Trading Plan

“I define market context as the integration of the trend, price action, price pattern studies, and support/resistance. The primary is the trend and (it) overrides all other particulars of market context”. Crabel

Tasks:

  • Adhering to our performance process is our priority, as it is what we can control.
    • With the outcome of each trade secondary.
  • Trade ‘in the zone’, or ‘let it happen instead of making it happen’.
    • Remove the mental barriers that prevent us from letting our subconscious govern our trades.
    • Thoughts about outcomes and results come from the conscious brain. The conscious mind deals with trade analysis. However, during realtime trades, we want to keep the conscious brain quiet, almost inactive.
  • We know that to be good as a fast-money trader, we have to get good at waiting.

Edge:

  • “Money is made by anticipating what is coming—not by waiting until it happens and going with the crowd.” (Wyckoff)
  • We work the trades, proven through backtesting, without fear or hesitation.
    • “Repetition is the mother of wisdom!” (Weis)
  • We accept whatever happens as it happens, we underreact to everything, we are unflappable, and we trust in our trading skills.

Strategy:

Win at least as often as we lose, but on average, make each win two to three times as profitable to each loss.

The only thing remaining is to learn how to play the game!

Preparation:

“It’s the process that’s most important, not the results”. (Dr. Rotella)

Traders can be defined as ‘position’, ‘swing’ or ‘active’. This methodology is active, tending towards swing.

  • Start with a higher timeframe analysis (structure)
  • Allocation from this analysis to a watchlist
  • Trade timeframe, proportionately lower than that used for the analysis (for example, 4h analysis to the 1h entry)
  • Financial news releases reviewed
  • Diet and routine are correct
  • Centred (Do I feel like doing this today?)
  • Take time to move and stretch

Instruments:

Currency pairings and US 500.

Timeframes:

Except for the 1m, each timeframe above is a trade anchor. (An anchor is a chosen timeframe that determines the trade-entry and trade-stop position and for the most part the trade-management. The target is not as constrained).

Trading analytics:

  1. Weekly: Log all opened and closed trades
  2. Monthly: Review overall performance
  3. Quarterly: A review of trading plan/performance
  4. Annually: Post investor results

Structure:

  • Forecasting (yellow bars).
  • Below is the follow-on sequence of daily bars. Not as low in price as forecast, but an acceptable representation.
  • Note that the 5th and 6th bars from the end are the narrowest two consecutive bars relative to the previous 20 bars; this is the point where the market is at its most ready to move.
  • Structurally, the next stage might be:
  • The higher timeframe structural forecast is provided (see below).
  • On this occasion, a ‘possible’ happened and stalled the ‘probable’.

The next example is a daily chart that shows a structure and a forecast that is good, but not good enough when moving to the lower timeframe.

The final chart in this sequence overprints the actual daily bars with the forecast. As good as the forecast is, in terms of price hitting target, this trade would have failed if not correctly managed on the lower-chart.

The market and price pattern studies:

  • Support/resistance lines
  • Trend/channel lines
  • Correction
  • A squeeze or narrow range setup
  • Follow-through, or not, at a critical level
  • Inside bars “precursors of trending action” (Crabel)
  • False breakout
  • Breakout
  • Breakout test
  • Momentum
  • Wedge
  • sHs or 3P

Where to find trades:

“Have an open mind rather than being fixed on a preconceived ideal.” Weis.

“[There are] no perfect setups”. ” Don’t worry about finding a perfect trade, just worry about trying to find a reasonable trade”. Brooks.

The snapshot of EUR/USD 1 hr chart illustrates both the repetitiveness and the volatility of the market.

Trend:

Use of the regression trend (prefered) or the Keltner channel (each at +/- 2.5 deviations)

  • Find:
    • The ‘always in’ long/short level. (or change of premise level)
    • The point at which the current structure formed
      • Therefore, the start point of the regression trend tool
  • Trend
    • Trade with the trend (the ‘always in’ direction)
    • Overbought or oversold opportunities
    • A target to the:
      • Mean, if the channel is wide
      • Channel line, if narrow
  • Neutral
    • Trade with the probable price action
    • Our target is a:
      • Channel line
      • Measured move
      • Support/resistance
  • Trade if:
    • Reward/risk
    • Setup

The example below employs a regression trend with the assessed premise point being the high of that period. (Determining the change of premise point is the real skill of this method.)

A further example below shows CAD/JPY entry long on a potential 2.7R trade from a double bottom setup.

The gallery below shows AUD/JPY on a 30 min chart. The point here is the flexibility in deciding what is the ‘change of premise point’. We can see that it can be over a relatively large expanse narrowing to quite a tight area. In the case of a narrow channel, the target can be adjusted as the channel expands.

The example below shows the GBP/CAD 30 min chart. Neutral (rather than a trending) build-up.

Trend and structure

The next stage, following on from above, is to find an entry point by tracing bar-by-bar the trend and structure of the market. The screenshot below represents the wider picture. The second screenshot shows the breakout test setup in more detail that eventually provided a probable entry short.

Correction:

The correction often provides a measured move target. Entry from which depends on the structural characteristics; for example, ‘momentum’.

Wedge:

Breakout:

The USD/JPY example below supports a breakout build-up. The box below shows on the 1hr chart; however, in this trade, I referred to the lower (5min) chart for the breakout entry long.

“Always be on guard when a market moves above previous highs and the range narrows.” (Weis)

EUR/USD below is a suitable example of a diagonal breakdown and from within a box pattern. Stop placement above the prior high or more conservatively above the top of the box pattern.

The with-trend breakout below provided a suitable squeeze or build-up before the break long. Entry can be contentious. In this instance, entry was on the first close above the pattern. However, the prior bar pre-close would also have been acceptable. (Price reduced from here providing a trend line break of the extended diagonal drawn and a small profit exit).

