Qualify a trading setup

How to qualify a trading setup?

qualify a trading setup

Here is what I recommend that you do if you are serious about trading a given setup: whether it is a pinbar, or a 1-2-3 pattern, or any other price action or other trade opening setup for that matter.

This is a critical step, a milestone, in the discovery process of your own trading system, a system that is right for you, that you will be able to trade effortlessly once you are ready. The setup is a key building block of the trading system.

It takes a lot of work, you may need to to practice like Patton’s soldiers, but here is a specific action plan I followed, and I will follow for new setups I am learning to trade:

Action plan to qualify and learn to trade a setup:

 

  1. Read a lot about this setup or patten. Search for it, on investopedia, on stockcharts, on forex factory and beyond. Read Joe Ross book law of the charts, it is free.
  2. Learn and understand this setup or pattern. What does it mean? What is happening in the market when it is being printed. Why it is supposed to work? Who feels fear and who feels greed? Where the unfilled orders are if this pattern is printed on the chart? Where the stop losses are? Read dr Alex Elder book “Trading for a living” to understand the trading psychology behind technical analysis patterns.
  3. Learn and decide how you would trade it. Where would you place a stop loss? Where is the entry order? Is this a limit, stop or market order? (entry method)
  4. Find it on historical charts. Find 20+ occurrences of this pattern on historical charts. Note down what happened next. How it would be good to trade it. Find occurrences that paid and ones that did not pay (would end up in a loss). Take screenshots, copy them and review.
  5. Backtest it. scroll back without looking and go bar-by-bar (F12 in MT4) and look for the pattern. Imagine you are trading this. Note the result. Do at least 20 trades. Are you profitable? If not, repeat and learn, possibly adjust the approach. Yes, it is a lot of hard work. It is more like weeks vs. hours. Use a trading simulator.
  6. Forward test it. Once you are profitable trading this pattern bar-by-bar on historical charts with no cheating, move to demo. Trade it on demo for at least 20 trades, but I’d recommend 40-100. Use equal dollar risk per trade position sizing so that results are not randomly impacted by a trade size.
  7. Checkpoint. Are you consistently profitable on demo? Do you trust in your ability to trade this pattern? If you said yes to all of the above
  8. Start trading it live on a micro account. Set a position size to lose a small equal amount per trade. Trade it for 3 months or 40 trades at least, whichever comes last. Analyze your performance on myfxbook. You can start a journal on forex factory to stay motivated and get inputs from others. Important note: to start trading you need to qualify the complete trading system, not just the opening setup. See other building blocks.
  9. Gradually increase your position size. If you are profitable on micro, slowly increase your trade sizes and keep trading and learning. Over time, if you are successful, add new systems and test them the same way, withdraw some profits, diversify your savings.

Is this all?  No. I covered the trade opening setup qualification here. You need to follow a similar path to learn how to close the trade effectively, how to use confluences and filters and how to apply the right position size, i.e. other building blocks of the trading system.

As a result, you will be trading with high quality, and you will be consistently profitable if you have a profitable trading system and trade it with quality. And this is what we are after!

One last point, if you think now: “OK, I can do this, but what setup should I learn to trade?” or “just give me a profitable system and I will do it“, my answer is:  you can try my SDH1 EOD system that I trade, however I do not know if it is the system right for you. You can also read trading books or Forex Factory trading systems forum. Unfortunately no one can do this work for you. Everyone needs to discover their own trading system or method.

Trade opening filters

Trade opening filters

trade opening filter

To have a complete trading system you need trade open criteria, entry method, initial stop loss placement, trade management plan, positing sizing method. For a complete trading plan, you need to add list of markets, broker, computer, trading hours, mental preparation, emergency plan, etc.

This article talks about one component of the trading system, i.e. filters you can use to decide if to open a trade.

Filters

Filters are criteria that needs to be met for you to open a trade. This is a list of things that, if not met, you do not open a trade. A good filter will eliminate losing trades. It will also occasionally eliminate a wining trade; that’s trading.

