Our Bristol day trading plan

Bristol

The previous week James, Nick and I (Buzz) met in Bristol for a few days for a day trading pow wow.

Our agenda was to agree a defined method of trading, to backtest that method in detail and agree on markets we would each trade.

Single market

A comfortable aim at the outset, maybe. However, as with anything worth doing its beginning needed to bypass egos, emotions, ‘set in our ways’ experience developed over several years and, therefore, generalised methodologies.  An immense struggle.  But, we all felt that we had got to where we wanted to be by the end.

In our first week of trading following the gathering we had decided that for now each of us would trade a single but different currency market.

Trading multiple markets, although potentially providing more entry opportunities, actually resulted in more (early) abandoned trade entries as the observation of one market would often incorrectly influence the judgement on another.

Moreover, observation of a single market provides more harmony for that market as each pairing have specific traits, news related releases, spreads and a certain rhythm of volatility.

Even after a single week of applying the ‘only one market’ restraint, we have seen a significant jump in the possible combined trades achieved. We have each become a specific currency pairing specialist.

Not to say that having mastered the single market we will not expand to two markets per trader. At the moment, however, we like the results, and in any case, it is highly unlikely that we would take on more than two markets per individual.

The 4th amigo

We’re also in the very early stages of training a fourth member of the team. But it can take many months to years to bring someone up to partial let alone full account trade ready.

Plan, brief, execute and debrief.

Our muster in Bristol encapsulated our ‘plan’ phase of things. Our brief is our individual (written) mantra, and the ‘execute’ is our daily trades.

Publication of a weekly debrief in a video, or written format will happen via this blog. In the meantime, we discuss events between the team daily when we can via Skype.

James and Nick currently trade at the minimum amount. The next step is for them to participate at a quarter of full risk and so forth until able to consistently take maximum risk trades. (See blog post ‘conservative breakout trading’ for our risk amount calculation).

The mantra of a conservative breakout day trader

I’m a somewhat cautious breakout day trader.

I take note of the pace and harmony of the market.

I favour trades that are in the direction of the current dominant pressure.

With a neutral view, I let a break build up ‘properly’.

I pay attention to magnets such as a double zero or fifty price level.

I’m observant of obstructive elements on the way to a target.

And I’m aware that being in a trend or a range has implications.

Moreover, I do not need a trade; therefore, I do not search for one.

To that end, I spot my trades rather than find them.

I monitor significant financial news and do not trade their effect.

My entries are in association with the 25 exponential moving average.

Added to that I use the squeeze or confluence of setups such as a pattern break, a pullback reversal, a pattern break pullback or a pattern break combi.

A signal bar is highly desirable, a break of which is my entry which in turn becomes my entry bar.

I wait for an acceptable break, and I’m patient to avoid false and tease break traps.

I exit at the (1) target or an appropriate (2) resistance, (3) technical or (4) reversal point.

My goal is to determine the nature of a break, consistently.

  • A breakout day trader
  • The pace of the market
  • Dominate pressures
  • The thickness of a buildup
  • Is a magnet present?
  • Are obstructive elements on the way to target?
  • Trending or ranging?
  • Don’t need a trade; don’t search for one
  • Spot trades rather than find them
  • Awareness of significant financial news
  • Entries and the 25 EMA
  • Add to that the squeeze or confluence of a setup
  • A signal bar is highly desirable
  • Wait for a ‘proper’ break
  • Exit at the target, resistance, technical or reversal point
  • The goal is to determine the nature of the break

It is at times like now that day trading comes into its own.

Overtrading

Day trading does not mean overtrading. Far from it. As we review our trading strategies, one or two trades a day is typical for us, and often we can go for a couple of days without a take.

Even in the defined methodology of our ‘conservative breakout’ strategy patience is a vital ingredient.

It is essential, however, that by being particular with our entries, we do not unknowingly manifest reluctance – which in turn can bring impatience.

Method

To help negate this, we use a well-established method between ourselves of a plan, brief, execute and a debrief.

How does this improve our work? It makes our approach considered, open, exact and, therefore, honest. That is we review our plan in clear language, openly express our methods, know when to get down to business with focus and be forthright in what we got right as well as what we got wrong.

