TraderGav.com

Gav's trading blog - Perseverance, Consistency, Confidence

Strategy & tools

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.

 

1 point challenge

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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.

Stop and look back

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I have not completed my 100 trades of dummy trading, so it is still too early to do statistical analysis. But i think it is appropriate to review my progress and decide my next step. I had bad days since end of August. Looking at the performance chart since 01-August-2006 to 18-Oct-2006, ugly?, I think so. my accumulated R has been dropping.
Overall, system expectancy fell to 0.09 and accuracy is around 45%. But then , it is still too early to analyze these figures.

[photopress:dummy_trading_performance.jpg,full,pp_image]

After reviewing the result I have identify some problems:

  • Personal problems during September had created some troubles to my life as well as my trading

  • Lack of discipline. There were times, I was anxious to trade, and breaking rules.

  • Dummy entry is not only about reversal up/bar and inside bar. Market trend and intraday market tone are important prerequisites. I did not do enough for this part.

  • Trying out multiple positions concurrently. Obviously, I am not good enough at this, yet.

  • Without a profit target for each trade. Basically, I did not know where to exit the position in order to protect profit. For many instances in my life, I do not do well when I do not have a target. This problem appears in my trading now.

Here are steps I have taken to improve.

  • I have reduced my risk level from from maximum 1.25% to 0.76%. So now I am more careful and particular in choosing real low risk dummy entry.

  • Maximum 2 opened positions concurrently.

  • Learn to be really patient. It is absolutely fine to sit with cash if there is no low risk entry.

  • Setting minimum profit target for each trade. I am using Fib extension levels to determine exit point now.

It seems like I am such a big dummy fan huh. Well, I believe in controling risk. As long as I keep my risk exposure in check, walking through the bad days, I will be the last one to laugh. Dummy spot just suits my risk appetitie so well. I will start exploring more strategies when I have achieved consistency in my trading performance.

Be a better trader.

Survivor tips for trading U.S market from Asia

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Trading U.S markets from Asia is interesting. We have different time zone, so I am keeping my day job as a IT professional crew and do my “full time” trading at the evening time. I normally get to my bed around 1am or 2am.

Here are some ‘survivor’ tips I have gathered and experienced after few months of active daytrading. I guess Eyal might have better tips since he has been trading from New zealand and Singapore now.

  • Water! Drink plenty of water during day time. Keep my body hydrated at all time. (this is tip from my Mum since I was 3 years old)
  • Cut down caffeine consumption during day time. I limit myself from sipping 2 cups of coffee a day.
  • Cut down my carbo and serving portion of dinner. Heavy dinner makes me sleepy. I have cut down my size of dinner by half. Sometime, I even share with my fiancee.
  • prepare some light food, like small cakes (please, I mean small) or cookies.
  • Hit Da gym! I maintain at least twice a week of cardio and weight training. Though I still fail to get my six packs, at least , I got my heart beating smoothly and maintaining my waist line.
  • Heavy and nutritious breakfast. This is to pump up myself for the day’s work.
  • Pop in multivitamins everyday. This is a must.
  • Do a cat sleep after lunch in office. Make sure I am energetic enough for afternoon’s discussion.
  • Absolutely no alcohol allowed. Well, a couple of beer during weekend is fine. My last taste of alcoholic drink was 6 months ago. And I don’t feel missing anything.

After all, trading U.S market from Asia is still bad for health. I am just doing something to reduce the possible damage. I need a healthy body to spend the money I make from trading.

Grading my trade and myself

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I have been thinking of grading my trades and execution. There are indeed some bloggers grading their trades. Trader-x grading his trade setup with alphabets (A, A+…etc), J.C from NYSE scalper’s tales grading his daily trades as well:

I’m going to re-define what I consider a good trade and a bad trade. Since I’m not doing 8000 and 10,000 share positions as often any more, I’ll consider a good trade anything that makes $150 or more and a bad trade anything that loses $100 or more.

I find it to be useful by grading my trades and trade execution. It gives me an insight of my trading performance from another aspect in addition to expectancy and accuracy.

Here is my grading plan. This is to be done separately on each type of trade setup. Basically, I am applying the ideas introduced by John Carter in Mastering the trade.

  • 1: Target hit
  • 2: Out at a differrent price from target, but profitable (time stop)
  • 3: Out at even (scratch, time stop)
  • 4: Out at a different price from stop, but a losing trade
  • 5: Stop hit

The following scale is to grade how well I actually executed the trade:

  • 1: Followed trade as dictated in my plan
  • 2: Followed trade entry, but closed out position before predetermined target was hit
  • 3: Followed trade entry, but removed stop and let position run past original target
  • 4: Entered setup late and didn’t set target
  • 5: Impulse trade

Add up daily scores and divide by the total number of trades to get an average for both categories. This will keep a grade point average of the number of trades you made that are profitable and those that are executed as originally planned. Track by trading method used, so you are able to rate each method and tweak as needed. Review the score at end of each month to see what needs to be modified.

I am particularly interested in looking at the second category which is a psychological challege. It is easy to have some buy/sell signals, but, to follow the plan, trust myself, trust my plan and methodology and reduce number of impulsive trades are challeges traders face everyday. I have the tendency to exit a trade prematurely, This grading plan will always warn me to “behave myself”.

This is just another way to improve my trading.