of trading is most comfortable? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping? (Note here that a short-term trader, for example, does not become a long-term trader just because his stop was hit and he didn't sell; a long-term trader doesn't become a short-term trader because he chickened out and sold too soon. Each of these approaches are selected deliberately and for thoroughly-considered reasons.) How patient are you? How adventurous? Are you a leader or a follower (most people think they're leaders)?

The second step is to decide what you're going to trade and when you're going to trade it.

Have you found an instrument -- futures, stocks, ETFs, bonds, options -- that provides you with the range and volatility you require but also the safety that enables you to relax and trade in an objective and rational manner?

Have you yet found a time (5m, hourly, weekly) or tick (1t, 200t) or volume (1K, 100K) interval that gives you enough trading opportunities but also gives you enough time to think about what you're doing? If you want to limit your trading to the "morning", are you physically and psychologically prepared to trade all day? If not, can you shrug off whatever opportunities you may miss by limiting the amount of time you spend trading?

The third step is to develop your system.

A system consists of (a) a set of rules that you use to select profitable positions and (b) a set of rules that you use to manage the trade once you're in it (again, whether you call it a system, a method, a strategy, a plan, a scheme, an approach, a procedure, or a modus operandi is not as important as sitting down and doing it).

Developing a system begins with deciding just what it is you're looking for. Therefore, begin by studying price movement in real time (or at the end of the day through "replay", if your charting program offers it). By "study", I mean to observe it with intent, not just read about it or listen to somebody talk about it. You have to understand what you're looking at before you know what to look for. Note the conditions under which price rises, falls, drifts. Make every effort to avoid imposing your biases(1) onto what you observe. You may see trading as a war, a competition, a game, or a puzzle. You may think you're out to kill somebody, outwit somebody, or are out only to detect the flow and slip into it, riding the waves as if you were sailing. None of this should be allowed to affect what you observe

Develop a set of preliminary hypotheses which exploit the profit opportunities presented by these movements, e.g. price began trending "here". Price broke out "there". Price reversed "there". What can I do to take advantage of that? What do I have to look for?

Decide what strategy will best take advantage of what you think you've found. Are you looking to catch a reversal in the hopes that it will become a trend? Or are you looking to trade series of reversals within the day's or week's range? Or do you prefer to wait for a breakout and trade what may become a trend? Or would you rather wait for a retracement in what may be shaping up to be a trend? Limit yourself to only one strategy at the beginning.

Carefully define the setup (the set of circumstances which you define which triggers an entry) which implements this strategy, preferably using old charts (attempting to define the setup by studying realtime charts is inefficient since you don't yet know what it is that you're looking for). This is called "backtesting". All else flows from this. Unless you know what you're looking for, you cannot test it, much less screen for it. If you have not tested it, you have no idea of the probability of its success. With no idea of the probability of success, any trades made are essentially guesses.

Therefore, focus on the setup. One setup. Determine its characteristics, find the markers of buying and selling interest, buying and selling pressure, buying and selling exhaustion. Define it so specifically and so thoroughly that you can recognize it without any doubt whatsoever in real time. Decide provisionally where best to enter, what the target ought to be, where the stop should be placed, and so on. Only after the setup is defined and tested (and it can't, ipso facto, be tested until it's been defined) can one even begin to think about trading it with real money, much less trading multiple setups. Attempting to shortcut this process merely expands the amount of time it will take to develop the necessary skills. Nothing is gained by painting the house before scraping it, cleaning it, and priming it since you'll have to do it all over again sooner rather than later.

You are free to create your own based on whatever jingles your bells. You may, for example, focus on divergence. Or higher swing lows and lower swing highs. Or candlesticks of one sort or another. Or trendline breaks. Or base breakouts. Doesn't really matter. What matters is that you keep four concepts in mind: demand/supply, support/resistance, price/volume, and trend. In this way, you can create your own setups which hundreds of thousands of other traders won't be watching along with you. You must understand, however, that what determines the success of the trade is the trader, not the setup. If you're looking for something that "works", you may as well save yourself a lot of time and stop right here. What will “work” – or won’t, as the case may be – will be you.

Forward-test what you have so far, again using old charts, preferably replaying them (if replay is not available to you, then scroll through them, bar by bar). In other words, "pre-test" the setup. Make whatever modifications are necessary to the setup, i.e., re-examine and re-define your strategy. Address risk management, trade management, money management in further detail. Determine the ratio of winning trades to losing trades (you will, of course, have to define "winner" and "loser", which is where risk management and trade management come in). Determine the ratio of profit to loss. Determine the maximum loss. Determine the maximum number of consecutive losers.

Note that beginners often use "win/loss" to combine two separate considerations into one, and failing to keep them separate can create problems. One is win:lose. The other is profit:loss. Between the two, the "lose" and the "loss" have two distinct meanings. Win:lose refers to the ratio of winning trades to losing trades. Profit:loss means, expectedly, the ratio of profit to loss.

You'll read that the % of winners can be less than the % of losers as long as the winners are sufficiently profitable, one's management is superior, etc. And, yes, theoretically, one can "win" less than 50% of the time if his profits sufficiently outweigh his losses. But if your real-time real-money test begins with a string of the losses anticipated by your backtest, you'll be out of the game almost before it begins. In fact, one can be left high and dry even if his % of wins outnumber his % of losses, as mentioned above, if there is insufficient control of the amount of loss OR if the losses occur in sufficiently high numbers at the beginning of the trial.Then there are commissions and assorted trading costs to take into account, which is why traders who actually trade find that, without size, all the postulations about percentage don't mean much in practice.

Paper-trade this plan, in a simulated environment, as a semi-final test, until you are satisfied that it performs at least as well as it did during the previous testing phase. This may take several months or more depending on how many trials you perform. If your plan is not consistently profitable, go back however many steps are necessary to arrive at a potential solution.

Trade the plan using real money in real time, spending only what is absolutely necessary on "tools" and trading the minimum number of shares, contracts, etc., allowable. If your plan is not consistently profitable, go back however many steps are necessary to arrive at a potential solution. Recalculate your win rate and profit:loss ratio on a continuing basis.

If your plan is consistently profitable in practice, increase your size to what is a comfortable level, maintaining a continuous loop of re-appraisal and re-evaluation. When things come unglued, back up as far as necessary to regain your footing.

Novices rarely do any of this. They borrow something from somebody or somewhere and perhaps modify it somewhat, but they rarely go through the defining and testing process themselves. Some just try whatever seems like a good idea and hope for the best.

If one has absolutely no idea where to begin, there is nothing wrong with using a canned strategy IF it is used only as a point of departure. In other words, the canned strategy, regardless of what it is or what claims are made for it, still has to be tested, which often entails taking what is unexpectedly vague to begin with and defining it to a level of specificity that enables the testing to take place (it should come as no surprise that those who do go through the process succeed and those who don't, struggle, often to the point of being driven out of the market). Examples of canned strategies that are reasonably well-defined include the Darvas Box, the Ross Hook, the Opening Range Breakout, O'Neil's Cup With Handle, Dunnigan's One-Way Formula. Some of these are more vague than others and will require considerable work on definition before they can be tested. But they serve as points of departure.

Wyckoff’s "hinge" is another setup, though not one which would be classified as "canned", requiring as it does some sensitivity to trader behavior. The hinge is a type of "springboard", in which price action firms, like Jello, another Wyckoff concept (the springboard, not the Jello), the idea being that something is getting ready to happen as a result of what bulls and bears have been doing to "discover" price. (The pattern people call it a coil or symmetrical triangle; the difference is that the hinge is the result of a particular dynamic between bulls and bears and can be expected to result in something; the coil is technically nothing more than a pattern, and can result in nothing at all but drift.)

This particular "setup" occurs when bulls and bears are struggling over price, and it can be seen everywhere from a tick chart to a monthly chart. There is first a wide discrepancy between what one side thinks is a fair price and what the other side thinks is a fair price. Since they disagree, the range narrows, the bars get shorter, trading activity becomes subdued, and eventually you close in on a point which is more or less a midpoint between the two extremes. From this, price will then move -- often explosively -- in one direction or the other IF the hinge is being formed in an important spot, such as a point just after the initiation of what promises to be an important trend.

