Apparently, my posting on
my 10-year plan has left some wondering if I know exactly what a trading plan is.
I would like to clarify that the 10-year plan is
more a target than a plan. I wouldn't even call it a financial goal (it definitely is not), it's simply putting into
exact dollar amount how much I want to achieve in a year of
daytrading a specific instrument. It's for me to gauge
how much time I'll need to accumulate a specific amount just by daytrading that instrument.
My trading plan is more complicated, and varies
depending on what instrument I'm trading. The one that I used to use for trading the
ER2 was described in my previous post
here,
here, and
here .
Futurecafe's author, Moyo, has done a MUCH better job than me describing and explaining the technicalities of my own trading plan though: To be a successful trader, one needs to have a plan. “Have a plan” -a lingo that’s thrown out in a lot of trading books and traders education manual. All it really means is to know all that will be done before entering a trade and exiting a trade, as well as analyzing the various scenarios. You need to know what direction you’ll be trading in, what the resistance and supports are, entry and exit points, stop loss, profit target, what do I do if I’m right? What do I do if I’m wrong? What do I do if I made more money than I expect or lose more than expected? All these should be well laid out in your trading plan.
So here’s a model trading plan, based on an actual trade that was placed by a full time trader Jules.
The first thing to do is look at the previous day’s market performance, and the market behavior a couple of days before. This helps you understand a little on the trader psychology. It is important to understand this because theoretically price action in the market is a reflection of what the overall consensus on what buyers and sellers agree the price should be in a particular time frame. Our trader Jules states
“Knowing the whys gives me a better sense of whether a trend will last. Knowing the whys these days tells me whether YESTERDAY's trend will last (nowadays, you just can't think beyond 1 day's trend), and who (bulls or bears) will be the jittery one today should price fail to hit a support or resistance.
In a climate where no one knows for sure where the market is heading, and where most players are opportunists taking a ride hopefully on the right side, what we are all playing is just FEAR. What I have learnt so far about an uptrend is that it is motivated by HOPE and GREED and a downtrend is fueled by FEAR. But these days, a decidedly strong upward move could be one that's driven by fear too -frightened bears covering.
As far as ER2 is concerned, you seldom see ranging sessions these days. They are either strong trending days or CHAOTIC sessions that give you fake breakouts and NO PATTERNS. These are all signs of extreme sentiments to me. Everyone's jumping in when they see an opportunity, and fleeing when it looks like the party is going to be over sooner than they thought.”
She has pointed the two major emotional states that produce price action in the market i.e. fear and greed. Human emotions tend to move us to take certain decisions, both emotions cause people to either buy or sell. Take for example a situation where an economic report suggests a weakening economy, fear drives people to buy into the “safe havens” i.e. metals, and treasuries, and may also cause them to sell equities and currency. Fear causes people to exit a trade at the wrong time, an example is a situation where one enters a trade and the price begins to fall, fear may cause a person to sell out of that trade at a resistance point, which if they had waited, the trend may have reversed and the loss would be much less. The same and reverse is true for greed, people hold on to trades much longer that they should because of greed and they end up loosing most of their gains.
The 30 min chart is a good time frame to seek out major supports and resistance points for a day trade, this is because most day trades don’t last more than 4 min, so with a 30 min trade you have a “birds eye view” of the price action prior to the time you’ll be making your trade.
Jules states “first, I look for the lines that I think are the ones that the bears and the bulls will be hoping to see breached. And if these lines are not hit, you'll get a trend in the first (sometimes longer, maybe till 11am) hour of the trading session (On some days, I simply can't find a line that I can work with and that's usually when there's nothing much happening in a market that's going nowhere in the first place).”
It is important to know that the market comprises buyers and sellers - and back to our understanding of price action: buyers and sellers all watch for the same support and resistance points in order to have a slight understanding of the overall market psychology.
Resistance points is a psychological price point at which buyers in the market will refuse to bid the price higher and a support point is a psychological price point at which sellers in the market will refuse to sell lower. If a price breaks any of these psychological points for a considerable amount of time (this varies on your trading time frame), it signals that the consensus in the market has shifted and there’s either a trend reversal of a trend continuation. Take for example on the chart above we see the 707 price point has proven to be a pretty strong support, if the ER traded below 707 for 5 mins, one can go ahead and enter a short position in the ER because it suggests that the price will be heading lower
*It is not this simple, but it suggests the idea behind supports and resistances.
In the above chart we see a huge spike in price on the 8th of Sept and a huge fall the very next day. In a bid to understand the market psychology, Jules ask “was that just profit taking, or frantic offloading (after all, and I'm referring to just ER2, yesterday's session failed to reach the high of Monday's session, and this is not exactly the sign of a healthy uptrend)? If it's the former, will price continue its upward move following Monday's gain?”
She has pointed out an important sign of an uptrend, higher highs, this tells one that the market feels the price will continue to go up and people feel comfortable with paying more.
In further analysis:
“At this point, I take a look at Monday's price movement: Not at all bullish. The gains were from the gap; After that was DOWN almost all the way, followed by bears taking profit and covering (maybe even some new buying??) in the later part of the day. So, now, I really have no reason to think that the market is optimistic.”
I look for the first resistance that I think would discourage the bulls if it's not broken. That would be the support from Monday's session 722.35.
Then I look for the first support that I think would send the bears covering if it's not breached; Yesterday's low 707.
As far as I'm concerned, I don't care about all the other support and resistance between them. By a certain time, if either one of them has been tested but not breached, that will give me a rough idea of who's going to be running for cover.
On some days, the lines are not tested at all before market opens. That's when I don't get an entry pre-market. Those are the days I play by ear and SCALP.
Back to today. On my charts there are lines below and above my lilac and brown dotted lines. Those are my DREAM profit-targets. When looking for these lines, I look at where ER2 will likely hit by the end of the trading session. The support and resistance lines that will hold are the ones that have never been tested before or tested just once or twice. I look for those lines. But if they are too near (ER2's range is hardly less than 10 points per day), I look for the next line above when I'm looking for resistance, and the next line below when I'm looking for support.
After all the analysis has been done, here’s her conclusive thoughts before going into a trade “For today, I'm bearish. So I'll be expecting ER2 to test 722. If it does, and test it several times before 830, I'll enter short and set my stop loss a few ticks above 722. My profit target will be 712 (Sep 4's low, which I think is likely to be where it will pause before making the next move). That's a 10 point move. If I get in with 2 contracts, I'll let my 2nd one run and set my profit target at 707 (yesterday's low).”
This highlights a good trading plan that can be followed and modified to suit your style and your personality. The advantages of having a plan are numerous. We have acknowledged the fact that emotions come into play when a trade is in progress, but with a plan one has thought through the process, and would be following the plan as opposed to having emotions rule the trade. See more analysis on http://juzjules.blogspot.com