But what about the economy?

In our approach, the state of the financial market gives us relatively little concern. Over the last couple of weeks, traditional investors will be wondering (having enjoyed a most incredible stretch of profitability) what is best to do.

In contrast, we go from day to day taking each moment as it arrives with equal consideration. We are not concerned with external pressure other than the occasional economic calendar information a few moments before and after the news is released.

In a way, this puts us firmly in control of our possible gains and our losses (part and parcel of financial day trading). With a well defined and practised method we might even be very successful – maybe not each day but on average over every few days. And that control brings a sense of consistency and purpose.

Then we can let compound interest do the hard work.

The best looking chart is not always the most profitable

A slow market this morning. Little news until this afternoon. But a trade is a trade, and the best looking chart is not always the most profitable.

We got suitable signals from both GBP/USD (top chart) and GBP/JPY (bottom chart) at about 09:45. GBP/JPY some five minutes earlier. Although the price action favoured GBP/USD, Japan showed its colours earlier.

A trade is a trade, so we entered short GBP/JPY (the lower chart). The price action that looks the best does not always provide the speediest or best result.

We asked ourselves (1) what is the dominant price direction and are we following it, (2) is the market trending or ranging, and finally (3) is there price action that may interrupt our desired track to target?

Our answer to each was acceptable, our only concern with GBP/JPY was the significant number of 14,800 that we had to traverse on route to our goal of 30 pips.

On the other hand, if we had chosen GBP/USD its magnetic number of 13,200 slightly above possible entry, would have been an issue also.

A better plan would have been to take profit at the 14,800 price range and reassessed a reentry. But in hindsight is always easier.

We ejected the trade for a few pips profit and went back to waiting patiently.

Asia to European provides trading opportunities

First trade of the day. EUR/USD short for 19.2 pips.

Some great opportunities are often provided as the market transitions from the Asian to the European market time at about 8 am.

The UK market opening at 9 am often more volatile and regularly contains economic activity. This morning at 9.30 am, for example, has a GDP release for Stirling.

As conservative breakout traders, wherever possible we avoid the uncertainty that such news provides.

Our trade this morning is slightly more aggressive than usual. See chart below.

The Asian market provided a strong buffer above the 11,500 price level. The breakout short slightly after 07:00 was not an entry for us. Price bounced (reasonably aggressively) off the significant number of 11,500.

However, bar 1 and the doji before also on the 25 moving average line favoured a short. We entered on the close of the second doji (bar 1) which made our 19.2 pip target some 30 minutes later at bar 2.

Short opportunity off the 25 EMA but the 11,500 price is a buffer.

 

Hold until target, unless.

Screenshot

An update to our last screenshot. We Quite like the mix of GBP on the left and EUR and AUD on the right.

GBP on the left and EUR with AUD on the right.

GBP traded with (x) ticks set at 1470. The right-hand column is at 5-minute bars.

Strategy

Our strategy is a conservative breakout for each market; however, we will use our probability momentum strategy with GBP in a strong trending market.

The red arrow shows an entry from this morning in GBP/USD. The opportunity presented itself in both GBP markets. As we only trade one market at a time, it is a matter of picking one.

The Asian market time is often quiet regarding volume or bar size and movement. However, occasionally a good trade or two present themselves. Having said that very little happened in this trade until the European market opened at 8 am. The UK opening at 9 am often more voluminous and, this morning, coupled with European economic news.

Our trade progresses south slow but sure.

Hold the line

As the trade tickles the target line we are watching closely for any ‘technical’ sign that we will not achieve our goal; this is an awkward moment for novice traders. Our rule is that we always hold until target unless we have a definite reason not to such as technical, resistance or reversal. To show how difficult this can be, price in this instance cleared target and spread by a pipette then headed north. Fortuitous for us, maybe.

Conservative breakout trading

Our style of trading has progressively moved to conservative breakout and where we compound our traded amount daily.

Even on the 5-minute charts, this approach provides for few entry opportunities. But as we are trading at our maximum amount ( after we have established that we are consistently profitable), this is not an issue.

The compounding aspect missed by most traders but is a most powerful aspect to the methodology. 