The market always tells you what to do. It tells you: Get in. Get out. Move your stop. Close out. Stay neutral. Wait for a better chance. All these things the market is continually impressing upon you, and you must get into the frame of mind where you are in reality taking your orders from the action of the market itself — from the tape.

Your judgment will become poorer from the very time when you decide that you know more about the market than the market is telling you. From that moment your results will be unsatisfactory, for in this trading business the tape is the boss. You must learn to obey its orders, doing exactly what it tells you. When you can accomplish this, you are on the high road to success in your stock trading.

Richard Wyckoff

Recommended Books:

The General Semantics of Wall Street
by John Magee (see my review)

The Nature of Risk/How to Buy/When to Sell
by Justin Mamis (see my reviews)

And if you're greener than green . . .

The Wall Street Journal Complete Money and Investing Guidebook

or

Standard and Poor's Guide to Money and Investing

(1)12 Cognitive Biases that Endanger Investors

1. Confirmation Bias

This is a fatal flaw of trading; we tend to surround ourselves with information that validates our own point of view and dismiss input that conflicts with our reasoning (also known as cognitive dissonance). This is the primary reason why we always strive to see “both sides of every trade” as the residual grist between variant views is where education—and profitability—resides.

2. In-Group Bias

This is a manifestation of confirmation bias, or the tendency to surround ourselves with those who share similar takes on the tape. This could pertain to our physical environment or a virtual experience, such as Twitter. Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious—or angry—with outsiders who dare to question how we feel.

3. Gambler’s Fallacy

One of the most famous disclaimers in finance is that past performance is no guarantee of future results. This bias is often referred to as a “glitch” in our thinking in that it extrapolates what happened in the past to construct an idea of what will happen the future. How many of you have played roulette at a casino under the premise that a string of red increases the likelihood of a black outcome? That’s flawed thinking; the odds of red (or black, for that matter) or 48% on each independent spin.

4. Post-Purchase Rationalization

The definition of an investment should never be a trade gone awry. Nobody initiates market exposure expecting to lose money, but we should never post-rationalize our risk (such as ignoring stop-losses or throwing good money after bad). We would be wise to remember that good traders know how to make money but great traders know how to take a loss.

5. Neglecting Probability

History is littered with stretches where in hindsight we’re reminded not to confuse brains with a bull market. This bias limits our ability to properly assess risk, whether it’s overstating an unlikely event (such as buying a stock for a takeover) or understating an unlikely event (such as Y2K, the fiscal cliff, or a terrorist attack). Tail events do happen, of course, but betting on an outlier is a long shot by its very definition.

6. Observational Selection Bias

This is when we suddenly notice something we haven’t noticed before, and wrongly assume the frequency has increased (when it hasn’t). Let’s say I bought cannabis stocks as a way to play (what I perceive to be) the legalization of marijuana. All of a sudden, everywhere I look, there are more and more signs that support my thesis; the topic is featured on 60 Minutes, it’s a hot-button issue during the election, it gained momentum in the mainstream media. While some of that may prove true, I am on the lookout for news, whether it’s conscious or not.

7. Status-Quo Bias

Most of us are creatures of habit in our own way; we use the same toothpaste or align with a particular smartphone device. That routine often extends to our investments in the marketplace; we’re comfortable with the stocks (or indices) we often trade and often miss opportunities outside of that comfort zone for fear of the unknown. Change isn’t only positive, it’s inevitable.

8. Negativity Bias

Let’s face it: We live in a sensationalist society where scare tactics and negative headlines garner the most attention. If you doubt this for a minute, turn on your local news tonight. Scientists theorize that we perceive negative news to be more important than positive news. The risk—for the bears and for humans as a whole—is the tendency to dwell on bad news rather than embrace good news, and there’s the added twist that the stock market is widely considered to be a leading indicator.

9. Bandwagon Effect

How prevalent is this when it comes to the financial markets? They teach it in college as a stylistic approach (momentum investing)! Nobody in our business—or in the media—wants to miss a move in the stock market, and history is littered with bubbles and busts that demonstrate this bias in kind. In life, this is driven by our innate desire to “fit in and conform"; in the markets, it’s driven by two factors: fear and greed.

10. Projection Bias

This is predicated on projecting our thoughts and beliefs onto others and assuming that others are wired the same way (they’re not). This can lead to "false consensus bias," which not only assumes that other people think like we do, but that they reach the same conclusions. In short, this creates a false consensus, or sense of confidence when in fact one doesn’t, or shouldn’t, exist.

11. The Current Moment Bias

This is a direct descendent of the immediate gratification mindset that dominated society for many years—and some will argue that the government is currently operating in this mode, mortgaging our children’s standard of living to achieve short-term fixes. In short, we want to live as well as possible and pay for it at a later date (as evidenced by the level of debt and our growing deficit). The housing crisis was rooted in this bias, as is the basic concept of leverage.

12. Anchoring Effect

This tendency, also known as the relativity trap, compares a situation to a limited sub-set of information; it’s when we focus on a number or value and extrapolate it to a current situation. This often manifests in the marketplace through the fundamental metric, when we observe that a stock is “cheap” relative to its peers or a historical precedent (also known as a “value trap”). --Todd Harrison

The Trading Log

As part of your journal, a trading log should be more than just bought here, sold there, made this, lost that. It should contribute to the record of your journey (“journey” -- ”journal”). If done correctly, a log will reveal patterns. Patterns of what you're doing right and what you're doing wrong and when and how often and under what circumstances. Patterns of the behaviors of those who are trading your stock (bond, fund, option, whatever). Patterns of the market you're trading, of its cycles, of its stages, of what works at some stages and in some cycles and not in others. It will reveal much regarding your trading. It will also reveal much regarding your self.

Addressing the questions asked in The Trading Journal and defining and testing the setup are only the preliminaries. Eventually, one starts trading, if only on paper, and that is where the log and journal can make the difference between success and failure.

A log is not just a record. It is also a plan. Before the first trade is ever made, even if only on paper, prepare for the day. Note any events that you should be aware of (reports, press releases, meetings, speeches, testimony, nuclear explosions, approaching meteors, etc). Write down reminders of any elements of the trading plan that you're having trouble with and what you intend to do about them, e.g., “don’t take any trades anywhere but at support or resistance” or “be wary of wide-range bars” (this may be necessary as early as the afternoon of the first day).

Above all, record your justification for each and every trade. Record your thoughts before, during, and after the trade, written in real time (your perception of what looks to you like a potential setup will change substantially after the “setup” resolves itself, and when you ask, later, “what the hell was I thinking?”, your record of your thoughts -- your "self-talk" -- will tell you, so that the next time, in real time, you’ll have a deeper and more rational perspective). This is more than just the reason for the trade (“It looked like it was going to go up”). It is more than the rationalization (“It was time for it to go up”). It is more than the mystic prompt ("I felt it was going to go up"). It’s the justification for it, the explanation that one would provide to one’s boss or client if he were trading for someone else. If everyone wrote down the reasons behind and justifications for every trade, their learning curves would be accelerated dramatically. And if writing all this down proves to be too much of a distraction from the screen, pick up an digital voice recorder from eBay for a few bucks.

At the end of the day, review your decisions, if necessary by "replaying" the day, a feature available in several charting programs. Did you make good trading decisions, i.e., did you follow your rules or not? If you followed your rules but made one or more losing trades anyway, do any of your rules need to be re-examined? If you didn’t follow one or more rules, which do you most often fail to follow? What’s the problem? What did you say to yourself at the time? What do you need to work on the following day? Always, what could you have done differently to improve the outcome? Can it be tested to find out if it's only an occasional anomaly or worth incorporating into the system?

And then you write down your detailed plan for the next day . . .

Beginners, particularly those who are frustrated, should keep in mind that this is a process and that everybody goes through stages. One take on these stages is provided below. If you are at the very beginning, you have lots of company. If you find yourself further along, congratulations. If you prefer more detail, there are 38 steps posted thereafter, and these will provide you with more frequent benchmarks of the progress you're making.

Stages of a Trader

Stage One: The Mystification Stage

This is where the neophyte trader begins. He has little or no understanding of market structure. He has no concept of the interrelationship among markets, much less between markets and the economy. Price charts are a meaningless mish-mash of colored lines and squiggles that look more like a painting from the MOMA than anything that contains information. Anyone who can make even a guess about price direction based on this tangle must be using black magic, or voodoo.

