Keeping stops tight

Keeping stops tight means very well considered entry positions if we are to have a chance at profitability.

09:00 My watchfulness of the market has, I think, increased. I take very early exits as required. Here’s the trade from this morning. I entered on bar 1, a type of pattern break pullback (pbp); seemed reasonable at the time. My concern was the significant number above the entry position. However, if bar 1 had closed even slightly above the close of the previous bar, I would have exited. If bar 1 had pushed up – before closing to one pip above the high of the last two bars – I would have exited. When bar 2 closed, as a combi long, I exited which coincidently was breakeven.

When the reason for entry changes, I get out.


14:22
An odd-looking entry. My reason was in the price action of the three bars before entry. Also, I’m looking for opportunities where the stop (and therefore the risk) is small. Not a perfect ‘Bob’ entry, but this time it worked.

14:28
Of interest, I moved the stop to its position at two pips above entry only after the bar below the 7,160 level closed. I took the scalp due to the ranginess of the day which was also the turning point and the ceiling test of the bar to the left at 08:20.

Let it go

Many systems trade a trend. That is they are trend breakout methods. But there is a glitch with this. No matter what timeframe we observe the market is in a range for most of the time.

Ranging market

I’ve read that 80% of the market cycle is ranging. And this can be more or less confirmed with a brief observation of a broad section of one’s charts.

To, therefore, aim for a ‘trend’ dependent system is to spend much of the time sitting watching. It’s worse than this because it is difficult to determine if the price is in a range or the early stages of a trend. It is only apparent once the day, week or month – depending on our chosen timeframe – is well underway or completed.

Trending market

Moreover, a discipline that works well in a trend may not work so well when a market is ranging and vice versa. So what is the answer? My view is that as the market spends most of its time in a range, I’d like a procedure that works consistently well in that environment.

When I get to the occasional trend – as long as I stick to my methodology – my account shouldn’t come to too much harm and as long as I can withstand the frustration that being out of a trend generates I’ll be fine and remain ready to do battle when (all too soon) the range starts again.

The secret here is sticking to our methodology. It is very tempting – and we have all done it – to alter how we trade to try to fit in with the new and dynamic looking trend. For the range based trader there is only one thing for it when the big move hits, let it go.

Unless I can successfully combine the tight and wide stop strategies. This, I consider, is only recently possible with the introduction of a technical software update known as ‘auto qty’. I will trial this over the next few weeks and report back.

How I trade

Many have mentioned that they are interested in doing whatever it is that I seem to do. There is a side to trading that attracts.

And I’m not referring to the gambling types but those that genuinely want to learn a craft based on a desire to learn a strategy, a method and discipline. A good start is to read the books by Bob Volman.

What follows is copied directly from our daily Skype chats. This is something I will probably post more regularly so others get a feel for what happens day trading in real time.

Buzz 07:48

Worth a look at my statistics for yesterday. A Monday and often a slow day. A total of 14 trades of which 6 were winners (5 actually as one win was small). However, my gain was £642 for a £270 loss. All the profits were scalps as a ranging day. I’m trading tight with my stops. On one occasion I was out only to re-enter the same direction, and on another, I was out and bet on the opposite direction within a bar or two. The most important thing to me is context. Once I’m happy with that, I find that I’m closely watching the detail (individual bars).

For clarity, my planned stops are not tight, but my manual rejection of the trade (my actual stop) is close. I would still not trade without the planned stop in a proper position and for the reward/risk to make sense; this is only one technique. I think trading as Bob does in book two works well if done consistently. My outs are more in line with Bob’s writing in his first book.
08:06
I made the conscious decision yesterday to try the tight stop regime. But that was in a range. A trending market might show different results. Also, I figure that the more I practise the tight stops then, the better I ought to get at it.

Nick, 08:33
Its interesting to note your average times in winning and losing trades. 20 minutes for winning trades, and your out of losing trades in an average of 3 minutes. Thats good practise that I need to learn.

Buzz 08:37
An example from this morning – which I missed. The entry short for me would be on the pullback on bar 3. Quite near the top of bar 2 actually. My planned stop would have to be above the high but my actual out (manually) would be at the tight stop arrow – as price goes above the top of the bar before bar 1.

Fund update

The FTSE 100 has seemingly gone into freefall taking out all gains since mid-2016. 

A fall in the value, to some extent or other, can be seen in all indices; and with much uncertainty to follow in 2019.

Selfishly, this is not our concern with the Slow Trader fund. We are over 41 per cent up since the start and without the worries that plague traditional funds. See Slow Trader Hedge Fund.

We can make that last comment with some confidence because of the way we trade. We day-trade on a small time frame, but we buy or sell (long or short) with little bias to the fundamentals. We only go where the price action is going.

A justified objection to day trading is the unexpected effect that short-term news can have on results; this is valid. But we trade away from news events whenever possible, and quite often a warning of a prior news spike will show to the watchful trader.

‘Breakout day trading’ parts one and two provide in some detail how we traded for most of last year: an aggressive breakout style that can result in significant gains; and, as much fun as that is, in matching losses too. Not so much fun. 

However, much of the information contained in ‘breakout day trading parts one and two’ is valid hence the reason for leaving these pages available for review.

We have moved to a more cautious style of breakout trading. The gist of which is in ‘my mantra‘ or can be glimed from a glance at the selection of trades posted in the ‘chart debrief, Buzz‘ section.

A detailed description of our ‘conservative’ trading method will follow as 2019 progresses. 

We know that our revised and cautious and compounded trade procedure will provide the future build in the fund that we want.

The power of compound interest

To qualify as an expert trader, we run our trade account as we would a business. Any founder of a new company will need sufficient capital to get started, they will take as little as possible from the industry and will put all their energy into growing the capital of that business. We do the same with our trading account.

A consistently profitable trader can utilise the massive advantage of compound interest.

Consider that we are a consistently profitable trader that does not calculate the compounded amount per pip on a regular basis.  We start with equity of £15,000 and have a consistent daily profit of £75. After 232 days our capital will be £32,400.

If we consider that we are the same consistently profitable trader but this time we adjust our amount per pip regularly by the ‘risk level of each market‘ calculation then after the same period of 232 days our equity will be £75,443.

A somewhat simplified proposition, but the principle is clear: we must apply a regularly adjusted calculated and, therefore, compounded amount per pip.

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

My strategy is taking ‘cautious’ breakout day trader signals, but within that, I trade any valid break that comes along.

I aim to determine the nature of a break and to always think in probabilities.

I take note of the context, 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 want obstructive elements between entry and stop but not between entry and target.

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

My entries are from near or on the 25 exponential moving average in association with a squeeze setup in a direction appropriate to the context.

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

I wait for an actual break, patient to avoid false and tease break traps.

In a trend, I swing my trade and exit at the target (at least 2R) or resistance, a technical or a reversal point.

In a range, I scalp my trade and exit at the target (at least 1R) or resistance, a technical or a reversal point.

But I do not need a trade; therefore, I do not search for one. I spot my bets rather than find them.

My goal is to trade at (?) amount per pip at 50 per cent of margin.

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.