10 Oct Writing a trading plan — part 4

Writing a trading plan

Part 4

One of the best sources out there for learn­ing any­thing about trad­ing is def­i­nite­ly with­out a doubt; Investo­pe­dia. So many high­ly pro­fes­sion­al con­trib­u­tors and knowl­edge to be found there. That is also where I found this arti­cle on ‘Build­ing the Per­fect Mas­ter Plan’ by Matt Black­man.

So thanks to Matt and thanks Investopedia.

Part of a series

This is the fourth part of ‘writ­ing a trad­ing plan’. Not sure how many parts it will have because that all depends on how much work each part will take to write. I will con­tin­ue this series until I have a work­ing trad­ing plan that I can be con­sis­tent with. I will men­tion all mis­takes and things that did go well to the best of my abil­i­ty and in all hon­esty. Thanks for tak­ing the time to read it. 

Writ­ing a trad­ing plan. Part 1.

Treat­ing trad­ing like a business.

Writ­ing a trad­ing plan — part 2

Writ­ing a trad­ing plan — part 3

DISCLAIMER

Click here for my dis­claimer. It basi­cal­ly says that I am on my path to becom­ing a trad­er and these are just my opin­ions on how to approach learn­ing to trade. Feel free to check it out and com­ment on it.

Here it goes…

Sum­ma­ry so far

In the first part of writ­ing a trad­ing plan I talked about things like skill assess­ment. You first have to learn some basics before you have a bet­ter under­stand­ing on how to make a plan. Then I took a look at ‘men­tal prepa­ra­tion’ and made a mantra for myself. A mantra I will say before I start my trad­ing ses­sion. After­wards, I estab­lished the amount of risk I am will­ing to take. This was pri­mar­i­ly based on my bal­ance chart, take a deep­er look into my bal­ance chart here. At the end of the first part I wrote about my per­son­al goals regard­ing trading. 

In the sec­ond part I wrote about doing your home­work. The things that, in my case, crude oil has cor­re­la­tions too. News to read. Finan­cial instru­ments to watch in order to pre­pare myself for a trad­ing ses­sion. Then I con­clud­ed that because I trade the very small time frames I don’t have to take them into con­sid­er­a­tion that much. 

In the third part I wrote out my thoughts on ‘trade prepa­ra­tion’ and defined my exit rules. The exit rules come before the entry rules because they are more impor­tant. Most peo­ple tend to neglect these think­ing the entry rules are more impor­tant. I defined my trade prepa­ra­tion as doing the tech­ni­cal analy­sis on the charts that I am trad­ing at. On top of this the men­tal prepa­ra­tion that goes into start­ing your trad­ing session. 

In this fourth part I will con­tin­ue fol­low­ing the trad­ing plan out­lined by Matt in his arti­cle on Investo­pe­dia. The remain­der of the items are:

• Set Entry rules
• Keep Excel­lent records (next article)
• Per­form a Post-Mortem (next article)

So let’s get start­ed with work­ing on the next item which is ‘Set­ting entry rules’.

Set Entry Rules

In order to set entry rules I think we need to first under­stand that there are dif­fer­ent strate­gies for dif­fer­ent occa­sions. I’d like to observe first and then see what dis­tinc­tions and ulti­mate­ly strate­gies we can make regard­ing ‘entry’ rules. Here are some fac­tors to take into consideration: 

• Time frame
• Time peri­od (what time in the day/week/month/year)
• What pat­tern are we trad­ing? Are we wait­ing for a break out or are we trad­ing the ‘inter­nals’ of the pattern. 
• What is our strategy?

Because I trade on a small time frame and take only ‘quick’ posi­tions in the mar­ket I am a scalper. Don’t know what that is? GOOGLE!

Time frames

I have dis­cussed ear­li­er what time­frames I use but I’ll share it here again. At any give time I have on my screens open the fol­low­ing charts: 

• The dai­ly chart (analy­sis)
• The 4 hourly chart (analy­sis)
• The hourly chart (analy­sis)
• The 30 minute chart (analy­sis)
• The 15 minute chart (entry and exit)
• And the 5 minute chart (entry and exit)

EDIT: After read­ing up a bit on using mul­ti­ple time frames on Babypips.com  I decid­ed to fol­low its advice and only use 3 time frames. The arti­cle makes a few sug­ges­tions and since I am hav­ing more ‘luck’ with tak­ing small prof­its I decid­ed to go with the small­est set­up. The 1‑minute, 5‑minute, and 15-minute. I will write anoth­er arti­cle on my expe­ri­ences using these charts.

Read my arti­cle here on choos­ing the time frames.

Mon­i­tor setup

On my main trad­ing set­up I have 3 mon­i­tors. In the mid­dle I have my 24 inch mon­i­tor that shows me the high­er time frames (ie. dai­ly, 4H, 1H, and 30m). On the right I have my 23 inch mon­i­tor that shows me the 5 and 15 minute chart. These two mon­i­tors are con­nect­ed to my lap­top that sits on the left of my set­up. By using a lap­top I don’t have to wor­ry about pow­er out­ages that rarely hap­pen where I am but can hap­pen. On the lap­top screen I take notes in Trel­lo on my posi­tions and watch the trad­ing hours time­line of the main exchanges around the world (ie. Syd­ney, Tokyo, Lon­don, and New York). On the far right I have a tablet that I use for redun­dan­cy to open and close posi­tions or for check­ing news and social media. 

