Hi all, I hope you had a good trading day. I am glad that I took the day off: looks lame to me.
So, some of you have been asking me how I trade. Honestly, this is not a simple matter. I want you to imagine something right now. Try to create a color than does NOT currently exist. Go on, take a moment and think.
So, now that you realize it is impossible, you know how I feel trying to explain how I trade
I am kidding, however, explaining how I trade is not particularily easy since I do not have pre-defined rules. I think not having predefined rules allows me to be more open minded when it comes to trading. Markets are ever-changing, so should your strategy. Does that mean constantly switch things up? No, but it does mean that you need to recognize when something isn't working and what you need to fix.
Anyways, on to how I trade! (If you haven't noticed yet, I like to rant )
In quick summary:
-Identify day type (range or trend)
-Identify how I think market will go about ranging or trending
-Find areas that I think are good, risk averse entries.
-Create a THESIS
-Pull the trigger and manage from there!
More in depth? Fineeeee
I want you all to keep in mind that this seems like a large list of things I have to do in the morning, but really it is not. I spend some time looking at my charts, filter through my thoughts, create a thesis, and then trade it. It really isn't as tedious as I may make it seem.
Identifying day type:
-Typically I want to see what the past few days have been doing (Market has been ranging for 3 days? Maybe you watch for a breakout or you trade the range until it is broken.)
-Look at volume (volume decreasing the past 3 days which have all been trend days, maybe it is fading and we need some consolidation or a pullback)
-Overnight price action (massive range ON? 115% of ADR? Maybe we are going to cool off the jets and spend the day within the ON range.)
-News. This can be big. You want to see if there is news today. Not only that, you want to know when the big reports are coming out always. (Yellen testifies on Friday? Well, we may have a super range-bound market until then.)
-Once the day has begun, see how large the OR (Opening Range) is. (5-tick OR? Well, we may see a smaller range-bound day)
-Watch other markets. Did other markets make large moves ON? Are they making big moves during the day?
Remember, everything here is apt to change. This is vague because no day is the same. I am just trying to open my mind for you to peer in
How will the market go about ranging or trending?
-If I think market will trend:
-Do I think the market will pullback at the open to get the buyers ready to launch? Short-trap etc.
-Do I think the market will chop for a while until we blast off? (this is not often)
-Do I think that we will blast right off after the open? (This happened a lot in 2016; trend days with few retracements)
-Do I think that we will make a large move one way, only to reverse later in the day for an even larger move?
-If I think market is going to range:
-This one is simple: identify where you think it will range. Think that it will be stuck in the overnight range?
then fade the extremes (ONH and ONL)
-Another example: I think that market will range, but I am unsure where I think the extremes will be. So, wait.
-When I say wait, I mean: let the market tell you! You see a failure to break a support that is right by ONL? There you
go! Market just told you that it does not have the strength to go lower. Buy it. Bullish TICK divergence? Now I am
getting excited. This is setting up for a nice win. I will buy it up down here and sell at the top of the range.
Do these make sense?
Finding areas of interest:
-Once you have done the prior things, you need to know where to place a trade.
-I call these areas that you want to trade at "areas of interest", or "AoI" for short.
-This all comes down to what significant price levels are near?
-What areas do you think the market can reach?
-Areas of confluence?
-Places that are less risky than others. Let me explain: I expect a range day, and we are at the middle of the range. Do I want to start buying here? No. I want to start my buying towards the bottom of the range. This reduces risk and expands reward. Next example: I expect a trend up day. We blast up instantly. I want to wait for a pullback to buy. If I do not think a pullback will occur, then maybe I just put a one-lot trade on. Keep it safe.
Create a thesis for the day:
-Once I am done with all of that, I create a thesis. Sometimes this will have more than one part, but most of the time not.
-What is a thesis? It is a theory that is testable.
-A day's thesis is simple for me. It is literally the three things previously listed. What, how, and where.
-Example: Range day, pop at open and then range, top being ONH and bottom being Y-Close. Done.
Next, trade plan:
-Based on day's thesis
-Have targets and puke point in mind. (Puke point is a mental stop-loss.)
-Example related to the previous one: Since I expect Y-Close to be the bottom of the range, I want to fade that area.
- Maybe I buy one contract 5 ticks above Y-Close, add 2 more contracts at Y-Close, and there you go. Let price wiggle and move. Nothing is perfect. You can't pick tops and bottoms. So back to the example: my puke point may be 5 ticks below Y-Close. Just an example guys.
Now, pull the trigger and manage trade:
-I always scale in and out
-I typically do not trade with a hard stop. I keep it mental. This may be one of the #1 reasons I became consistently profitable.
-I am not currently going to disclose how many lots I trade right now. I do not want to say "I trade 30 contracts" because then people would think that they couldn't trade this way. So, I am coming up with a plan for this
Want to know the best part about all of this? It does NOT matter if I am right! My thesis can totally get blown, but that doesn't mean I will always lose! What I do when my thesis is blown is sit back, and re-analyze the market and come up with a new thesis and trade that. Maybe the new thesis is the opposite of my original. Maybe not. If you manage your trades correctly, I firmly believe you can be profitable. Do not worry about trying to predict the market. Worry about how to handle your trade.
Wow, that turned into a longer post than intended.
Thanks for following along! Send me a message or post here in the thread! PM's and replies in the thread are great ways to ask your questions and such. Thanks again!
Last edited by rocksolid68; September 8th, 2016 at 08:30 PM.
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I always find that trade management tends to be one of the most overlooked items when it comes to trading. Would be great if you could post some after-the-fact commentary of how you managed your trades during the day.
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I had a very busy saturday and Friday night. However, I was able to get some time today before football!
Here are my trades from Friday. I ended up profitable, however, I was sloppy
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I switched my chart to a Renko chart to show you the entries/exits in a better fashion. I am going to change the colors because it is not very easy to see the trades against the bars and black background.
-I was wanting a short, but market never rallied. Since I was expecting a rally, I was a buyer.
-I bought 2 contracts initially, took some heat, then added two more near my puke point (48)
-I took some off at VWAP for ~14 ticks net.
-I held them until they came to breakeven. Then I flattened them out for +2 ticks.
-This is where I got sloppy.
-I wanted to play the long side moments after I flattened my long. I was regretting that I exited.
-I bought a total of 2 lots and ended up flattening when price broke down. Took a big hit to the PnL
Net Trade PnL: -26 ticks
Net Day PnL: -10 ticks
-At this point I am realising that we are in for a move to the bottom of the range we have been in. I was hoping for a decent sized move down.
-I was shorting the -1SD and IB-Low.
-I got a total of 3 lots short. I took a little heat and got scared when price came back up around 10:30 my time. I was almost going to flatten.
-I held on and took some money off the table at the day's low.
-I took my runner off ahead of Monthly S1 because I was too scared to hold on any longer
Net Trade PnL: +68 ticks
Net Day PnL: +42 ticks
All in all, I made 42 ticks which equates to $525. If I take out commissions it comes out to above $500 still.
-I should have not taken the second long. It was an emotionally charged trade.
-I should have held longer on my short.
-I can't really blame myself too much for not holding as long, because heck; who would have thought we would get a move like that????
-Made good money, but could have made more. Will hopefully do better this coming week.
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