I flew fast jets for 30 years of my life. I've traded full-time, more or less, for the last ten years, initially from fundamentals and over the last few years as a dedicated day trader. I live on the North Norfolk coast.
An entry without an agreed setup is a form of overtrading.
We see patterns everywhere, and that is the problem. As a result, we end up trading on feeling rather than probability and a clear risk/reward.
Overtrading is any trade based on a fear of missing out—or any emotion.
All traders overtrade at some point or other.
I refer here to day trading. But, it is a consideration for all styles.
Because of the intensity of day trading, concentrating on the ‘one thing’ is particularly relevant.
The one thing is one market, one session, one strategy, and to master one set up at a time.
The idea of the ‘one thing’ will fly in the face of what most traders do. Many will watch multiple markets across various sessions and apply different strategies and setups.
Suppose we learnt to sit on our hands. Watch and wait. Narrow our trading time, if day trading, to a few hours a day. Or be much more specific than that. Specify a session to trade every day with the same strategy and set up.
A FOREX market, for a while, tends to repeat in volume at similar times.
And how about, instead of bouncing around multiple markets, view only one. Get to know that market. How it moves, how far and how quickly—including spread, commission and expected slippage.
Similarly, with strategy. Do multiple approaches work? What is the statistical result over an extended period of each trade variation on our profit and loss?
Do we know if one works and another doesn’t?
Ditch what does not work—and more often than not, it will leave only one.
Maybe within that one (consistently profitable) strategy, we have different entry and exit criteria. But again, run the results methodically. Are they truly working?
Be ruthless and throw out any that don’t. The more we focus and specialise, the fewer mistakes we make.
And mistakes lead to loss and away from consistent profitability—the last two words being the goal of any serious trader.
To move from profitable to consistently profitable is a more significant jump than it sounds. How do we manage to do that?
Specialisation, focus and discipline are key.
We are trading the same market during the same session with the same strategy day after day.
Why the same market?
We get very familiar with its movement, size, and how it might react to specific news announcements. Each market has a DNA—the subtle differences in structure and how it often changes from one form to another. Knowing this movement—intimately—is necessary to be able to execute a setup successfully regularly.
Trading the same session day in day out helps us focus. Day trading when you’re on it is intensive and exhausting. We need to be on our game to win. We can realistically maintain such intensity for limited periods. A few hours a day. So we use that to our advantage and dedicate ourselves to a single consistent trading session each day. The graph below—provided by Nick—shows the volume for the Pound/Yen. UK time (UTC+1). The graph shows the highest volume period is from pre-New York open and for the following few hours. We trade that session.
Sticking to a tried and tested setup is, ironically, one of the most challenging things for a trader to achieve. It is for me! And is, I conclude, why I’ve been good but not consistently profitable. The best setups are often not crystal clear. Therefore, by design, each entry needs to follow a clear set of rules. But at the same time, each setup is unique in detail. I need to ignore off-script early and late entry opportunities. Unlike algorithms, our minds see patterns everywhere. Algorithms, however, make instant binary decisions needing only the smallest of price movements. Way too quickly for us. Minimum size also dictated by spread and commission costs.
Our edge is reading the algorithmic price movements of risk and reward within a contextual market structure. And when these movements get to an appropriate size, we join in with proper context and price action criteria. How will I make this necessity for discipline a strength? I take every trade with James. I’m the snipper—and he’s the watcher. That combination (militarily anyway) has always worked better.
Once we’re settled on a particular way of trading and are profitable, we don’t want to mess with it too much.
That’s not the same with the preferred platform and brokerage. We need to review these from time to time to see if we still have the best setup.
We’ve given both—mainly ‘which broker is best for us’? —a lot of thought recently.
Each trader has their requirements depending on style and trade frequency.
As a discretionary day trader, my own needs include:
Low spread (the difference between the bid and ask price).
Speedy and reliable execution.
An intuitive dealing platform.
Recently I wasn’t getting the first two points from our current broker. The market (the GameStop story) has caused some brokerage turmoil. However, getting trapped in a trade two days running was not calming. Nor was their excessive increase in the spread at any slight adverse change in volatility.
I want to say a thank you to Chris Lee (Pipmaven blog) for his recommendation of IC Markets.
IC Markets and Pepperstone fit our needs. I particularly liked their associated ctrader web platform.
Our analysis is via TradingView with the broker’s platform only needed for trade execution.
TradingView have various brokers that allow entries directly on the TradingView chart. Oanda, for example, who in the last few days were given on-chart trade access for UK residents via TradingView.
(Nick’s preferred option as it more suits his systematic approach).
For me, it’s IC Markets with their very low spreads. However, anyone following my path should look at Pepperstone and Oanda—as they provide UK regulated account protection.
IC Markets, Pepperstone’s and Oanda’s prices are direct to market—no broker’s dealing desk in the way. And the indication is that Pepperstone will link to TradingView shortly too.
Some traders (those with larger accounts) might like to have more than one brokerage, which is also useful if they employ different strategies and different timelines.
Personally, I aim to get as good as I can be at one clear strategy and with the same broker and platforms.
The algorithm data continues at pace. Now at nearly 60% profitability with a 2.88 profit factor or reward/risk ratio for EURGBP. But that is not the whole story.