But those ads on TV are so persuasive. Earn $100,000 A Week In Your Spare Time. At Your Kitchen Table. In Your Bathrobe. All one has to do is buy Hidden Secrets of Market Wizards Revealed! (plus shipping and handling). Or that software with the red and green arrows (how hard can it be?).

So you open an account, subscribe to Level II, install your charting software, and are absolutely mesmerized by all the flashing lights and colors. DOM? You bet! And all you have to do to participate is . . . click.

Stage Two: The Hot Pot Stage

Before you’ve lost all your money, the thought that you haven’t the least idea what you’re doing may prevent you from blowing your account entirely. You realize now that this is not easy, it’s hard, it’s work, but rather than chuck it, you elect instead to take the subject “seriously”. You locate your library card and/or shop Amazon. You check out -- or take much of what you have left and buy -- all the “recommended reading”. You take the courses. You attend the seminars (box lunch included). You subscribe to the chatrooms and websites and newsletters. How-To book or notes in hand, you scan the markets every day. After a while (sometimes a good long while), you notice a particular phenomenon which pops up regularly and seems to "work" pretty well. You focus on this pattern. You begin to find more and more instances of it and all of them work! It’s all true! It Works! Your confidence in the pattern grows and you decide to take it the very next time it appears. You take it, and almost immediately your stop is hit, and you're underwater for the total amount of your stoploss.

So you back off and study this pattern further. You go back to the books, back to your notes. And the very next time it appears, it works. And again. And yet again. So you decide to try again. And you take the full hit on your stoploss.

Practically everyone goes through this, but few understand that this is all part of the win-lose cycle. They do not yet understand that loss is an inevitable part of any system/strategy/method/whathaveyou, that is, there is no such thing as a 100% win approach. When they gauge the success of a particular pattern or setup, they get caught up in the win cycle. They don't wait for the "lose" cycle to see how long it lasts or what the win/lose pattern is. Instead, they keep touching the pot and getting burned, never understanding that it's not the pot (pattern/setup) that's the problem, but a failure on their part to understand that it's the heat from the stove (the market) that they're paying no attention to whatsoever. So instead of trying to understand the nature of thermal transfer (the market), they avoid the pot (the pattern), moving on to another pattern/setup without bothering to find out whether or not the stove is on.

Stage Three: The Cynical Skepticism Stage

You've studied so hard and put so much effort into your trading, and this universal failure in the patterns only when you take them causes you to feel betrayed by the market and the books and materials and gurus you tried to learn from. Everybody claims their ideas lead to profitability, but every time you take a trade, it's a loser, even though the setups all worked perfectly before you played them. And since one of the most painful experiences is to fail when success looks easy, this embarrassment is transformed into anger: anger at the gurus, anger at the vendors, anger at the writers, the seminars, the courses, the brokers, the market makers, the specialists, the "manipulators". What's the point in trying to analyze and improve your own trading when there are so many dark forces out to get you?

This excuse-driven blame game is a dead-end viewpoint, and explains a lot of what you find on message boards. Those who can't pull themselves out of it will quit.

Stage Four: The Squiggle Trader Stage

If you don't quit, you'll move into the "squiggle trader" phase. Since you failed with patterns and so on, you figure there's some "secret weapon", a "holy grail" that's known to the select few, something that will help you filter out all those bad trades. Once you find this magical key, your profits will explode and you'll achieve every dream you ever had.

You begin an obsessive study of every method and every indicator that is new to you. You buy a whole new series of books, attend new and different courses, sign up for new and different newsletters and advisory services, register for new and different trading websites and chat rooms (you hear this guy really knows his stuff). You buy more elaborate software (100s Of Indicators And Studies!). You buy off-the-shelf systems (Guaranteed Results!). You spend whatever it takes to buy success.

Unfortunately, you stack so much onto your charts that you become paralyzed. With so many inputs, you can't make a decision, particularly since they rarely agree. So you focus on those which agree with the direction of the trade you've taken (or, if you're the fearful sort, you look only for those which will prove to you how much of a loser you think you are).

This is all characteristic of scared money. Without a genuine acceptance of the fact of loss and of the risks involved in trading, you flit around like a butterfly in search of anything or anybody who will tell you that you know what you're doing. This serves two purposes: (1) it transfers to others the responsibility for the trade and (2) it shakes you out of trades as your indicators begin to conflict. The MACD says buy, the sto says sell. The ADX says the market is trending, the OBV says it's overbought. By the end of the day, your brain is jelly.

This process can be useful if the trader learns from it what is popular, i.e., what other traders are doing, and, if he lasts, how to trade traps and panic/euphoria. And even though he may decide that much of it is crap, he will, if he doesn't slip back into the Cynical Skepticism Stage, have a more profound appreciation -- achieved through personal experience -- of what is sensible and logical and what is nonsense. He might also learn something more about the kind of trader he is, what "style" suits him best, learn to distinguish between what is desirable and what is practical.

But the vast majority of traders never leave this stage. They spend their "careers" searching for the answer, that perfect setting, that ultimate tweak to their backtest, and even though they may eventually achieve piddling profits (if they don't, they will of course eventually no longer be trading), they never become truly successful, and this perpetual not-quite-failure not-quite-success can have debilitating consequences for the psyche.

And in case you're wondering, the following chart is not a joke.

Stage Five: The Inwardly-Bound Stage

The trader who is able to pry himself out of Stage Four uses his experiences there productively. The trader learns, as stated earlier, what styles, techniques, tactics are popular. But instead of focusing entirely on what's "out there", he begins to ask himself some questions:

What exactly does he want? What is he trying to accomplish?

What sort of trading makes the most sense to him? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping? Which is most comfortable?

What instrument -- futures, stocks, ETFs, bonds, options -- provides the range and volatility he requires but is not outside his risk tolerance? Did he learn anything at all about indicators in Stage Four that he might be able to use?

And so he "auditions" all of this in order to determine what suits him, taking all that he has learned so far and experimenting with it.

He begins to incorporate the "scientific method" into his efforts in order to develop a trading plan, including risk management and trade management. He learns the value of curiosity, of detached interest, of persistence and perseverance, of taking bits and pieces from here and there in order to fashion a trading plan and strategy that are uniquely his, one in which he has complete confidence because he has tested it thoroughly and knows from his own simulated trading and real-money experiences that it is consistently profitable. This eventually becomes his “edge”*.

He accepts fully the responsibility for his trades, including the losses, which is to say that he understands that losses are inevitable and unavoidable. Rather than be thrown by them, he accepts them for what they are, a part of the natural course of business. He examines them, of course, in order to determine whether or not some error was made, particularly one that can be corrected, though true trading errors are rare. But, if not, he simply shrugs off the loss and goes on about his business. He understands, after all, that he is in control of his risk in the market.

He doesn't rant about his broker or the specialist or the market maker or that vast conspiracy of everyone who's trying to cheat him out of his money. He doesn't attempt revenge against the market. He doesn't fret. He doesn't fume. He doesn't succumb to hope, fear, greed. Impulsive, emotional trades are gone. Instead, he just trades.

*the knowledge proved through research that a particular price pattern or market behavior offers an acceptable level of predictability and risk to reward to provide a consistently profitable outcome over time.

Stage Six: Mastery

At this level, the trader achieves an almost Zen-like trading state. Planning, analysis, research are the focus of his time and his effort. When the trading day opens, he's ready for it. He's calm, he's relaxed, he's centered.

Trading becomes effortless. He is thoroughly familiar with his plan. He knows exactly what he will do in any given situation, even if the doing means exiting immediately upon a completely unexpected development. He understands the inevitability of loss and accepts it as a natural part of the business of trading. No one can hurt him because he's protected by his rules and his discipline.

He is sensitive to and in tune with the ebb and flow of market behavior and the natural actions and reactions to it that his research has taught him will optimize his edge*. He is "available". He doesn't have to know what the market will do next because he knows how he will react to anything the market does and is confident in his ability to react correctly.

He understands and practices "active inaction", knowing exactly what it is he wants, exactly what it is he's looking for, and waiting, patiently, for exactly the right opportunity. If and when that opportunity presents itself, he acts decisively and without hesitation, then waits, patiently, again, for the next opportunity.

