What’s most important: trade entry, management or psychology?

In the last blog post, I mentioned that a trade entry process, management of the trade and the emotional challenges are each equally important.

The vast majority of the information available to us is, however, based solely on entry procedures.

Some gurus say (and for a good reason) that profitability is a function of the management only and—what is now becoming more realised—the emotional decisions we take with each trade.

I’m staying with the full package, evenly split approach—an exact entry requirement balanced with proven trade management and a no doubt (unemotional) exit strategy.

As for entries, there is a myriad of ways to trade. We have to find what works for us. I use a combination of trend and channel lines, price action and—thanks to Nick’s coding—unique indicators.

The channel lines are provided by James, who has a very natural affinity for this work. To look at the simple trend line structure below, you may get a false impression. Simple but—for anyone that has tried to do this for a living will attest— far from easy. To determine a workable contextual trend with barely one touch is exceptional.

The crosshairs in the chart above represent my short entry position in a trade last week.

The charts below show Nick’s objective indicator of the same trade. The lower red line (green line above if I were long) represents a 50% probability objective based on the yearly bar averages. The white dots are my ‘average true range’ to establish risk, and the shaded red and green areas represent the wicks of the prior daily bar that assist with macro price action.

The objective probability indicator is handy in a ranging or (medium to shallow) trending market.

We can see from the above example—of acceptable probability—how our entry, management and exit process might work in unison.

Of course, it is when it doesn’t go so well that the synchronicity or not of the three elements shows.

Minimise unnecessary loss and sharpen profit taking

Back to live trading after an exhausting couple of weeks that introduced seven new hotel rooms to our business. For the extent of the renovation See the hotel blog.

In trades, we started this week with a day of backtesting. We then missed a trading day and later in the week had to change our usual routine to a later trade start of mid-afternoon.

The late start provided a different challenge. You will know of the interest rate change and the immediate effect this news had on sterling. Our trade start time this week was after the interest change news and, therefore, after much of the action had already taken place.

The reduced activity in the market after the interest rate exhaustion meant that we needed to cut our chart bars from our usual 5, 3, 2 or 1-minute bars down to 23-second bars. At 23 seconds we could get a read on the chart. The issue now is finding a trade that provides at least a 16 pip move, our smallest scalp in the GBP USD chart.

Working the 23-second chart is rapid. Strategies have to be clear and decisions decisive. Miss the exit signal and the chart is away from us into ‘no man’s land’ before we know it.

From that experience this week (Thursday after the UK interest rate decision and Friday after the USA non-farm payroll) we have introduced three brief but essential points to our strategy page on exits.

If we hadn’t traded the 23-second chart, the exit strategy points might not have been as defined or evident to us. Using these same exit strategies in the higher time frame charts, which we will do this coming week as our routine is back to normal, will minimise unnecessary loss and sharpen profit taking.

Note added March 2018. With two of us working well as a practised team the extremely low charts were interesting to experiment. These days the lowest chart I use is 5-minute bars occasionally 1-minute looking for an express breakout entry.