Archive for the trading plan Category

Trade based on what the market is doing

Posted in education, market analysis, trading plan on 2012-09-05 by Strategesis

All aspects of the market cycle between extremes. That’s true of price, of course, but also of other measures: Volume, volatility and the degree to which price moves sideways (“choppiness”) or vertically (“trendiing.”)

All combinations occur: High volume and high-volatility (trendless) chop, low-volatility and low-volume trends, high-volume, low-volatility trends, etc. Each such combination has different characteristics, and so requires different trading plans and trading strategies.

To be consistently profitable, you have to know the type of market you’re trading–the “weather conditions,” if you will–and use trading plans and strategies known to be effective for those conditions. Just like a boat captain or airplane pilot prepares and plans his excursion based on the weather, a trader should pay attention to market type: Narrow or wide range? Inside or outside the previous range? Choppy or trending? High or low volume?

I have my own proprietary indicators that help me determine the type of market. Some of them are shown in the linked chart.

(Clink on image for larger/full view)

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How to trade this headline-driven market

Posted in market analysis, trading plan on 2011-11-06 by Strategesis

From Safehaven.com:

The current price action in the marketplace pales in comparison to the world’s geopolitical tensions and deteriorating social mood. In my trading career, I have never seen the price action in the indices react so violently to intraday headlines and rumors. Risk is high and the types of traders profiting from this market are day traders and very short term traders with trades lasting just a couple hours to 24 hours in length. Aggressive trading which small position sizes is all that can be done right now. This is not meant to be investment advice, but more as a function of the market environment in which we find ourselves currently trading within.

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Why it is better to occasionally play the long shot, instead of ONLY going for the highest probability play

Posted in education, trading strategy on 2011-04-19 by Strategesis

From PhysOrg.com:

“Instead of trying to make perfect decisions based on imperfect information, the cell plays the odds with an important twist: it hedges its bets,” Simpson said. “Sure, most of the cells will place bets on the likely winner, but an important few will put their money on the long shot.”

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Breakout Trades

Posted in education, trading strategy on 2011-03-22 by Strategesis

Breakout trades are much less likely to be successful when there isn’t a strong trend in the direction of the breakout (relative to the timeframe on which the trade would occur.)

So what’s a trend? The basic definition is that an uptrend is a progression of higher highs and higher lows, and a downtrend is a progression of lower lows and lower highs. More precisely, in an uptrend, each swing high is higher than the previous one, and each swing low is also higher than the previous one. In a downtrend, each swing high is lower than the previous one, and each swing low is also lower than the previous one.

In a strong trend, price moves persistently in the same direction, and retracements are usually relatively small in price and/or time—preferably both. In a really strong uptrend, the high of each bar is higher than that of the previous bar, and the low of each bar is also higher than that of the previous one. In a really strong downtrend, the low of each bar is lower than that of the previous bar, and the high of each bar is also lower than that of the previous one.

By contrast, when the there is a lot of overlap between successive price bars, when retracements are deep and/or long-lasting, and when there is not much net forward movement (up or down) from swing high to swing low and from swing low to swing low, then either there is no trend, or else it’s relatively weak.

In addition to the persistence and strength of the trend, the probability of success of a breakout trade also depends on the “gravitas” (or importance placed by the market) on the support or resistance price past which the breakout occurs.

The “gravitas” of a support or resistance price is a function of the following factors:

