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Musings on the construction of a successful trading plan. Would like feed back.

Discussion in 'Forex Articles' started by WaveRider, May 3, 2012.

  1. WaveRider

    WaveRider Sergeant

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    I am a barely successful in a tiny live account, not a big account, but please don't flame me. It's easy to say you got it all figured out when you have nothing to lose but I'm not saying that. This isn't a holy grail, just a mental experiment to see if we can simplify what seems so complicated.

    The two parts of the trade decision machine are the part that makes the money (the trader) and the part that limits risk (the trading plan). Here it is and some blah blah after.

    The trader's role (the part that changes, adapts, that can't be programmed) - this part tends to be the decision to trade:
    1. Snaps price action action S/R and identifies, weight of psych levels, pivots and other S/R. Even indicator only traders look at floors and ceilings to guide trading. Done before trading decisions can be made.
    2. Identifies news and other volatility factors indicating when to stay out or in based on rules below - is in this section because the news release may be so small as to not affect the trade. Or are we near the Sunday gap? A historic number? This is the peripheral vision.
    3. Reads candlestick patterns for possible market sentiment, or uses fibs or gartley patterns to gauge where the market is going. This is the real judgment non EA thinking part. This is the compass part. Are we likely up or down today? Oh if only I could get my forex compass working!
    4. Determines good entry and exit points (but in line with the plan's rules below).


    The trading plan's role (the part that doesn't change) - this part tends to be what keeps you out of the trades and limits risk exposure
    1. Manages money to a predetermined % per trade loss acceptability. Generally 2-4%. This step iterates position size based on acceptable risk of loss, not desired gain.
    2. Enters at a predestined acceptable R:R ratio. Generally 1:1 or better, or whatever, but it should meet some reasonable criteria.
    3. Plots best lot allocation such as what portion of profit to take at the points specified by the trader - such as: TP of 50% at 0.5R:R, take 25% at 1:1 and let 25% trail stop until out. This is a mechanical, boring listing of how to break trades up, if at all, to let profits run and cut losses. This should be mechanical to remove fear and greed. This is when Sive says "move stops to break even."
    4. Identifies common and ideal trades and how to trade them. This should probably be listed first. This serves as the outline for the judgment of the trader above. Which patterns to trade, such as head and shoulders, and how to execute ideally. New trades can be added but should be written down, tried in demo, tinkered with and finalized before live trading. News traders have made extensive notes on how to trade each kind of news release so when that release comes up again, they have in mind their strategy. This also determines entry and exit because this section will tell you when a pattern is negated and no longer valid.

    Failing at forex is usually both parts not being anything close to being ready.

    Every trading plan needs
    1. Which way are we going on the TF I care about? Up or down.
    2. Where do I get in?
    3. Where do I TP.
    4. Where is my analysis wrong and I take the loss?


    For the first part (trader):
    Clear mind, as unemotional as possible, following a routine of looking at news and snapping lines and fibs. Honest about whether there is a trade or not. Patient to wait for the right pitch. The trader's enemy is the trader. He needs to stick with his plan. Fear, greed, revenge. Those are the things a trader is needs to route out. Consistency, stability, honesty. He needs these. Also there is no substitute for seeing thousands of charts. This builds a good trader.

    For the second part (trading plan):
    Developing a plan takes some time to be both successful and fit with a person's personality. Every forex school says one should make trading as mechanical as possible, leaving few decisions to the trader. Clearly outlined, firm numbers listed. If the trader says when to trade, the plan says how to execute.
     
  2. Pharaoh

    Pharaoh Colonel

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    Sounds like a very good start. It sounds like there will probably be the discretion at assigning weight to various possible support/resistance levels. That does leave a vulnerability if the trader is having a weird day.
     
  3. WaveRider

    WaveRider Sergeant

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    Sounds like we're on the same page. I was also devising a S/R level value system that would help guide trades. It looked like this
    S/R value menu:
    monthly pivot - 8
    Sunday gap - 8 (Meaning the price will very likely gravitate here before reversing. This is a S/R but also a trade in itself. We'll say the market is very likely to see this as a place to TP.)
    Weekly pivot - 5
    Classic horizontal S/R - 3
    Daily pivot - 2
    minor pivot points - 1
    major psychological levels ( 100's) - 1 (minor psyche levels really only matter if they mattered before but then that makes them classical horizontal S/R)
    large fry - $1.69

    ideal set up
    Sell with 1:1.5 or better R:R
    PPZ should be equal or greater ceiling and lesser floor
    Take profit according to S/R weight. If equal, TP completely, if not TP in proportion to remaining S/R value
    Example
    Trader is considering a sell position with 1:1.5 R/R
    Resistance tally
    Weekly PP - 5
    psych level - 1
    recent horizontal S/R - 3
    Total ceiling - 9
    Support tally
    recent horizontal S/R - 2
    psych level - 1
    fib extension - 2
    total floor - 4
    This means our confluence resistance is great and our confluence support is weak, making this a higher probability trade than price action alone. Our stop is pretty safely hidden above this confluence area and if the market stops us out, it means it really wanted to go against us and won't be just market noise.

    I just arbitrarily chose values based on my experience with how these S/R's behave. It would have to be based off the 1h or 4h chart. Every higher TF would half all values and every smaller time frame would double all values. This is because the higher TF's don't care as much about daily pivots or psych levels, but that stuff matters a lot on the 15 and 5 min TF's. Classic horizontal S/R's would keep their valueof 3 for any TF but would have to be re-snapped to make them relevant to the TF you're working with.

    I'll see if I can incorporate some of this theory into my trading plan. This is not a decision making tool as much as a tool for gauging risk. That is, it won't tell you to trade, it will probably tell you not to trade, if the stop is hidden behind a weak S/R and the price is headed for a strong S/R confluence area.
     
  4. Pharaoh

    Pharaoh Colonel

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    Oh good. You included large fries with that. Too many trading systems ignore this critical element. :p

    It looks like you could almost work out a script that could assign overall weighted strength levels to S/R. The closer you can come to automating it, the easier it would be to try to test out what weighting scheme works best.
     
  5. TadS

    TadS Private

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    I agree with Pharaoh, I really like what you have done with assigning objective values to support and resistance levels. This will allow to evaluate trades on a very strict basis and will lead to you becoming a very disciplined trader.

    I would suggest keeping a very detailed log of the trades you entered in as well as opportunities you may have missed. This seems like a great start to a system but I am sure with some careful analysis you will be able to improve it even more!

    Great work so far!
     

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