The above is the figure for our best pairing. The one on which Nick has focused. However, a dozen others (majors and a few significant minors) run a close second.
Each pairing is individually tested, and the algorithm adjusted as needed. For example, best market entry timings are specific to each currency and its pairing based on volatility look back.
And determining the market cycle has been improved by introducing a Japanese line break chart—a movement chart rather than a time-based chart.
A minimum Euro VIX (volatility index) is incorporated in the algorithm which—being USDEUR based—will require testing as to its applicability (if any) on other FX pairings.
Nick’s test is designed for an hourly chart and looks for entry/exit solutions over the past 750 days—figures above are providing trades (tested yesterday) on 223 days. In other words, we’re seeing trade entries from one to three days on average.
This delicate balance of ratios provides the best net profit. However, Nick can make adjustments to the algorithm (in the VIX and others) whereby per cent profitability increases significantly and the reward/risk balloons, amazingly, to well over five.
However, in this instance, the number of trades closed and the net profit achieved decreases substantially. In this instance, we could increase each transaction to a higher average per cent per entry (currently trading at one per cent of account), but we know that to do so is not sustainable or practical in the real world—drawdown for some trades could go through the roof for one.
I do remain a discretionary, rather than a system, trader—for the time being at least. But Nick has brought a quantifiable aspect and improvement to our methodology. This week, I found that taking trade entries from Nick’s quantified indicator system and transferring them to James’ subjective value drawings (rather than the other way around) have worked very nicely thank you.
We needed more trade data, so Nick taught himself to code. In other words, computer programming to test trade conditions. He has become extremely good at it.
Okay, he started from a high baseline. A spreadsheet wizard—and a master’s degree in engineering—he has some mathematical skills!
As a trader himself, he already knows what’s practical. We both spent a couple of weeks of the festive break poring hours into coded trade development.
What I’m talking about here are algorithms that give trade entry and exit conditions.
Did it work?
The surprise was what didn’t work—off-the-shelf indicators for one. We tweaked and adjusted the conditions and continually run the strategy tester. But the results were poor.
That was when we knew that we needed to develop original code, based on an edge.
We went with a (structured and systematic) trial that tested intraday price conditions against the previous day’s daily price levels.
With a trend-criterion agreed it then took dozens of pages of code to run the what-if conditions. Some worked, many didn’t.
Each test looked at the past two years of hourly price movement. We studied the results of net profit, trades closed (total), per cent profitable, profit factor, maximum drawdown, the average per cent per entry and the average number of bars in a trade.
Without a similar test of strategy—carefully coded and adjusted trade parameters—how would anyone know what they’re doing works?
In our testing, each change or addition to a strategy often improved some figures—or increased drawdown slightly —but significantly reduced the number of trades taken and, therefore, the overall profit.
To make a small correction in condition improves one trade but taken over multiple entries is often a loss-maker.
The trial confirmed that the change in profit factor (reward/risk) has more effect on profit (per improvement condition) than an increase in the percentage of wins.
However, our limitation with intraday is the end-of-day close. We elected not to take a trade overnight as brokers’ do not provide an automated exit condition that met our needs.
A trailing stop was not profitable, and other solutions increased the maximum drawdown unacceptably.
However, we achieved some 60% profitability and with wins being twice that of loses, and with acceptable drawdown. We were jolly pleased too.
Gambling, betting or speculating? What’s the difference?
After reading Jim Paul’s book, it got me thinking about my system. What was I doing each time?
What we want to do is trade, but are we sometimes betting? What’s the difference?
How Paul sees it:
If it’s for entertainment, then we’re gambling.
Emotionally attached to the outcome—and ego is involved—then we’re betting.
Assessed the risk and the probability the chances are it qualifies as speculation.
Trading, on the other hand, is speculation that follows a plan.
(The same applies to investors, just over a longer timeline).
Sounds straightforward. But in the heat of the (trade) moment what was I doing? What are the clues?
Do I get upset, even mildly, when taking a loss?
Alternatively, do I get quite pleased with myself when I record a win?
Was my risk measured, apportioned and applied?
Did my ‘trade’ follow my plan (precisely)?
Did I improvise in some way?
To ensure I have a trader’s approach—and that I don’t lapse into what could be categorised as betting—I use a checklist.
When I’ve developed my trading plan, and tested it, I take a lot of time to distil it into a checklist format.
As an ex-aviator, checklists were very much part of working life. However, ironically it was the book ‘The Checklist’ by Atul Gawande (a surgeon taking lessons from aviation!) that brought home the more profound need for a checklist.
Checklists are not a bullet abbreviation of a plan. That wouldn’t work. Still too detailed more likely. An index for aviation, surgery and trading is often time-critical. Therefore, such a reference is an item all on its own.
It contains stuff that if missed, could be very unhelpful if not catastrophic.
Maybe items not found in a manual or plan.
An example Gawandy uses is the checklist from a light aeroplane where one emergency starts with the words ‘fly the aircraft first’.
My trade entry checklist has such a beginning: ‘(on review) at the month’s end, will this entry be apparent?’
My trading plan is one thing, but to make sure I implement it speculatively (as a trader)—and keep mister ego at bay—I need my checklist.