He does not convince himself that he is right. He watches price movement and draws his conclusions. When market behavior changes, so do his tactics. He acknowledges that market movement is the ultimate truth. He doesn't try to outsmart or outguess it.

He is, in a sense, outside himself, acting as his own coach, asking himself questions and explaining to himself without rationalization what he's waiting for, what he's doing, reminding himself of this or that, keeping himself centered and focused, taking distractions in stride. He doesn't get overexcited about winning trades; he doesn't get depressed about losing trades. He accepts that price does what it does and the market is what it is. His performance has nothing to do with his self-worth.

It is during this stage that the "intuitive" sense begins to manifest itself. As infrequent as it may be, he learns to experiment with it and to build trust in it.

And at the end of the day, he reviews his work, makes whatever adjustments are necessary, if any, and begins his preparation for the following day, satisfied with himself for having traded well.

(from Bo Yoder, Vad Graifer, and Mark Douglas)

38 Steps To Becoming A Successful Trader*

We accumulate trading information - buying books, going to seminars and researching.

We begin to trade with our 'new' knowledge.

We consistently 'donate' and then realize we may need more knowledge or information.

We accumulate more information.

We switch the commodities [or stocks, or futures, or...] we are currently following.

We go back into the market and trade with our 'updated' knowledge.

We get 'beat up' again and begin to lose some of our confidence. Fear starts setting in.

We start to listen to 'outside news' & other traders.

We go back into the market and continue to donate.

We switch commodities again.

We search for more trading information.

We go back into the market and continue to donate.

We get 'overconfident' & market humbles us.

We start to understand that trading success fully is going to take more time and more knowledge then we anticipated.

Most People Will Give Up At This Point As They Realize Work is Involved

We get serious and start concentrating on learning a 'real' methodology.

We trade our methodology with some success, but realize that something is missing.

We begin to understand the need for having rules to apply our methodology.

We take a sabbatical from trading to develop and research our trading rules.

We start trading again, this time with rules and find some success, but overall we still hesitate when it comes time to execute.

We add, subtract and modify rules as we see a need to be more proficient with our rules.

We go back into the market and continue to donate.

We start to take responsibility for our trading results as we understand that our success is in us, not the trade methodology.

We continue to trade and become more proficient with our methodology and our rules.

As we trade we still have a tendency to violate our rules and our results are erratic.

We know we are close.

We go back and research our rules.

We build the confidence in our rules and go back into the market and trade.

Our trading results are getting better, but we are still hesitating in executing our rules.

We now see the importance of following our rules as we see the results of our trades when we don't follow them.

We begin to see that our lack of success is within us (a lack of discipline in following the rules because of some kind of fear) and we begin to work on knowing ourselves better.

We continue to trade and the market teaches us more and more about ourselves.

We master our methodology and trading rules.

We begin to consistently make money.

We get a little overconfident and the market humbles us.

We continue to learn our lessons.

We stop thinking and allow our rules to trade for us (trading becomes boring, but successful) and our trading account continues to grow as we increase our contract size.

We are making more money then we ever dreamed to be possible.

We go on with our lives and accomplish many of the goals we had always dreamed of.