Time peri­ods

Obvi­ous­ly the mar­ket doesn’t behave the same all of the time. It behaves dif­fer­ent­ly on sev­er­al occa­sions that we then can for­mu­late a dif­fer­ent kind of strat­e­gy for. In my exam­ple I will have a look at the WTI crude oil futures con­tracts. I already wrote an arti­cle about it here but in this arti­cle I’ll relate these events to poten­tial strate­gies. Of course since I am a begin­ner I will then need to try out these strate­gies. Here are some things I think I should keep in mind when trad­ing WTI crude oil:

• News reports com­ing out
  • Amer­i­can Petro­le­um Insti­tute API comes out with their report usu­al­ly on Tues­days unless there’s an hol­i­day on the pre­ced­ing Mon­day at 16:30 E.T.. For me this means 4:30 in the morn­ing on Wednesdays.
  • The Ener­gy Infor­ma­tion Admin­is­tra­tion (EIA) comes out with their report on Wednes­days 10:30 E.T. unless there’s a hol­i­day on the pre­ced­ing Mon­day. For me that is 22:30 on Wednes­day evening. 

• Open­ing and clos­ing times of the main exchanges around the world
  • In com­bi­na­tion with the most vol­ume trad­ed that can be an indi­ca­tor for more volatil­i­ty. Remem­ber, volatil­i­ty is good. 

Open­ing hours

Let’s talk about open­ing hours. If you want to see how this graph looks like for you please go here. In the graph we can see that based on where I am in Asia the exchange in Syd­ney opens at 5 o’clock in the morn­ing. Tokyo then opens at 8 and they both close around the same time. Syd­ney clos­es 14:00 and Tokyo at 14:15 in the after­noon. Then there’s a gap until Lon­don opens at 15:00 (even though futures con­tracts can still be trad­ed). Lon­don is open until 00:00. New York opens at 20:00 and clos­es at 5:00 in the morn­ing when it’s time for Syd­ney to reopen. That com­pletes the cycle for the day. 

High activ­i­ty

Now what is prob­a­bly even more inter­est­ing is the amount of vol­ume trad­ed through­out the day. As we can see in the graph under­neath the trad­ing hours. There we find the the his­tor­i­cal hourly trade activ­i­ty. Now, I would strong­ly sug­gest you com­pare this to your own find­ings active­ly trad­ing in the mar­ket. The graph sug­gests that at the open­ing of Lon­don there’s a peak in activ­i­ty the first hour. The hour before it the activ­i­ty starts to increase already. Then activ­i­ty sub­sides only to pick up stronger at the open­ing of New York. Which makes sense because now both Lon­don and New York are open and heav­i­ly trad­ing. The high­est activ­i­ty is between 21:00 and 23:00. Then at 00:00 Lon­don clos­es and activ­i­ty retreats back. 

What about the strategy?

We can con­clude that there are dif­fer­ent ways of trad­ing dif­fer­ent time peri­ods. Here I will dis­cuss the way I see on how these are divided. 

1. Low volatil­i­ty
   1. In these time peri­ods the mar­ket hard­ly moves
   2. More like­ly to stay in range
   3. Can ignore ‘pres­sure points”
   4. Look for the chan­nel that prices are rang­ing between and try and hit the extremes of this range to take posi­tions in oppo­site direction
2. Medi­um volatility
   1. Accom­mo­dates big­ger moves
   2. Moves can result in break­outs from ‘pres­sure points’
   3. Wait for break­out and trade only in that direc­tion. If you do choose to bet on the oppo­site direc­tion wait for a def­i­nite con­fir­ma­tion first. Usu­al­ly prices don’t return and they just keep fol­low­ing the ini­tial wave. Try and iden­ti­fy the range at the bot­tom or top of the wave to see which way it breaks out. This way we can either catch the rever­sal or the con­tin­u­a­tion of the wave. 
3. High volatil­i­ty
   1. Can behave very errat­ic but accom­mo­dates big moves
   2. Try and catch the wave upon break­out from pres­sure point

Get your surf on

OK, I already men­tioned to ‘catch the wave’ but what exact­ly means that for me? I believe we trade based on cer­tain assump­tions we make about the mar­ket. Based on these assump­tions we either stand on the buy or sell side of the mar­ket. I use a long, medi­um and short term mov­ing aver­age (ie. the 200, 50 and 20 MA). Because of the lag­ging effect of these mov­ing aver­ages I don’t believe that these have much of a ‘pre­dic­tive pow­er’. What they do ‘do’ is smoothen out the direc­tion of the ‘waves’ of price action. This way we get a gen­er­al indi­ca­tion on what way prices are going. How­ev­er, like I said. We won’t be able to make pre­dic­tions off of these. I do think we can get a bias based on these mov­ing aver­ages that will give us an ini­tial posi­tion in the mar­ket. Buy or sell. Then we wait for the mar­ket to give us a con­fir­ma­tion and we trade ‘only’ in that direction. 

In the detailed plan I call the dif­fer­ent sce­nar­ios of trad­ing I will give exam­ples on what kind trades I make. Since this is already get­ting to be pret­ty long I will ded­i­cate a whole arti­cle on just that.

Thank you

Let me know what you think of this so far or just ridicule me. All good. This is tak­ing longer than I thought, which is a good thing. If it was done so eas­i­ly every­one would do it right. Till next time my friend. See you then.