Our method lends itself to observing a few charts at once (three to four). However, we only have one entry open at any one time.

The pointers below provide suggestions on setting up the charts and for the daily calculation of trade amount per pip.

Chart set-up

The four markets below fit the screen better than three. We use the top left (EUR/USD) as our anchor screen. That is we scale every other display in proportion to the anchor screen.

Four markets fit the screen better than three.

To do so, we manually adjust the ‘price’ axis to provide the look that we need. For EUR/USD this is a width of about 100 pips. The other screens scaled accordingly.

A low vertical scale density works best.

Our method is for a fixed stop and target providing an essential and consistent 2:1 reward risk. (adjusted for spread). Again, using EUR/USD as the template, we scale the other charts accordingly as a percentage of their opening price for the day.

The candles seem tighter than most will be comfortable but with a little practice, it quickly becomes apparent why this less volatile appearance is more suitable to the conservative breakout trader.

Risk level

EUR/USD example

We trade a single market at any one time and, therefore, a single price level. In this regard, we can be accurate with our amount per pip. Take the example of our favoured market, EUR/USD. At the start of each trading session, we calculate our amount per pip which, unless the market makes a significant price difference, is maintained throughout the day.

Assumptions for the example: market value 11,640, margin 3.33%, equity 15,000 (50% of equity 7,500) and overall risk not to exceed 2% of equity. Note: we use 50% of our equity as we are looking for a margin during any one trade to be very close to the 50% mark.

EUR/USD 10.8 pip stop.

Margin at 3.33%       11,640 x 0.0333 = 387.6    then    7,500/387.6 = 19.3 (price set per pip)

2% check         A: 15,000 x .o2 = 300 (max risk)    B: 19.3 x 10.8 (stop distance) = 208.4

The 19.3 in the example above is our amount per pip. In the 2% check, ‘B’ is not to be greater than ‘A’.

Note that (as is the case with AUD/USD) a market with a margin of 5% then the margin calculation above would be multiplied by 0.05 rather than 0.o333.

In our fledgeling expert period, we complete the daily calculation but trade quarter of the amount and increase in quarters as we become surer that we can fly.

When entered into a trade using the amount per pip as calculated above margin will go a few percentage points against us if the deal is negative and vice versa if positive.

 

The Ticks have it

(x) Ticks

Many advanced charts have an (x) ticks facility. A tick represents a transaction between a buyer and a seller at a given price (and volume, except in FOREX). In the (x) ticks chart each candlestick shows the price variation of x consecutive ticks.

The (x) tick chart is not time-based. Therefore, each currency pairing in our trade list will close at different times. Moreover, the bars in an (x) ticks view are representations of transactions, and their frequency is variable. For example, over one period we may have 50 bars, and in another period of the same timeline, we could have 75 bars.

Backtesting

Backtesting of multiple currency pairings is the best way to determine if (x) ticks provide suitable trade opportunities for the individual. The example below shows EUR/USD 30 minute bars with one trade entry opportunity in the leg shown.

30-minute bar, one trade opportunity.

The chart below uses the (x) trade setting with x being 3,000. In this leg example, two trade opportunities are available. However, this is not to say more trade entries exist with (x) ticks as it all depends on the timeline set (above) or the ticks set (below).

(x) ticks often provide more trades, particularly on a breakout.

How many (x) ticks

How do we select the (x) number of ticks to view? As with the classic intraday time-based view, this is a personal choice but one which must be mostly proportional to market spread and the mean of the bars traded being a suitable size. If we use 3000 ticks in EUR/USD for example, the leading price action of using 3010 or 2940 will not alter, but the trade opportunities could be significant.

Based on Bob Volman’s day trading with 70 ticks we backtested higher amounts divisible by 70. Some areas of the test are subjective as to whether we would or would not have entered a prospective trade.

Lower timeframe

In the lower timeframe (or tick frame), 1470 and 2940 ticks provided, for us, the best results over a wide range of tests. Tick bars do not correlate well to traditional time-based bars. However, our ticks above would at certain times of volume provide similar representation to 5-minute and 10-minute bars respectively.

