Now this one will probably be a short one… …so good for you! Less time spent reading blogs – more time to improve your trading infrastructure. Let’s get to it.
A short intro, of course, is mandatory… So recently I have been asked by one professional trader if I could recommend some good reads regarding Technical Analysis and trading altogether. Now clearly this person has been around the block so no need for him to read all the crap out there (I’m sure he had already read it all… like we all probably did). Obviously, I pointed him to this blog. The reason he asked, was because of his interest to move away from a discretional scalping to a more structured larger timeframe trading approach (scalping will make you bald in the first few years, larger timeframes are easier on the mind, body and lifestyle (provided, of course, that by some miracle you will manage to make money scalping…)). This got me thinking, what information could such a person benefit from? What could he do to take the first step to accomplishing his goal? He is already making money trading, he has been doing this for a long time and clearly knows all the nooks and crannies of the trading world, how can I help him?
As usual the answer turns out to be as simple and as straight forward as it gets… TRADING PLAN!
Often enough, however crazy this sounds, but traders (especially discretional or fundamental ones) forget the importance of a trading plan. With experience you develop this sense and feel of the market that a trading plan just seems redundant. You just know how to do things, when to do things because you have been doing it for so long, You breathe with the market, it’s just in your blood, and it works (if you haven’t gotten to this stage in trading – you will, if you got what it takes). All fine and dandy here, but this is not what I am all about here at Statistical Trader… However good it works – its not scientific. First step towards becoming more scientific in your trading – prepare a trading plan. Always. Period.
In order to be successful you need to know that your trading approach works. You need to know that it makes money in the long run or it will be just too easy for you to drop out when a drawdown period comes in. Now not all of us have the ability to automate our trading and perform backtests on it to be sure that it works. So what you can do? Not much actually but you can become as robotic as possible when it comes to your trading and just trade for a while. That way you will collect some data about your trading and be able to use some of my suggestions from other (or future) blog posts to evaluate how you trading is performing. However, for that to be a valid information you must follow strict rules as much as possible as close as possible to what a computer algorithm would do. Therefore you must have as technical of a trading plan as possible.
I know it might sound overwhelming, but I am here to help, with time and my help you will be able to develop a proper trading plan that can be both easily automated, and easily followed manually and without emotion.
When building out your trading plan there are a few things you must aim for.
Most of the traders will be discretional traders I am sure (if you don’t know what that means, a loose translation to laymen’s would be – a trader that has a good feel of the market and mixes other analysis methods (in most cases variations of Technical Analysis) with his ‘feel’ of the market to make his trading decisions). The main thing to aim for, is to make it as technical as possible. Try and eliminate your feel of the market from the equation, or even better! try to describe your ‘feel’ in technical terms. Try and put some structure to your ‘feel’ of the market. Maybe seeing certain price action formations triggers you to feel a certain way? Try and find these formations – those can be easily put into algorithmic words! Try to look for things like that.
A good rule of thumb when doing that is to imagine that you are trying to explain things to a computer. A computer does not have eyes, he does not interpret things based on vision. The only thing a computer understands is numbers and formulas. He has your indicator values, he has price bar values, volumes etc. So you must explain it to the computer using what he knows.
Now let’s say you want to explain a pinbar to a computer (you can understand a pinbar without these algorithmic explanations and use a ‘short’ description in your trading plan, this is just for the sake of an example).
So a pinbar. When you look at it – it’s clear. But for a computer to know it’s a pinbar you would have to say something like this:
“Ok computer, so a pinbar is a candlestick, that has open and close values very close to each other. And high or low value that is far away from the body. Now to put this to numbers –take total bar height (high-low) then take body’s height (absolute value of (close-open)) and tell to the computer when body’s height is 10% (or whatever you interpret as pinbar) of the total bars height, and the body is very close to the low or the high point of the whole bar height – that’s what is called a pinbar, mr. computer”
This is only an example to illustrate the way you should start seeing your ‘feel of the market’. Try and take this approach and you will see how technical you can get about your trading. Then it’s just a matter of following your rules.
Alright, this is getting longer than I expected, so I’ll cut it short, and provide additional info in the upcoming blog posts or youtube videos, or Instagram stories.
Now a final note – I remember very well when I started getting into trading and at a certain point I started building out my trading plan. Now I remember in particular the struggles of doing that from scratch. I read books, searched online trying to find templates of how a descent technical trading plan should look, but to no avail. I was very disappointed to figure out that there is no valuable resource regarding this and that no portfolio managers had ever provided how professionals have their trading plans structured. That is why I am currently building out a pretty, easy to understand and implement technical or semi-discretional trading plan template, that you can use to structure your trading approach a bit. Now I wanted to upload this blog post asap, so I don’t have that template ready yet, but I will upload it here soon, and when that is done I will let you know if you drop your email in the box below. Find the email box below the blog post.
P.S. regarding this: (from ^) “no portfolio managers had provided how professionals have their trading plans structured”, I just want to express my disappointment in this industry that we, as traders have created. It still baffles me how secretive everyone is when it comes to trading. Everybody thinks they have the best sh*t and they hide it from the world. As simple as a trading plan template. There are people who have created those I am sure, why is nobody sharing them? It’s just a single example out of a bunch… But we have to stop this. We need to educate each other properly, and we need to help each other. When I upload something here, share it with everyone you think would find it useful. Don’t hide things from your fellow traders. I want to change this by sharing information and resources completely selflessly. That is the main reason behind this blog. I am sure there will be enough money for all of us in the markets and I am sure there will always be people to lose their money so that we could make a profit, regardless whether we keep information to ourselves or share it with everyone… So let’s change this industry by making it transparent! Share this with everyone!