*from Commodity Futures Trading Club News

Ingvar

bighog Registered: Aug 2005 Posts: 2228	07-25-13 03:31 AM Who has looked into there average daily "take" from the days range?A good well disciplined day trader with an "EDGE" defined and constructed by that individual only should be able to average approx. booking 1/2 of the daily range. That includes all whip-saw days that can be rough on the best of us. What douses the bad days are the runner (trend) days where we get more than 1/2 the intraday range.Anyone that can get a consistent 1/2 booked on average is a really good trader. The key to hitting that nut is understanding what worked yesterday is out to fool you today. There are only a very select "action" moves that work for whatever your 'edge" is. Momentum works for me while chop eats me alive if I try to outsmart anything but momentum runners. True, at times the daily range can get rather punk which must be considered. (there are other toys to work in times of slack though if desired)The days we get a bunch of handles, ticks are sweet, the days we see less workable moves are not to be discouraging because we know the average will be ok. The good news about tough days is we no longer give back profits, like in the beginning where a weeks charmed trading got trashed by being a fool.An interesting stat would be if anyone that has been showing consistent profitable trading can feel good by knowing "ON AVERAGE" their trading has improved by booking larger and larger amounts of the days range............Not the amount of money made, that can always be improved by adding cars. But real improvement.
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bighog Registered: Aug 2005 Posts: 2228	06-22-13 03:12 PM Quote from bighog: A hobby is just a hobby, a business is just a business. Worlds apart for sure. What you fail to comprehend is that trading is like any other professional path taken to produce an income. Their are professional dues to be paid before you reach the promised land. How many lawyers become decent trail lawyers compared to those just filing papers at the county clerks office knowing it will be settled out of court for some chicken feed amount? About the 8 hour job which you have concluded is beyond your reach. Guess who in general trades LESS than 8 whole hours a day. Give up? I will be kind enough to tell you who. The winners, that is who, they got past the hobby stage and paid the dues in time/effort and graduated to the BIG LEAGUES. Winning day traders do NOT spend hours and hours watching a screen after they find what works FOR THEM as an individual. Typical time spent entering and exiting orders on a daily basis: From 0930 est to about 1400 unless a fed report is coming out or I am casually watching for an afternoon reversal signal like a "DC" in ES. A DC (double cross) is a reversal where price recrosses the 20 and the previous trend.........look for a basing first and never forget the 1-2-3. Casual glances at a screen (4 toys actually) is all that is needed to glean for a prospective upcoming event. The difficult part of trading is in the beginning, then it gets SIMPLE. Simple is as simple does. PS: Many "DC" signals come out of the blue and those are usually the ones that run for a solid 10 handles if not completely reversing the ENTIRE early trend of the day.
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bighog Registered: Aug 2005 Posts: 2228	07-03-13 01:42 AM Quote from bighog: Do not feel lonely young lady, there is nary a soul on the planet that can predict mkt direction with certainty. Thank goodness! What you described in those very few words is the absolute extent anyone will ever extract from TA, PERIOD. There are far to many variables as inputs from the players themselves for any one person/computer to unravel and say for certain that this or that will always work 100%, again THANK GOODNESS! With all that in mind, is it easy to understand why so many fail to defeat the trading game. Now do not get me wrong, I am all for everyone getting to the winner circle, but we all know most will fall short of that goal because they never grasp the concept of "self". Your statement that TA will only get anyone only so far is so accurate it will be fluffed by 95% of readers. "she is wrong, we all know there is a secret to winning because many say they have the grail but will not say so", I love that one. TA, is like having a GPS system on your dashboard, it will tell you where you are going but can not tell you what to do once you get there. Sound familiar? Here is the down and dirty solution to a game that has more divisive inputs than your mother in-law has to your marriage. Understand TA, then trade until your mistakes stick you in the eye until it hurts........discard that tactic and move on, FIND what works for you and for the life of you, DO NOT try to find anymore, milk a couple cows and let the rest just roam the field and forget them. BOTTOM LINE: NO single trader out there can do much more than what I just described, it is impossible to solve the whole mkt problem. Slay 90% of the days noise and the remaining 10% will be very kind to you as long as you wait patiently for the mkt to show its hand first. After TA, comes your intuition, your skill, your courage, your mistakes, your blood, your guts, your mistakes, your highs, your lows.............face it..........this game is almost as tough as politics, you MUST have a thick skin to get where LESS IS MORE. PS: Intraday swinging is what works for me. ES is still number uno....... that instrument works for intraday swings because the volume is so thick that "monkey see, Monkey do" simply works. I get the runs and avoid the flatish ema and "all is good" Trendline (visualized in the head) 20 ema plotted, early run, a late reversal.......those are all that is need to seek out.......15 handles. (8 trades is es to get that amount, not two, ha)
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bighog Registered: Aug 2005 Posts: 2228	07-21-13 04:25 PM Truth be known: Watching price moves 'within' the bars period (5min) will eliminate any need to follow volume because those movements tell you who was in control and butt spanking the other guy.....Also, if one gets a good read of price moves 'within' the 5m bar there is no sense looking at a 1min bar, peeking at a 1m bar is a distraction from the 5m. I assure you, if reading the 5m correctly, you can be AHEAD of the 1m bar.A well developed trader watching price moves taking place is innately visualizing what is "COMING NEXT" and digesting the INFORMATION being delivered in order to make his/her next trade/exit based on that and that information only (unless he/she is determined to either let the max stop get tagged and/or let it ride to targeted exit). There will be nothing printed in the 1m bars that has not already been seen as the action in the 5m unfolds in real time. Watching the dom is a joke at best, the dom has about as much relevance to profits as a commercial has to a great movie........just useless dribble until the action returns in what really matters.How the trade is finessed once filled is what makes the whole process gel. All of the proper ingredients, right temperature and watchful eye will go to waste if one does not stir correctly.PS: No, I am not picking on nodoji and her using the 1m chart, PSS: Let us change laws so we can eliminate these flying rats once and for all http://icwdm.org/handbook/birds/Gulls.asp
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bighog Registered: Aug 2005 Posts: 2228	07-27-13 01:05 AM I will share what I call an "EDGE" for the opening bar range breakout strategy called "My 4x4 that uses no gas"Keep in mind this is for the 0930 EST bars range. We are talking ES here. The 4x4 means 4 contracts each trade and seeking 4 handles (16 ticks) and if/when satisfied book the trade/s and move on to your regular day trade tactics for the rest of the day, or just call $800 good for the day if desired. Surprise yourself!The STOP loss can either be the other side of the bars range limit or anything in between depending on how your breakfast is feeding your brain.If the STOP is the other extreme end of the ORB, then by all means do a SAR. I like smaller STOPS and will wait to see how price acts as it nails either side........BUT SAR works best in tighter open bar range.In general, unless we get a sissy type whipsaw over and over open, a couple small stop-outs will be reversed once price takes off for a few handles.Some days, price takes out either one side or the other of the orb (open range bar) and never looks back.Extend the mechanical contest to 5 handles on 4 cars and you just nailed a grand. Depending on the action itself (subjective) I will punch out at +2 or +3 handles and reenter for the 4. The nice days are when you get 4 handles in a single trade, sweet!That is what I call an EDGE for the opening of the day.......... PS: yeah, yeah, I know, it is not wise to give away secrets in a public forum, LOL. But, what many new boys/girls only figure out later is that.........you want friends following you so you can profit from them..
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NoDoji Registered: May 2008 Posts: 8301	07-26-13 11:02 PM It's a mechanical strategy with specific rules. It's a with-trend entry tactic in a strong trend using a 1-min chart for intraday scalping. I've already shared a couple of simplified versions of it on ET. If you want to refine it, have at it. Since there is no bad entry in a strong trend, any similar tactic will do.Just look at a 1-min chart of CL and observe when price breaks out of a 5-min range, triangle, or HOD/LOD by at least 10 ticks. Make notes about what happens next. If you do the work, you'll find out how to easily profit from these instances when the CL becomes the poster child for Newton's First Law of Motion.
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NoDoji Registered: May 2008 Posts: 8301	07-27-13 04:52 AM Classic setups can be found here, but you have to do the work to determine a) the context in which to trade them and b) how to manage your risk/reward.http://www.daytradingcoach.com/dayt...ysis-course.htmThis little pattern is one of the best, IMHO:http://www.dacharts.com/123.htmIt's not always lower high (off the top) or higher low (off the bottom). Sometimes it's double top (or double bottom) and sometimes it's slightly higher high or slightly lower low (failed breakout of previous high/low).Bob Volman describes some great setups in his book "Forex Price Action Scalping".If you ever took calculus in school and got at least a "B" average, then you may find Al Brooks "Reading Price Charts Bar By Bar" the holy bible of price action setups.
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NoDoji Registered: May 2008 Posts: 8301	07-27-13 07:01 PM Quote from d08: the market always keeps changing. I'm purely a chartist and whether I look at daily, weekly and monthly price charts over decades or I look at intraday charts over years, I can't see anything different, but I constantly see posts on this forum that markets have changed. Are these changes related to something other than price movement?
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NoDoji Registered: May 2008 Posts: 8301	07-27-13 07:12 PM Quote from kuvala: The idea of this thread is from a great advise from Market Wizards, which says to find that one setup which works great for anyone's trading style and keep on doing the same. This is my top advice for everyone who asks me for help. Choose a single setup/tactic and master it to the point that you see it and you place the order without further thought or hesitation. When I was absolute beginner with just over 3 months of trading experience (and no specific plan other than trade entry triggers), I decided I wanted to be a day trader instead of a swing trader. I found a setup that made absolute sense to me (basically a 1-2-3 setup) and I paper traded it for a few weeks very successfully. Finally I took the plunge and started trading it live and I think I made around $17K in three weeks. Then I started messing with a simple plan and commenced to lose a lot of money. It took me a long time to get back to what in essence is that same simple plan.
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NoDoji Registered: May 2008 Posts: 8301	07-27-13 07:36 PM Quote from hitchslap: I'm no expert, but I get the feeling that the current market conditions aren't favourable for Cornix's method, however, he's still keeping his head above water. It's not as though he's hemorrhaging money. He's around break-even. I think that when the conditions change, he'll probably start killing the market. I guess if you can break even when the market isn't playing ball, then you're doing OK. There are periods of price action where the setup appears but there's no follow through. I've had strings of 6 or more small losers/break-even trades, then suddenly the game's on, you're on the stronger team because of TA, and the whole team's got your back. I once had a day with a 9% win rate and ended up with a good day's pay as a result of using TA to ensure I'm positioned with the stronger team once the scrimmages are over and the big game is underway.
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NoDoji Registered: May 2008 Posts: 8301	07-27-13 08:22 PM Quote from marketsurfer: It feels good to think about the market in nice sentiments. Nothing wrong with that when describing what happened. However, the truth is, it feels good to nail the trend after 6 plus tries and ride it to profits superseding each of the previous losses and commissions. Cutting losers and letting winners run is how you win--- this has nothing to do with TA entries, particularly those that lose 6 plus times in a row. It's just randomness working for you and you playing the game untill luck provides profits. No doubt it's great skill to cut losers and let winners run, but this nothing to do with TA based entries. It's not randomness. TA allows me to be positioned in the right direction when price makes the big move. The trader without a plan or the one who trades based on strong opinion or the inexperienced trader would likely have misinterpreted what price was saying or been completely unaware of how to catch a runner in the first place. Such a person would be far more likely to have traded emotionally, ended up on wrong team, and instead of quickly cutting the loss and reversing sides for the big winner, would've averaged down during the breakout run and cried "Uncle!" just before the end of the trend. I've done this personally, and I've watched other traders do this many times. What they do is random, meaning they're gambling. My TA-based trading does not involve gambling (random bets). I know in advance that if I trade every valid signal and manage the trade according to the fixed rules of my plan, I will be profitable enough at the end of the month to cover living expenses, entertainment expenses, taxes, and retirement savings.
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NoDoji Registered: May 2008 Posts: 8301	07-28-13 07:55 PM Quote from jnbadger: It is incredibly simple, but it also flies in the face of human nature. That's where this so called "edge" is that you guys are so obsessed with. Consistently profitable trading definitely flies in the face of human nature. Human nature wants to get in at tops and bottoms (get the best possible deal), and human nature will be imprinted with the memory of times when it succeeds in doing this because of the huge ego gratification that ensues and will sweep under the rug the failures (addiction to random rewards). Human nature finds it very easy to do what feels right at the time even if there's no statistical evidence backing up the decision (and even when statistical evidence is against it), and human nature is conditioned to believe that you must fight for what you believe in and when something feels right it's easy to believe in it, and so human nature ensures that most traders will trade their bias rather than a positive expectancy plan. When what you've been doing is wrong and you're a losing trader, doing what's right will feel wrong. Human nature finds it very difficult to do what feels wrong because that would require acting against its beliefs. Even when presented with objective statistical evidence backing up actions that produce the best possible overall result, human nature ensures that most people will act on their beliefs.
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NoDoji Registered: May 2008 Posts: 8301	07-24-13 12:24 AM Quote from marketsurfer: I fully understand the scalability issue. However, I would like to observe you trade in real time with no other information than a chart. You do realize that is incredibly rare and it would be quite impressive to observe it live. This is why I keep pushing the TA brigade here--- I want it to be true but my experience and influencers have led me the other way. surf You'll just have to trust that I trade this way, because I'm not on display, I'm trading for a living. Pull up a 5-min and 1-min chart of CL and annotate these trades. You'll see how intraday scalpers use S/R and pure price action to extract bits of moves from the active little instruments like CL: Preparation: Prior to the crude oil pit open I identify a channeling down trend in the overnight session and draw support and resistance lines, connecting the swing highs from the overnight session and placing a parallel channel line across the latest lower low (8:20am ET). I notice that the last new low came out of narrow range consolidation contained by the 7:45 bar. The low of that consolidation range is 106.24. If the down trending channel continues to hold, that price level just about coincides with the down trend line I drew connecting the overnight swing highs. That will be key resistance. Trading begins: Just before the open, I place a sell stop to trade to the short side off the 1-min chart (1-min with-trend continuation for a test of the previous low.) The pit session opens and price makes a bullish run up right through the significantly lower high that printed during the 8:40 ET bar. That was a surprise. I realize there is very key resistance overhead and since there was no pause or pullback for me to get long in that opening run, I place an offer to sell the upper trend line which happens to coincide with the narrow range consolidation low described previously. This is an anticipatory trade; I’m using technical price analysis involving confluence of two identical resistance levels to enter a low risk trade (13 tick stop loss) in the direction of the overall trend (which is still down until that channel breaks out). My offer is taken and price immediately turns. Because price ran non-stop to that upper channel, I assume the pullback to the lower channel line will be interrupted by defense at every level, so I place a hard target just above the round number for a 21-tick profit. I see a 1-min with-trend continuation pattern setting up for a long trade, but price hasn’t broken out of the down trending channel yet, so I do not trade this pattern by itself. I only trade this pattern in the context of a well-defined trend, which at this point is still down. By the close of the 9:11 bar on the 1-min chart, a 1-2-3 reversal pattern off that upper trend line is in play and I that’s my signal to get short. Price comes within 1 tick of my offer and stalls. I pay a bit extra to get in at 106.12 because the R:R still fits within my plan: My risk will be 13 ticks and my hard target will be 15 ticks, with a bid to take profit placed 1 tick above the swing high that broke out during the opening run, the break of the 8:40 bar high on the 5-min chart. My bid is lifted almost to the tick which alerts me to calculate the R:R of a 1-min long entry from that level. I see immediately that there’s congestion between camps, so I wait for clarity. Despite the strength of the run up from the open, the larger channel could still be very much in play, meaning more short setups coming. The price action of the 9:20 bar on the 1-min chart clears the congestion and I look for a long entry setup. The close of the 9:22 bar tells me further pullback will be unlikely if that bar’s high breaks, so I place a buy stop there to position long, looking for a test of, and likely break of, the upper trend line. The trend line breaks, as does the previous swing high, but price stops short of breaking through the 106.35 R from pre-market. I give price a couple chances to try again and end up taking a 10-tick scalp. Price then pulls back to my entry price during the 9:29 bar and closes with that price as the low. This level is approximately a pullback to that previous down trend line resistance (previous R becomes S), and I jump in long again at 106.21. I have no target calculated other than “a break of 106.35” in my head and I quickly draw a 1-min channel across the 106.32 high and it looks like price should hit 106.39. I place a 20-tick hard target and prepare to take a scalper’s profit if it doesn’t get there. My offer is taken and I call it a day. Now I've revealed all the price action trading secrets of the magic price action gurus. There's big edges in them there price bars. Take what you will and enjoy!
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NoDoji Registered: May 2008 Posts: 8301	07-17-13 05:43 PM Quote from Tiras: *As difficult as it was to admit to myself, I think I have a list of psychological shortcomings that are preventing me from being consistently profitable: [list][] I have a gambling issue. You may understand price action, but your gambling has addicted you to random rewards, and you're not trading a plan. Willpower rarely overcomes addiction, but 12-step recovery programs have helped "hopeless" cases turn their lives around as long as the addict continues to do what works every single day. In the Foreword to Mark Douglas' Trading in the Zone, Thom Hartle writes: "The 95% failure rate makes sense when you consider how most of us experience life, using skills learned as we grow. When it comes to trading, however, it turns out that the skills we learn to earn high marks in school, advance our careers, and create relationships with other people, the skills we are taught that should carry us through life, turn out to be inappropriate for trading. Traders, we find out, must learn to think in terms of probabilities and to surrender all of the skills we have acquired to achieve virtually every other aspect of our lives." Nearly every facet of our lives revolves around the quest for something as close to certainty as possible, and success is often defined by finding oneself rated in the top percentiles. Yet successful trading depends on narrow margins of positive expectancy and the ability to accept what feels like "failure" all the time. Trading losses in a winning system are crucial to the profitability of the system because we cannot know the outcome of any individual trade, only the odds of net profitability over a series of trades. Mark Douglas captures the essence of profitable trading with what I like to call The 5 & 7: The 5 Fundamental Truths of Trading: 1. Anything can happen. 2. You don’t need to know what is going to happen next to make money. 3. There is a random distribution between wins and losses for any given set of variables that define an edge. 4. An edge is nothing more than an indication of a higher probability of one thing happening over another. 5. Every moment in the market is unique. The 7 Principles of Consistency: 1. I objectively identify my edges. 2. I predefine the risk of every trade. 3. I completely accept the risk or I am willing to let go of the trade. 4. I act on my edges without reservation or hesitation. 5. I pay myself as the market makes money available to me. 6. I continually monitor my susceptibility for making errors. 7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them. Douglas tells us (and the emphasis is mine), "...to whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully. To operate effectively in the trading environment, we need rules and boundaries to guide our behavior. It is a simple fact of trading that the potential exists to do enormous damage to ourselves – damage that can be way out of proportion to what we may think is possible. In trading, no one (except yourself) is going to force you to decide in advance what your risk is. In fact, what we have is a limitless environment, where virtually anything can happen at any moment and only the consistent winners define their risk in advance of putting on a trade. For everyone else, defining the risk in advance would force you to confront the reality that each trade has a probable outcome, meaning that it could be a loser. Consistent losers do almost anything to avoid accepting the reality that, no matter how good a trade looks, it could lose."** If you want consistent success in trading, over time and through varying market conditions, if you want to trade for a living, at the very least you have to do ample research and develop a plan based on favorable probabilities. That’s the absolute minimum requirement. Then comes the real work: learning to trade your plan or automating your plan without overriding it. Mastering one part of your plan isn't good enough. It must be mastered as a whole. Positive expectancy comes from a combination of win rate and risk:reward ratio, just as hydrogen and oxygen are required to make water. If you learn to hold trades until you're stopped out or your profit target is filled, that may be a huge step forward for you psychologically, but if you haven't mastered the ability to trade every valid setup without hesitation, your excellent trade management ability won't help much at all. Or maybe you have no problem jumping on every valid trade opportunity that presents itself, but you move stops and targets around. There goes your edge! A positive expectancy trading plan offers an environment of certainty, but it doesn't feel like certainty in real time because it requires what we refer to as "losses" and the concept of "loss" has a negative connotation for us due to a lifetime of programming. In trading, losses that occur as part of a well-research trading plan are absolutely necessary, Without embracing them, you're attempting the equivalent of trying to quench your thirst by inhaling some hydrogen and then later inhaling some oxygen.
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Ingvar

