Clarity brings results

Bad Assed Trader:  Having only recently taken delivery of my very own strategy I've been rather obsessive about it this past week.  It has haunted my dreams and occupied my waking thoughts.

Another session with Emmanuel last week helped me to clarify in precise detail what it is I am actually trading. Emmanuel's patience knows no bounds (just as well...) and if I was looking at my strategy with blurred vision he has now provided prescription glasses to enable me to see with absolute clarity.

That clarity has brought results.  November was my best month ever with a 6% return.  If I am able to demonstrate consistency with my strategy during December then in the New Year I will start to build up my trading account with chunks of my redundancy payoff and hopefully by the summer my trading income will equal what the NHS paid me.  This is the plan and has always been my goal...well, since last Autumn.

In my last blog I promised to reveal my trading strategy.  So for anyone who is interested here are my Rules, in their entirety.

Cautionary note before I start: For readers who are not traders - please don't try this at home without proper training first.  I've been doing this now for coming up to a year and a half and even with the Rules there is judgement and discretion involved.  A strategy that works for me will not necessarily work for others - to be successful as traders we have to build our own strategy, one that works for us and in which we have confidence.  So here we go....

My Trading Rules

I trade Cyclicity combined with Support and Resistance and Price Action

Entry

1.    Identify the trend on monthly, weekly and daily charts – daily is the chart I’m trading. Up, down or ranging, all are ok but identifiable pattern exists

2.    Identify Support and Resistance levels – horizontal or 50 Moving Average – which must work for the trade (ie bouncing, only use breaking if combined with bouncing).  Trade must be bouncing off strong Support or Resistance (S/R) & the stop loss goes behind whatever it is

3.    Identify target – reward to risk must be at least 1:1.  Ensure no strong horizontal/respected moving average levels of S/R are in way of target.

4.    Wait for cyclicity to be in my favour – ie we're at the early part of new phase 1 or 2 in whatever time frame I’m trading.  Countertrend is ok if conditions are exceptional and it’s clear price has a long run before it’s likely to return to phase 1 – in this case be extra conservative with target & double check lines of S & R that may cut the trade short

5.    Spot the inklings of change: Use the hourly chart for signs of the cyclicity phase changing eg lower highs or higher lows (M or W shape)

6.    Wait for price action to confirm the shift of sentiment eg doji bar, high/low test bars, train tracks, W, M on 240 (four hour) timeframe

7.    With trend trades: Ensure MACD/stochastic indicators are not diverging from price action.  This is the only reason to stay away if other factors are present.  Indicator divergence after entering a trade is irrelevant – stick with it.

8.    Counter trend trades: Ensure indicators (MACD/Stochastic) are diverging from price action and exhaustion of phase 1 is clearly confirmed by the indicators as well as cyclicity and price action (on the 240 time frame)

9.    Enter the trade on the break of the neckline of M or W on the 240 chart after seeing the lower high or higher low.

10. Set stop loss with reference to the daily chart: place above the daily high/low of the bounce cause.  If there is a moving average/horizontal S/R or big number within about 10 pips from the bounce spot place stop loss behind it for added protection (price sometimes spikes up to retest these things).  The exception to that would be if I’m targeting over 200 pips and my reward to risk is over 2:1 (then can put the stop loss >10 pips over where it previously bounced)

Mixed Signals means indecision and a warning to stay out

Management of the Trade

Set target and place a limit order for it based on next zone of S/R based on price action using discretion with conservative bias

If trading counter trend target is unlikely to be more than 1% but is based on next level of soft S/R or a respected moving average.  If significantly more than 1% looks likely then take half off at 1% and move stop loss to break even and trail daily.  Once close to target trail more aggressively on 240 or 60 using discretion (maximise protection of stop loss as priority) eg behind price swings and moving averages 

If trading with the trend trail stop loss on daily basis using daily bars as a guide but protecting stop loss using S/R on 240 or even 60 min charts (as above) as get closer to target

If price is fuffling this is not a reason to delete a trade, consolidation is normal before a move.  Think of snake down/snake up.

Trade deletion or interference loses money so set realistic target and leave.

Only take trades where you have a high level of confidence and can therefore sit through the random erratic movements on the way to profit without fear/anxiety.

Set stop loss realistically - adding a few pips for safety (as price has often just pipped me out before going my way).  Add more pips for larger timeframe (eg 5-10 for daily chart) and how choppy the pair is. I always protect my stop loss by Support or Resistance preferably with a big number as well. Expect Chop At The Top – cable often has a choppy bottom too!

If market gaps on opening and enters trade at different level then only take trade off if risk exceeds 2%, otherwise leave as it is with stop loss in same place.  Market gapping means correct anticipation of direction of travel and possible strong move.

The best trading is finding great trades that meet all the criteria, being confident in taking them, being realistic in setting profit and stop loss and being calm and competent at execution. 

If in doubt, stay out.  As Rob says: better to be a pilot on the ground wishing you were in the air than a pilot in the air wishing you were on the ground.

                                                  ************

So there it is, for the record.  My very own strategy in it's full glory.  


And just by way of demonstration, here's a possible trade I'm stalking. 

NZD CHF on December 2nd 2011

It's the New Zealand dollar against the Swiss franc. Price has been ranging for months and months, basically between the two horizontal grey lines (I've put two lines to represent the top of the range as there's a bit of a zone rather than a precise point: what was support back in January/February with price bouncing up off it has now turned to resistance with price being pushed back down from it).

Price is nearly at the top of the range so I'm waiting to see signs of reversal before I take it short (sell).  We already have a high test bar on Friday which is a good reversal sign but as per my rules I'm looking for more price action confirmation of buying exhaustion on the 240 and 60 minute time frames.

I'll let you know how it goes....