TraderGav.com

Gav's trading blog - Perseverance, Consistency, Confidence

Blog and Rants

Trading Plan: Defining a trend

by 13 Comments

Here we go. The postings for the coming weeks are all related to the subjects/tools that I am studying and implementing into my trading plan.

The first thing I need to know before I start a trading day is to evaluate if I am potentially facing a trending day or another choppy one.

There are different strategies for different types of market conditions. It is the most frustrating when getting chopped out by the market. I had tons of this kinda experience in dummy trading. The main reason? I was bowling in a tennis court, I hurt my arm and damage the court.

Two tools caught my attention. Average Directional Index and Guppy Multiple Moving averages.

I am looking at a longer time frame for this purpose. For example, if I were to trade off a 15-min chart, I will be looking at 10 times of 15-min which is approximately a 120-min chart to evaluate the trend.

The idea is to see a bigger picture. I would layout a 120-min chart with 200 SMA and ADX (Average direction index). I am not interested in the ups and downs of 200 SMA. Instead, I am focusing on the slope of it. I am ONLY looking for Long if it is sloping up, and Short if it is sloping down.

That’s not all. I start looking at ADX.

One major function of ADX is to determine if a futures/stock should be traded with a trend-following or non-trend-following system.

Right tools at the right time, give you the ‘right’ result.

ADX was introduced by Welles Wilder in his book New Concepts in Technical Trading Systems. Some explanations can be found on stockcharts.com as well.

ADX does not generate buy/sell signal for me. Instead, it is showing me the strength of a trend. This is the key point.

When ADX is below 20, it shows a lack of a clear trend. So, trend-following systems will face some whipsaws here and there. On the other hand, when ADX is rising and crosses above 20, it shows a trend is building up and gaining strength.

So, be happy, dummy traders. Some said when ADX falls from 40, it is showing a trend is pausing and steps into the consolidation phase.

In addition to the ADX, I browsed through my library last night. ‘Trend Trading’ by Dalry Guppy again caught my eyes. Mr.Guppy introduced Guppy Multiple Moving averages(GMMA). TraderMike wrote about GMMA before. It is used to view the nature and characters of a trend. It not so much of helping to make any decision, it does give me a feel and insight into the trend.

I have done some simple programming to display GMMA in Tradestation.
Some people are sharp enough to look at the chart and shout “It is trending”. I am not. I need some forms of analysis and tools to help. But, anyway, the point here is to make sure I am trading the right strategy in the right market condition.

Coming soon.. I am looking at Candy sticks…Oops…I mean Candlesticks…

Here are some ideas and readings I have found on the internet.

 

Work in progress – Dummy 2.0

by Leave a Comment

Maybe you have noticed I am not posting any trade so far. I am not trading this week. After a serious review of my journals, I have realized the weakness of my current trading plan. (Well, basically,strictly speaking, it is not even a plan). I am planning to take the coming 2 to 3 weeks to concentrate on writing out a concrete trading plan. If you have read the Reading Links I have posted, you know it involves a lot of work.(Man, it is not a one-night job). I even pick up backtesting to a certain extent. This is to firm the rules and confidence. My trading plan will be surrounding Dummy trading. So far, the basic belief and findings are, dummy system has great deal of merit.

This should be a project with intense studies and testings. Certainly, I will continue posting materials related to this subject along the way, and of course, some good suggestions from Dave (a.k.a MagicT).

By then, see you at Dummy trading 2.0.

Readings: Trading Plan

by 7 Comments

Here are some articles written on the topic on Trading Plan.

Here are some books on this topic.

Trading the Plan: Build Wealth, Manage Money, and Control Risk (Wiley Finance) – Robbert Deel

How To Create A Trading Plan– Brice Wightman

1 point challenge

by Leave a Comment

Again, Dave pushed me to do something about my trading and market. Here is another email from him. I am sharing this, for you to think.

Let me ask you to think about something. Suppose you were able to take 1 point out of the E-mini every day, day in and day out. You just waited for the market to give you the easiest 1point move of the day and you took it and were done.Now let’s say you start by trading only 1 contract, so you’re pulling in $50/day which you split 50/50. $25 goes back into your account and the other $25 pays your commissions, taxes and buys you gazinga pins. How long before you have enough in your account to trade two contracts? How long to three? How long before you are trading four contracts? Now you are at $200/day or $50k a year. Take it out as far as you want…how long until you have a $1,000,000 account? (This is best done in a spreadsheet!)

Now, look at any day’s S&P chart, at random. How difficult do you think it might be to find a way to pick the juiciest 1 point out of the market that day?
Put tradestation on 5-min bars and look at a day. How many opportunities are there? (I count several already this morning)

Now don’t get carried away and start trading without a plan..going for that juicy 1 point – there will be plenty of time for that, but not now! You still don’t have a plan, you’ll start losing money hand-over-fist. I just want you to try on a different way of thinking about the market.

1 ES point a day. sounds easy? Another key point here is consistency. For example, I trade 1 contract per 10K account. Start with 1 contract, I will need another 400 trading days to achieve another 10K and start trading 2 contracts. I think, it is interesting to challenge myself to achieve this 1 point a day CONSISTENTLY for 400 trading days. But before that, I need to start completing my trading plan.

Backtesting – Comment from MagicT

by

I have a short discussion with Dave (a.k.a MagicT). He brought up the idea of backtesting. Though It is contrary to my posting before on this topic, I feel that it is always good to have other’s opinion. And it might help other readers as well. With his consent, I am quoting my email conversation with Dave on the topic of creating a trading plan.

I have read your blog about your feeling on backtesting. I understand what you are saying. My purpose here is not to argue with you.

However, you have rightly concluded that you do not have a proper plan. I would like to help you to discover and create such a plan. For that we need a “trading plan”, which is part of the overall plan. The trading plan will be the keystone to your trading success. In order to create a trading plan, we need information. The best information we can get, at present, is our own backtesting. The backtesting will tell us a great deal, although it will not tell us if you will be successful with the system. For that matter, neither will paper trading.

I would make the case that actual money forward testing is not a good measure of the plan either, not if you have failed to backtest. The reason is this: Trading any system without having programmed its rules to test it, means that you will never have any idea if you are trading outside the plan or missing trades EVEN WHEN YOU THINK YOU ARE TRADING THE PLAN! If you miss a signal, how will you know? If you make a trade that you think is based on the plan, but you absentmindedly missed a rule, how will you know? You will only know if you test each day going forward with the same program that you used to backtest. Therefore, we must create a set of programmed rules that test our system.

No trade : Fixing in progress

by Leave a Comment

I know some people are bagging some profit by shorting the hell of market today. I am not trading today, partly because I did not find opportunity in the early part of the day. Instead, as advised by Dave at comment. I am going through my journal now.

He pointed out something.

“I know you’re serious about making money from trading, clearly more serious than many who try. I can “feel” from your posts that you don’t quite know how to make that happen. “

Very true. So I don’t wanna wasting my time struggling. I will see what can be fixed. Maybe I will make some postings later after discuss with Dave.