  • Age: How long has the price been there to be used by traders as a reference price for placing stop loss and entry stop orders? The longer the price has been an obvious point of resistance or support, the more exit and entry stops will be near the price, and so the more price-moving market orders will be issued automatically by computers (or fast-acting, disciplined human traders) to propel the price in the direction of the breakout. Don’t judge the “age” simply as clock or calendar time (although that’s valid), consider also the highest and lowest prices within significant time periods: The extreme high and low price of the past year is more significant than the high and low of the past quarter, which in turn is more significant than the high and low of the past month, which in turn is more significant then the high and low of the past week, which in turn is more significant than the high and low of the past day, and so on down the hierarchy of the time periods traders commonly use to analyze markets, make trading decisions and place exit and entry stops..
  • Size and strength of the trend before and after the point of trend reversal that establishes the support or resistance price: When a trend is reversed by a high momentum move, or by one that travels relatively far, that fact indicates that there was very significant breadth and depth of participation (many traders, many shares/contracts traded) that propelled price in a new direction. When a trend is preceded by a high momentum move, or by one that travels relatively far, that fact indicates that the buying or selling pressure that propelled the move finally exhausted itself—and so the move should be over and done with for a significant amount of time. Either one by itself, but especially both together, inspire very high confidence in that support or resistance price as one that should, with high probability, repel any future attempt to break past it. That means that many traders, and traders with very substantial assets with which to trade, will place entry and exit stops at or near such support or resistance prices. There will be great surprise and panic if such support and resistance prices fail to hold.

Be judicious in choosing which support and resistance prices to use when placing breakout trades. Avoid the weaker ones. Use profit targets whose distance from the point of entry is commensurate with the scale of the panic that should reasonably be expected to ensue if the support or resistance fails.

Professional traders generally “fade” the first attempt to break past resistance or support, but usually follow the move on subsequent attempts. Each attempt to break past resistance or support uses up the finite amount of support or resistance at the price, so each attempt is more likely to succeed. The supply of support and resistance is comprised of the professional traders who are fading the move, those who have profitable positions they want to exit at a profit, and those who have losing positions they want to exit as near to break-even as they can.

Breakout trades should work immediately, result in strong moves in the direction of the trade, and not exhibit any significant retracement initially. If price moves back to the other side of the breakout price for any significant period of time, or by any significant extent, exit the trade with as small a loss as possible. Breakout trades sometimes don’t work, and when they don’t, they signal their failure quickly and unambiguously, Listen to the market. It’s always right.

Believe what you see, and take appropriate action.

How to make money trading the news

Posted in education, trading strategy on 2011-03-05 by Strategesis

Courtney Smith, a trader and private money manager, created this video on how to trade on news. He shows an example of a specific move in the markets after a news event and shows how to get a good entry and a profitable exit.

Link: TraderInterviews.com

TTW (“Trades That Work”): Puretick’s (Alex Wasilewski’s) Trading Strategies

Posted in advisory service, education, trading strategy, trading system on 2011-01-17 by Strategesis

From Puretick:

One of our goals at Pure Tick is to get you trading like a pro on your own! In addition to providing trading alert signals, much of your time in the service will be spent soaking up knowledge on the markets. We teach standard concepts such as support and resistance, candle formations, bounce points, market internal indications and various other profitable setups used by Alex…

In reality that is the only hope for the newbie to graduate to the ranks of the professional. I am sure most new traders have read a number of trading books where the author proposes or in many cases rehashes a “holy grail” trading setup. Many times they simply plagiarize and rename the method.

When the new trader finishes the book and starts trading the next morning, the results are worse than expected. Sadly for the new trader, many of these methods—Trend Following or Counter Trend–are not that bad. Many do have a positive expected outcome over time. We have found that most methods average about a 55% success rate if every signal is taken. What many new traders don’t realize is that a method with a 55% success rate can easily have 5 losing trades in a row. Very few new traders multiply the average stop loss of that particular “holy grail” method times 5 to even get an idea of what that method might lose right out of the gate.

The prime trading methodology we use at TTW, and what we aggressively suggest for the new trader is to trade with the main trend of the day, and yet to avoid chasing the move once the trend has been determined. By definition this means we buy when a new momentum high has been established but we wait for a pullback. The opposite applies to short trades.

Right away a reader might say, “Yes, lots of trading gurus do that. What makes you guys different?”

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Position Sizing (a.k.a. Money Management)

Posted in position sizing on 2010-12-31 by Strategesis

From Trader Mike:

Position sizing could very well be the most important aspect of a trading system, yet, like expectancy, it’s rarely covered in trading books. A position sizing model simply tells you ‘how much’ or ‘how big’ of a position to take. Position sizing can be the key factor in whether or not you stay in the game or whether your gains are huge or minimal.

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