NoDoji Registered: May 2008 Posts: 8176	06-29-13 08:20 PM Quote from IronFist: is it possible to identify when it is or is going to be chop and just sit out on the sidelines, then? Or is this the reason successful traders scalp; so trends dont matter? You have a clearly defined trading framework and the ability to trade it with a trader’s mindset (the ability to trade all valid signals because you realize there is a random distribution between wins and losses for any given set of variables that define an edge). After interfacing with dozens of people over the years, this combination is possessed by less than 5% of them. You’re already a member of a rare class of trader, whether you're trading manually or are able to let an automated system go without interfering with it. Your plan is simple, but a bit too simple. The ingredients you seem to be missing are: 1. Contextual filters 2. Time of Day filter 3. What kind of day trader you want to be: intraday swinger, intraday scalper, or part scalp/part swing scaler Contextual filters are what help you avoid chop and catch the stronger directional price swings. The way I developed contextual filters was to first “eyeball” the price action leading into significant directional price swings versus small range-bound directional price swings to see if I could identify any patterns that occurred more often than not. A pattern in this sense could be a price action pattern (such as an M or W formation, commonly called a 1-2-3), or a relationship of current price to the overall price environment (proximity to a previous day’s key level, or to a trend/channel line in a higher time frame, or to the range of a price bar in a higher time frame, etc). Then, I’d perform a thorough statistical analysis of favorable and adverse price excursions surrounding these patterns to determine whether or not my “eyeball analysis” had any merit. Once you’ve done this, you’ll have more ammunition for developing your profit-taking plan. You may find that by implementing certain filters, your current simple plan becomes significantly profitable without any other changes. In fact, even without doing contextual filter research, your current plan may be fine by implementing something as simple as scalping part of your position and letting the remainder run or stop out. This way, the scalped profit pays for part of the loss during choppy conditions, but you’re able to catch those nice runners when they happen. My recommendation is to evaluate your results over the past couple months applying these scenarios: 1. Scalping N ticks on every trade (no runners) 2. Scalping N ticks on half, letting the other half trade as you have been 3. Identifying contextual filters and applying them to your current plan 4. Identifying contextual filters and applying a scalp/run trade management approach. Consider adding a 20EMA to your chart to determine if it provides a useful filter (I found it very helpful on the 1min chart). I also recommend analyzing whether there's any significant relationship between time of day and net results. For example, maybe the first 2-3 hours produce solid profits and the remainder of the session produces flat or negative results over time.