Higher intraday

Our favoured higher (intraday) tick frame is 4410 ticks; this equates closely to the half-hour bars on a standard time-based chart. The image below is a 30-minute chart superimposed on a 4410 tick chart over the same period.

In the first half of the image, the ascending 30-minute bars are on the left and in the second half of the picture, the tick bars descend on the right. Those proficient in price action identification will notice a tick bar entry opportunity in both the ascent and descent that is not available to the 30-minute bars.

Superimposed 4410 tick bars and 30-minute bars.

To Achieve the higher levels of ‘amount per trade’

Amount per trade and consistency define the top 1% of traders.

Our aim

From our last report, we had some trades go against us for a time. We managed that occasion to an eventual near breakeven. However, it was an uncomfortable period of trading.

Our principal aim is to protect the fund. (Which seems a contradiction if a detrimental trade is allowed to build).

In defence, we got very good at scaling-in and turning a negative situation into a profitable or neutral outcome.

Reward to risk

However, a disproportionately magnified stop distance to a planned target, will, from time to time, result in a loss that is more significant than our usual win.

Psychologically this is hard to take. We can find ourselves moving our stops to accommodate the possibility of one more scale-in to save the day. Works sometimes but is a recipe for a shocker.

From taking a breakeven after a two-week hold and management of a detrimental trade has been a good thing because going forward we have reaffirmed our trading rules.

We now trade a planned reward to risk of not less than one to one. No exceptions.

We do not have the flexibility to scale-into a detrimental trade, but actually, that is a good thing. Moreover, as a result, we expect to take smaller (controlled) losses which is acceptable.

After our experience that concluded soon after my last report, we’ve traded small as we build confidence and consolidate our revised approach.

5-levels of ‘amount per trade.’

We have 5-levels of ‘amounts per trade’. We trade the lowest amount when our approach changes and until we can prove profitability. Also, our trade amount increases to the next level after a string of three successful trades. It reduces, however, one level with any failed trade. With three failed trades in a row, we reduce back to the lowest setting and start the build process again.

This method is in contradiction to nearly every beginner; they, generally, increase trade amount after a loss and reduce after a win.

How many traders win?

There are no definitive figures on how many are profitable at trading. But from everything that we have read, it seems to be in the region of 20%. That is not the full story, however. The 20% contain vast differences regarding profitability.

Tennis provides a useful comparison. Consider the world tennis rankings. Those within the top 200 (the 20%) are net winners. In other words, they win a bit they lose a bit, and with expenses, it is difficult to make a living. The top 100 (the 10%) are more consistent winners and consequently win more significant amounts. But it is in the top 10 of players (the 1%) where we find big rewards.

To stretch this analogy one last time, where do we stand in the rankings? Entering the top 100 with a goal of reaching the top-ten within two years. Which, in trading reality, is nothing more complicated than systematically building the higher levels of ‘amount per trade’ for extended periods.

August

Light trading only expected in August. A family wedding then, as others are on holiday,  two dogs to look after and probably more involved than usual in the family business until the end of the month.

Return relative to risk

Below we have our previous 30 days of trading results.

They look similar to the last report regarding gain and percentage win. But in reality, are very different.

Such summaries provide useful figures but often not the important ones. It is nice to know the overall gain. After all, that is our purpose. However, I would like to know how we achieved that gain, or more accurately ‘what was our return relative to risk’?

The amount of leverage we can use is about to change significantly with the European regulation on margin to be introduced at the end of next week.

I have tended to trade on margin rather than on a firm stop. That is, if a trade went against me I would often hold and look for a suitable scale-in point to provide a break-even opportunity or, quite often, a profit.

All well and good until we are caught out with a massive move against us. That happened to us this period on not one but three currency pairings simultaneously.

Our return relative to risk was poor this period. And that has to change. Not only are such trades overly difficult to manage they are likely to create an excessive loss. In any case, the new regulation and change in margin will make such a strategy untenable.

Setting hard stops that provide a planned reward to risk of not less than one to one will offer more (albeit smaller and controlled) losses but also free us early to reenter with a new trade; rather than sometimes being locked into a scaled-in extended detrimental equity trade.

Stats for the last 30 days of trading.
The stats often don’t tell the whole story.