Breakout test:

The example below of USD/JPY is countertrend on the 1hr entry chart but is near the top of a range on the 4hr chart; this is a 2R opportunity, but countertrend makes us more watchful.

Another test of a breakout example below, this time was showing the higher timeframe reasoning (daily chart) before we zoom into the entry timeframe.

From the daily chart above we forecast the ‘probable’ and ‘possible’ price action before selecting the 1h chart below and our entry point. (Target was hit three bars later for a 6.87R).

XAU/USD below is a trade in-waiting short from a possible breakout test. The countertrend feel is a concern as an engulfing close long would signal a false-breakout and therefore change the trade direction to long. A conservative stop is above the box pattern — about a 2.7R potential.

“When prices persistently hug the low of a trading range, the odds favour at least a washout and many times a sharp down-move.” (Weis)

Momentum:

Usually, a momentum trade shows on a higher timeframe chart.

The skill of interpreting between higher to lower timeframe charts is most prevalent in the momentum entry.

Below is another example of a momentum trade. The prefered entry was a double top short from the high of the range drawn. However, not observed at 2 am! Instead, we accept a momentum entry some 50 pips lower.

Double top

The example below is a 1hr chart. On the higher timeframe price is in a downtrend. A short entry via a limit order with the target established on the 4hr chart. (The double top must show on a higher timeframe chart to that of the entry chart).

False breakout

  • Moves below/above support/resistance often are aided by stop-loss selling/buying.
  • When a clear support/resistance line is broken and fails to follow through.
  • Be watchful if the bar closes well off its low/high.
  • Probability increases if entering with the trend.
  • The test often offers an entry opportunity.

sHs (shoulder/head/shoulder)

The chart below is an example of an sHs entry short from the 1hr chart USD/CAD. The setup also provided a double top entry with a 28 pip stop (stop above the middle-high) and a potential 178 pip target or 6R.

Another example of a possible entry shown below and a limit entry short from the close of a double top right shoulder. The horizontal line is a crucial resistance from a higher timeframe chart.

Structure and pattern combined

Below is the structure/forecast on a daily chart transferred to the 1hr chart for more detail.

Below is the USD/JPY 5 min chart with an example of the Wyckoff ‘pearl diving’ analogy. The unfortunate diver descends at the high of each leg as marked. The diver gets air when ascending above the same high until our imaginary plunger fails to get above a high (fails to get air). Often with dire consequences.

Exit:

  • When the technical structure is incorrect
    • Break of a trend line
    • Exhaustion bar
    • Strong double bottom/top
    • Adverse wedge structure
    • Adverse false break
  • Fundamentally
    • FOMC interest rate decision
    • Interest rate decision traded market
    • NFP
    • London open, if a reversal is probable
    • Significant event

Trendline break: Exit a trade on the close of a bar that breaks a trendline leg. (See chart below).

However, be careful the trendline is correct. The example below shows a possible confusion trendline (dashed yellow line) that would have resulted in missed profit opportunity with a break of that line and subsequent trade exit not yet halfway to the target.

Watchlist:

  • Prepare the watchlist and ‘colour code’ for the week ahead
  • Structurally selective
  • Backtest the watchlisted charts before live trading

Entries:

“Be brave and get in at good levels. Institutional traders will use trend lines; they will use simple horizontal support and resistance levels to look for confluencies to try and place their orders. Nothing clever.” (Paul)

“Put entries where the masses put their stops.” (Paul)

“Buy signals occur when fear is high.” (Connors)

“Can never be more than 60% certain. Don’t be paralyzed by a 40% chance of loss. 60% is as good as it gets. If you are a trader, trade!” (Brooks)

Prefered orders are:

  • Limit order
    • Support/resistance
    • Breakout test
  • Market order
    • Squeeze
    • False breakout
    • Breakout
    • Momentum

Wherever possible be a scale-in trend trader. In other words, scale into with-profit, with-trend trades if historic price movement, market conditions and overall risk are reasonable.

Stop positions:

“Markets go to the obvious stops most of the time”. (Paul)

“A tight stop means lose less per trade but lose more often. A wider stop has a higher probability of profit, but the loss is bigger. As long as the stop is reasonable, the results are the same after 100 trades.” (Brooks)

A reasonable stop is always obvious”. (Brooks)

Place stops above/below a measured move.

If a measured move is not obvious, spot each of the stop positions listed below before selecting the preferred level.

If a measured move is not obvious, spot each of the stop positions listed below before selecting the preferred level.

  • Conservative
  • Medium “A skunk stop”. (Brooks)
  • Tight

If a ‘tight’ or a ‘conservative’ stop is employed consistently you get a similar result after 100 trades. (Brooks)

Brooks says that “beginners should not scale-in or use wide stops. If stopped out, beginners can enter again on a second reversal. If stopped out again do not enter on a third as probably not reading the chart correctly—for example, probably in a channel (trend) and not a trading range”.

Targets:

Know the (probable first) target level before trade entry. Set take profit at 90% of the desired goal or the high/low for the bar that formed the target level.

  • Measured moves
  • Trend or channel line
  • Key support/resistance

Accept loss:

“Every human decision can be broken down into perceived risk versus opportunity, loss versus gain. Everyone is scared of losing something, and that fear of loss tends to overshadow the potential benefits.” (Voss)

“Rationalize a losing position in the same way as a successful business pays its bills”. “At the level of one trade, the market cannot be predicted”. (Paul)

Based on account size:

  • Not more than 1% in any one trade
  • Not more than 5% in any week
  • Not more than 9.9% in any month

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