Ingvar

NoDoji
06-29-13 08:33 PM

Trading for a living is very routine when you do it right.

I found that profitable trading for me involves going with the market, not "taking it on". Think of yourself as a remora latching on to a big powerful-looking shark that swims by in the direction you want to go, so you quickly latch onto it. If you find that the shark suddenly changes course and is taking you in the opposite direction you wanted to go, you let go and wait for the next big powerful-looking shark to swim your way.

A well-researched trading plan with advance directives for trade entry and exit, combined with proper leverage ensures you won't lose it all.

There may be times when the shark you're attached to suddenly breaks out into high gear and you end up cruising past where you want to go toward an island paradise beyond your wildest dreams.

All right, I admit it: When that happens, it's pretty thrilling for a moment or two.

Ingvar

06-11-13 12:16 AM

I use that term frequently; possibly I’m the trader to whom you refer. With regard to oil futures:

A defined uptrend in my given framework (a 5-min time chart) consists of a pattern where I can identify one swing low that’s higher than a previous swing low, followed by a move up that breaks the swing high between the two swing lows by at least as many ticks as the difference between the swing lows.

A well-defined uptrend consists of a move up that’s so strong the pullbacks fail to print a bar close below previous resistance levels. This usually occurs when price breaks through a high of the day by 10 ticks or more.

Reverse for downtrends.

Price can print a strong trending move without a definable trend being in play. For example, today oil prices were channeling down in pre-market on a 5-min time chart. At the start of the pit session price broke through two previous swing highs without a single pullback on the 5-min chart, then just as quickly sold all the way back to the swing low just before the pit opened. In the 5-min time frame, no trend asserted itself during those two strong moves.

As with all price action patterns, often times close is close enough, so if a value is off by a few ticks or price throws a little head fake at you then turns right back around, consider the trend intact until proven otherwise.

06-14-13 05:49 PM

Quote from RedSun:

i start buying SCO. No margin....

I still do not know why CL is >$98 now...

I trade technical price action, here's the scoop:

1. 60-min chart, connect the Tuesday low to the Tuesday overnight low to get a lower trend line. Thursday overnight action found support there, so...

2. Place a parallel channel line across the swing high in between, the high from Wednesday.

3. The dip to the 95.00 zone in pre-market yesterday found ready buyers, so the LTL is now confirmed for a 1-2-3 long setup.

4. Yesterday's high came within a few ticks of that parallel channel line.

5. The overnight session formed a bull flag with Wednesday's resistance holding as support (well-defined trend on the 60-min chart).

6. Calculate a measured move* off the bull flag (flags generate a measured move reaction more often than not), for a new high target of 98.26.

* 96.92 - 95.08 = 1.84 and 1.84 added to 96.42 flag low is 98.26

Hope that helps!

06-14-13 06:18 PM

Quote from RedSun:

NoDoji, thx.

Walter Zimmerman says something similar, good to explain the technical side of it.

But the correlations are broken down. CL shows the divergence from other markets....

If I watched other markets, or paid attention to the actual news reports, I'd never put on a trade because the price action in CL so frequently marches to its own beat.

As a beginning CL trader I once watched a strong trend for over two hours run two or three points without trading. I was waiting for a reversal signal because the inventory report was very bearish.

06-16-13 05:38 AM

Quote from Georgii:

To my way of thinking a statistically valid setup should always be traded even if that means you can end up down at the end of the day. The idea here is that long run you should end up more up if you take those setups.

My experience backs this up, no doubt.

Quote from Georgii:

It appears the main challenge here is to stay focused, and since I'm not a computer I'm going to be susceptible to making errors in judgement if my focus is off.

A couple ideas that helped me:

When price is consolidating or is choppy, it can reach a point where it's sooo tempting to say, "Screw this", take a break, find that you missed a fantastic move, then put on a trade without a valid signal in an attempt to somehow capture what you missed. So as soon as you have the thought of taking a break because it's been ugly for so long, tell yourself to focus 100% for just 20 more minutes and then set a timer. Most of the time you'll be present for a very tradeable move.

Take a brief active break to stretch or jog right after closing out a trade.

Quote from Georgii:

An approach I've begun experimenting with is that I take the first setup or two with size, and regardless of whether it goes well or not, I ratchet down my size, unless I see something that I really, really believe in.

What do you mean by "really, really believe in"? That seems problematic to me. You should really, really believe in any setup/context situation that your statistical analyses have proven is net profitable after commission and slippage. Anything else is irrelevant and should be discarded. That's just my opinion.

I frequently really, really believe price is going to do something despite there being no setup/signal whatsoever that meets my trading plan criteria. When that happens it's generally an awesome fade.

Quote from Georgii:

Breakout is a bit tough on me mentally. The problem though is that many trends I see in ES don't stop to give you room to get on board!

These is the "easy money" price action environment and it's one I really, really believe in. It's my primary setup.

As a 5-min trader, if you carefully study a 1-min chart, you'll see how to get on board. Price doesn't run in a straight unbroken line; it pauses, drawing in counter-trend traders, and you'll be able to identify specific patterns in the small time frame for entering a strong trend (or a strong trending move).

Study the 1-min price action immediately following three kinds of breakouts: 1) a breakout with conviction from narrow range consolidation (flag or triangle formation), 2) a break through a previous swing high/low in a well-defined trend, and 3) a weak/failed breakout where price then makes a 2nd attempt after a shallow reaction (Al Brooks would call this a "failed failure" and although most of the ET community makes fun of this concept, it's well worth studying).

Quote from austinp:

Now on the other hand if your mental approach is to capture max % of the day's range every day, you are going to eventually try and micro-manage each and every single trade to its utmost possible performance. And you will anguish over this one taken off too soon and that one left too long with too wide a stop.

In other words, you will find yourself always wrong on just about every trade. Meanwhile, target shooting for a long-term mean has you cashed out, profitable, all done and out of the office, living your life

+++

06-16-13 09:32 PM

Quote from 1a2b3cppp:

The best places to go long and short are obviously at each high and low. Since you said I could do this in hindsight, I have labeled each buy and short entry with a green and red circle.

As I said earlier, I cannot identify them in real time.

We can never be certain in real time whether a particular price bar will print what eventually becomes a swing high or low. But we can identify the price action patterns that indicate a greater likelihood of a level holding as S/R or breaking out further.

On this chart, you noted a low, followed by a high. The low is not identifiable as a swing low until two or three subsequent bars close; the high is not identifiable as a high until two or three subsequent bars close. But you can assume the risk based on positive expectancy price action patterns and reap the reward more often than not.

Once that high printed and then pulled back, I’d expect the previous range high that broke out to hold as support. If buyers stepped in there and were able to push price beyond a previous 5-min bar high (excluding inside bars), then it’s likely the previous swing high will be at least tested if not exceeded.
.
There are two ways to play the pullback to the range high as new support: Anticipate that it will become support and place a limit order at the range high with a stop below the range low, or place a buy stop above a previous 5-min bar high IF the range high price is touched and appears to hold as support (again, I exclude inside bars) with a stop below the bar that breaks upside. If using a limit order, you’re filled during what looks like the 9:30 bar and take a small loss. If using a stop order, no trade is triggered.

