A trading plan must be tested and proven
if one expects profitable results. It’s difficult
to assess slippage when testing a plan on paper (or
in my case, on the computer). It’s even more difficult
to assess the necessary discipline that will keep you
focused. However, a disciplined trader coupled with
a proven trading plan will help instill the confidence
necessary to achieve success.
In my years of trading and testing to-date,
I have been able to witness market behavior and price
action on a wide variety of markets during varying degrees
of fundamental change. It is the fundamentals by which
markets are driven and technicals by which they are
traded. What I have learned is that testing my plan
requires discipline to take every generated signal in
all markets that can be afforded and to avoid the more
volatile and expensive markets.
The analysis covered a wide variety of
futures markets where a typical trade would last only
3 to 5-days with a few trades lasting 10+ trading days.
I guess it makes me a short-term position trader. Several
trades only lasted 2-days at best because price action
must dictate a valid signal whether profitable or not
over the next few days. Stop-loss was placed far enough
away so spikes wouldn’t stop me out yet protect
against a major move against my position.
Trading is a discipline, not art nor
science. There is no room for emotions. I use the technicals
for good entry strategies, stop-loss placement, and
adding to positions. Candlesticks can aid in warning
of reversals. Divergence adds to that confidence that
a reversal is eminent. Discipline, must be learned thru
testing and real money trades.
A trading system on its own should have
the ability to at least perform profitably with enough
cash backing up the expected and inherent account equity
drawdowns. This is the problem with almost all-mechanical
trading systems. Not enough available funds to continue
trading during periods of large drawdown. The development
of some simple rules have proven profitable by not waiting
to be stopped out of a trade either by an initial stop
loss point or a trailing stop.
Rule 1: Price action must dictate
a valid signal upon the day of entry or the trade is
exited on the open the following day.
This works very well at preserving capital.
The type of price action that must dictate the valid
signal is best described with candlestick patterns where
a white candle is bullish and a black candle bearish.
This article is not intended for the study of the various
candlestick patterns, but it is those patterns that
determine the validity of a signal. If the terms doji,
star, harami, engulfing candle, falling window, and
thrusting candle mean anything, then you will be able
to understand Rule I’s application.
Candlesticks can be an asset to a trader’s
arsenal if used to warn of an impending change. They
are also useful as pattern entry signals if used properly
with other technical indicators. I use candlesticks
to do just that. An example would be if short a market
and upon the day of entry and a bullish engulfing candle,
rising window or thrusting candle occurred, then an
order to exit the market on the open the following day
would be placed. This would eliminate any second guessing
or further losses if the market continued in the same
direction against your position. The probabilities of
the market moving back in your favor are much lower,
although it does occur.
Other examples might be if a signal was
generated to enter a market short based on a large bearish
candlestick and the following day’s candlestick
was a white harami or doji, the same exit criteria would
be applied provided these patterns occurred near the
high of the bearish candlestick.
All other positions relative to the signaling
candlestick would not invoke the exit criteria. If you
are short a particular market and you get a bullish
engulfing candle with higher swing lows and higher swing
highs; it would invoke Rule 1 because the market could
not break the previous low. This could indicate the
correction or 'a' wave is not complete.
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This trading method uses simple trader
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other financial markets including individual stocks,
FX Forex and commodity futures trading.
Scapling the markets is a simple and easy
to use trading system which uses basic technical indicators
and is based on a sound trading plan. A trader who follows
this trading system will likely be trading the market
trend and rapidly able to determine when to trade and
when not to pull the trader trigger and stay on the
flat the market and on the sidelines.
Rule 2: The breaking of short-term
resistance/support on the close should be used to move
your stop-loss to the projected extreme high or low
pivot point, close to the market price.
Stop loss points are used strictly to
minimize large losses yet still leave room for small
corrections inherent in the markets. A bullish engulfing
candlestick 2-days in a row would be a good example
if short the market. Breaking the highs set 3-6 days
prior would be another example.
Not giving back all the gains made is
what makes this rule valuable. However, it is more subjective
than Rule 1 and should be applied cautiously. My system
calculates the extreme high or extreme low pivot point,
which is a projection of the next day’s extreme
higher or lower trading range. If stopped out, likely
a minor ‘b’ wave will form on a correction,
which will allow you to get back into the trade. If
not, entry can be taken when market breaks support,
for example, if looking to short into the trend.
These trader rules are basic and should be easy
to follow. The application of these rules can improve
a trading system’s performance. Results show that
these rules do preserve capital and therefore increase
profitability. They are mechanical enough that emotion
can be totally removed.
The trading plan - After one year
of real-time testing (not back-testing), it has been
proven that the addition of rules added to a mechanical
trading system can increase the profitability and limit
losses at times when markets are not trending.
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It is estimated market trends only occur
less than 20% of the time, so it makes sense to apply
some rules to mechanical trading systems that only work
well when markets trend.
This trading plan will be used in my
money trades and will be profitable. To the extent of
my testing is unclear. But the testing which brought
this trading plan to life will reinforce the discipline
necessary to succeed. I suppose many traders do not
consider this vital step in their evolution to become
successful traders and that will bring doubt and uncertainty
into trading the mechanical trading system.
"Get Out Now" - TB . . .
I agree wholeheartedly agreed that, "Deflation
is the greatest threat to the stability of this economy
we have ever seen." I have been saying this for
years. However, the economy is like a massive ocean
liner -- it takes a long time for it to slow down from
full steam ahead and then turn around to go in the reverse
direction.
The fundamental reasoning is most convincing.
In addition, I would like to add that the coming deflationary
spiral is also cyclical - in short, human nature being
what it is, we are due for a similar situation to the
1930’s (though not necessarily exactly the same).
It is true that the lightning fast advances in technology
will eventually reinvigorate this (in general) great
capitalist system we operate, but capitalism is not
perfect; it is inexorably and detrimentally affected
by those two deadly psychological forces - greed and
fear.
Capitalism will not fail in the long
run as communism has, because it thrives on competition
- the exact opposite of communism, which destroys incentive
thereby breeding slothfulness. However, the world is
awash with a surplus of goods of every description and,
as was the case in the 30’s, we are due for a massive
adjustment before we can power on again. Not even the
mighty Greenspan, clever as he undoubtedly is, can stop
this. Perversely, he may well have exacerbated the situation
through "sophisticated" manipulation of the
economy, thus inviting even worse deflation when it
eventually arrives, as it inevitably will.
One thing Greenspan, and for that matter
every other human who has ever existed, cannot do is
to alter human nature—otherwise the market would
be perfectly ordered and we chart traders would not
be able to profit from the deviations from ‘true’
fundamentals—and wouldn’t that be a shame!
Please allow me to repeat some words
of wisdom "Get out now. We have seen 11,000 (for
the Dow), but it fell and it fell hard and will not
recover quickly.
I’m convinced that the big money
is to be made on the downside - and down is about to
happen." I would add not to forget that usually
the market leads the economy, so keep an eagle eye on
those charts rather than wait for fundamental signals.
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