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Trading Plan: Defining a trend

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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.

 

More on ‘The next trade is more important’

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More on Next Trade Is More Important

I decided to relook again my previous posting on “Next trade is more important‘. I discussed briefly on experience of having a string of winning days. Now I am looking at the losing experience. It seems to be a common problem among traders. Well, I made the same mistake on tuesday’s trade as well. Coincidently, ugly was having the similar problem yesterday.

What is the relationship between my E-mini S&P trade and Gold trade? Absolutely NO. But, at the psychological side, trader has a tendency to relate them. This is similar to the theory of points and line.

In the same dimension, it is easily for one to connect two points and make it a line, though these two points are, in fact, have no logical relationship

I find it to be so true in trading. When I had one or two losses in a row within a trading day, unintentionally, I become cautious. I do not want to lose money again and I do think that the probability to success today is low, since I had made two losing trades before. So, I assess the third trade in a different approach, (though I still think that I am following the darn trading rules!). I am eager to take profit now when I see the candle is narrow at the top of chart, (well, that’s lucky if the position is in the money) or I am moving stop loss to break even point far too early, just to avoid losing money, again. Oh, not again!

I do not have a concrete treatment for this kinda of psychological problem, since I am not a psychiatrist. To me, the best solution so far, is to stop trading for the day if I have two 1-R losses in a row. Because, I KNOW MYSELF. I am just not cool enough to make another trade immediately after 2 losses.

Anyway, market is always there, let’s fight another day.