So the limit-filled long looked promising for a moment, but the break of the inside bar produced no follow through and the range breaks downside with some conviction.

Technically, I’d now expect the range low to hold as resistance. Again, two ways to play this, either placing a limit to sell the previous range low that broke down, or sell stop just below previous 5-min bar low IF the range low price is touched. The bar where your red dot marks LH touches the range low, and either your limit is filled or your stop is triggered on the next bar. How you manage that one is up to you. I personally would bail for a scratch after the weak break of the first LL you marked, although holding with the initial stop loss in place keeps you in a fine short trade.

So that’s how, without knowing in real time whether or not a price will become a LH or HL, you can take a leap of faith that technical levels will hold and subsequent price behavior will trigger a profitable move more often than not, which is what positive expectancy is all about.

06-18-13 09:44 PM

For me the biggest advantage of day trading is no overnight surprises to wake up to (or have to hedge against). Also, I find that the most profitable moves occur during the first 3 hours of the RTH sessions, leaving me free for the rest of the day if desired.

Day trading is also the most difficult sort of trading because decisions have to be made far more quickly than with swing trading, you have to be able to clear the slate immediately upon the close of a trade and be prepared to trade again without the baggage of previous trades or current P/L, and you have to be good at staying very focused during price action that can feel like Chinese water torture at times.

Is it worth it? If you have a good trading plan and the ability to trade it, it's absolutely worth it, IMHO.

06-19-13 07:03 PM

Quote from jeredlbb:

"system"
generally
try
play reversals

Replace "system" with "thoroughly researched and tested business plan".

Replace "generally" with "precisely".

Read Trading in the Zone and trade your plan in a demo account until you can trade it with a trader's mindset.

Not sure what "try" means here. Do you have a disability that prevents you from seeing your setups and putting on and taking off trades in a timely manner?

With regard to playing reversals, what are your rules for trading a potential reversal?

06-19-13 07:42 PM

Quote from jeredlbb:

I trade pin bars as a reversal. I have attempted to filter out the pin bars that fail from the pin bars that lead to reversals. My filter is based on ATR and surrounding bars.

I guess in a way I am trading swings intraday. My time frames range from 15min to 4hour. I have been experimenting with tick bar charts as well.

I am starting to learn C# to try to begin to back test thoroughly. As of now I manually back test three or four months. I see that even that is subjective in some ways and can lead to errors. Your recommendations? I was using Tradestation, but recently changed to MultiCharts .NET

I am currently reading Trading in the Zone per Visaria's suggestion.

You're still experimenting (in the R&D phase), so avoid live trading until you have a plan, applied the rules to 500 appearances of your chosen setups and logged the results, then practiced in demo mode until you're consistently profitable and stick with your plan.

I manually backtested. I had a core setup and a method of entry and with my spreadsheet open I logged the stats surrounding every entry. The only filter during that phase was no trades withing 10 minutes of a major news release. Every appearance of the core setup had to be logged and evaluated.

Do you know the win rate % and risk:reward ratio of your pin bar strategy applied to, say, 500 appearances of the setup?

06-22-13 11:43 PM

Quote from 1a2b3cppp:

I have heard uptrends defined in the following ways:

1) a series of HH/HLs (some people say H/HL, some people say HH/HL, some people say HL/HH/HL, some people say HH/HL/HH/HL)

2) Anchor R becoming S

3) Trendlines

4) the slope of a MA

I have been unable to fine one that consistently works for me.

What are your thoughts?

As Took2Summit stated, "...you can draw the trend line however you want, but you have to be consistent."

You can use any framework for trading as long as it --- and your trading rules surrounding it --- are consistent.

All the ideas you list above for defining a trend do indeed define a trend. None of them, however, can predict whether the current trend --- definable at that moment in time --- will continue.

When you say you have been unable to find a trend definition that consistently works for you, what is your definition of "consistently works"?

All the ideas you list above for defining a trend work for me with excellent consistency, meaning I have rules for trading off these trend definitions that have produced net profit over series' of trades for years now.

Consistency is not certainty. All your threads seem to indicate a quest for certainty. Consistently profitable trading is based on positive expectancy, not certainty.

Your trading plan based on research and testing over a large sample size (such as applying a set of trade entry and trade management rules to 500 appearances of a particular setup and finding enough positive expectancy to produce a net profit after slippage and commissions) will provide the consistency you seek without any need for certainty in predicting the outcome of any individual trade.

Think of a well-researched and tested trading plan as a car that will take you through the streets of the Market City each day as you look for potentially profitable opportunities. If you took the car to a good mechanic and got the seal of approval (research, development & testing phase) before buying it, the chances of a breakdown are reduced. If you drive mindfully and safely, and wear a seat belt (stay focused and patient, follow your setup/entry rules, and honor your risk management plan), your chance of getting killed in an accident is quite low, and your chance of being available to take advantage of every opportunity is high.

I know several traders who have absolutely everything they need to extract ample profit from the market every week. They have well-researched and tested trade ideas with specific rules for entry and exit, yet they're unable to realize their dream because of common bad habits related to fear of uncertainty and/or a never-ending quest for certainty (usually in the forms of further testing, changing rules, adding/removing indicators, testing other markets, and so on).

There is a level of certainty in trading and if I were to express it in terms of tossing a coin for a living, it would look much like one of these scenarios:

1. You toss a fair coin. For every head you receive $130; for every tail you pay $100.

2. You toss a coin that is balanced to come up heads 60% of the time. For every head you receive $130; for every tail you pay $130.

3. You toss a coin that's balanced to come up heads 30% of the time. For every head you receive $500; for every tail you pay $180.

4. You toss a coin that is balanced to come up heads 90% of the time. For every head you receive $50; for every tail you pay $250.

If you could choose any of these coins and toss it for a living based on the risk:reward plan, would you do so?

06-23-13 10:04 PM

My mentor taught me classic TA patterns for free. These patterns are available for free (http://www.daytradingcoach.com/dayt...ysis-course.htm), and in inexpensive books.

I have an individual method of trading off these classic TA patterns. I've posted my strategies via annotated charts here on ET. I've taught my strategies to several others. None of the people I've taught them to have been able to make a living off them. It has nothing to do with their trading plans (all good plans); it has to do with their inability to trade their plans because of a desire for more certainty.

These strategies have been working for the 3 years I've been trading them and they appear to have worked for my mentor for many more years than that. Since they've been around for at least a few decades, I can see they've been working at least that long.

The only adaptation I've had to make to my core TA-based trading plan is when the volatility died down last year in the instrument I trade, I reduced my stops and targets accordingly.

Every one of these patterns are ambushes at times and always have been.

That's what risk management rules are for.

06-23-13 10:12 PM

Quote from marketsurfer:

No, it's not and can not be predictive. Even the MTA disagrees with you ( to the best of my knowledge). If it was predictive, why wouldn't the super computers that search non stop for such patterns, find them, exploit them and cause them to cease being predictive?

My personal hypothesis is that all the programmed trading has made them more predictive than ever. I'm often astounded at how many times in a row a particular setup will hit my profit target before hitting my stop.

Keep in mind that the big money that moves price can't just jump in and out all at once; they have strategies for building positions and exiting positions. These strategies become apparent when you study price action and develop your own plan around it.

I don't need to trade 50, 100, 500, or 1000 oil contracts at a time, so I don't have to worry about becoming the "mark" for market makers or about outsmarting another large entity that has to trade that kind of size to scale in and out of longer term positions/hedges.

I can trade my piker size, latching onto the big bad sharks like a little remora:

"The remora benefits by using the host as transport and protection, and also feeds on materials dropped by the host."

06-23-13 10:29 PM

Surf, I'm curious about something. If you believe there's no way to predict the odds of a directional price move based on the technical analysis of what price has been doing, then why do you think certain patterns repeat so much more often than they fail?

I'm looking at a daily chart of the ES going back to June 2012 and I see price pull back down to the rising 50-day moving average on 6 consecutive occasions and result in a directional move of 50 handles or more without closing below that 50EMA, meaning very low risk for significant reward.

How is it a pattern can repeat that often without a fake-out or "ambush" or outright failure?

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