Possible filters to use

  • trend, i.e. simply the trend on the timeframe you trade. If there is a clear uptrend, you take long setups only. Or maybe you trade the system only if there is a clear trend.
  • higher timeframe trend, e.g. if your primary trading timeframe is H1 (i.e. primary TF where you look for setups and you look at the chart every hour), then likely your higher level TF will be daily D1 or H4. So, a trend on your higher level TF can be a filter, i.e. if the trend is UP, you take long trades only. If the higher TF trend is DOWN, you take short trades only on your primary TF. This is what dr Alex Elder says in his books.
  • how to define a trend – here is a number of ways:
    • judgemental, i.e. you look at the chart to tell if it is going up, or down, or unclear (if unclear you do not trade it OR use a trading system designed for range trading)
    • using the indicators, e.g. if EMA 13 is above EMA 26 (or any other combination such as 9,21 or 100, 150, or 150, 365, all depending on your TF), OR MACD histogram OR combination, e.g. if both EMA 13 above EMA 26 AND MACD histogram up, then define it an uptrend)
    • using high and lows, i.e. define the uptrend by higher highs and higher lows and downtrend by lower highs and lower lows. Define a “high” or “low” (or call it swing high or low) by a bar pattern. “High” is where two bars before and two bars after the bar are lower, also known as fractal. “low” is where two bars before and two bars after the “low” are higher, i.e. fractal.
    • using a trendline, i.e. draw a trendline, for uptrend using at least last two swing lows, for downtrend using last two swing highs. This is judgemental.
    • using a supply & demand analysis, i.e. if previous demand levels are being taken out, then we are in a downtrend. If previous supply levels are being taken out, we are in an uptrend
    • any other way that makes sense to you.
  • market type. What market are we in? Is this a good market for this trading system? Van Tharp in his books and newsletters says there are 6 market types. bullish / bearish / neutral and normal / volatile (6 combinations). You may identify more or less types. Also different pairs look differently. Have a look at the chart and assess if this market is “friendly” for a given method. e.g. if you see a ranging chart, then it is likely not good for trend following, but may be a good market for some range trading systems. If you see a very clear trend, look for a system that will look for value zone locations to safely join the trend at a correction end.
  • the market, i.e. simply which currency pair or index or commodity or interest rate or stock or whatever tradeable market this is. Simply some systems are better for some markets than others.
  • time of the day, in case you have backtested a specific day trading system, you may have noticed it works well in certain time of the day when there is volatility, or it may exploit a certain time-based characteristic of the Asian session, or a London close. If your system is time-sensitive, then obviously a time of the day becomes a filter. If you have the system to follow the morning breakout of the London session, do not trade it in the evening, and so on. The same idea may apply to days of the week, e.g. do not trade on Mondays, etc.
  • news – or better a lack of big planned news releases, many day traders avoid trading if there is an upcoming big news event. “big” often defined as red item in the forex factory calendar. So a lack of news becoms a filter. Also, right before, during and after the news release, the spreads are often higher, which is a bad thing.
  • sentiment – bullish or bearish
    • broker’s sentiment index
    • info from the analyst you trust or your broker
    • Commitment of traders data on myfxbook
    • your own assessment of the sentiment based on how the market reacts to news:
      • e.g. if the market ignores the bad news and goes up on good news, then you may say there is a bullish sentiment. Reverse for bearish
  • R ratio TP level “available” before key S/R. For example, you want to go long, your logical place for initial stop is 20 pips below the market, so if you want to get at least 2R TP, you need to aim for 40 pips. But what if there is a major resistance 35 pips above, before your TP level? This may be a reason to pass on this trade, because the market is likely to reverse just before your TP.
  • behavior of some other market. I explored this a bit in my post about trade opening, but it also can act as a filter, e.g. you go long an individual stock only if the stock index is in an uptrend. Or look at the U.S. dollar index before trading any USD-based pair.
  • your mental state – are you relaxed, focused, good and positive? or distracted, stressed, feel like need a revenge on the market, feel like ego is at stake and need to make money fast? Yes, the former is the good mindset and a mental state to trade. The latter is a big NO GO to putting money on the line.
  • almost any other criteria – same as ones you use for trade opening setup
  • anything else that works for you – and what works we need to learn by backtesting, forward testing and live trading experiences…
  • and last but definitely not least – the fundamentals, i.e. your macro view on the economy, your or the analyst you trust. Application of fundamental analysis is a big topic in itself, and while not necessary for everyone, it may be a great filter for pro trades for higher timeframes.
  • and one more related to fundamental analysis: the interest rates differential and its impact on swap points (roll-over rate), important if you intend to keep the position long term, rollover rate will impact your trade result positively if you go long the pair with a higher interest rate and short the pair with the low interest rate (a famous carry trade).  This may be a filter, too.

Note that you can decide to use zero, one or more filters. Backtesting is the way to tell if a given filter is a good thing. The more filters you add the less trades you will take. Question is, and you need to answer while backtesting, how it impacts the overall profitability.

See my other articles with a trading system label to learn about other building blocks of the complete trading system.

Confluence factors for trade opening

Confluence factors for trade opening

confluence wordle

A complete trading system building blocks include open criteria, entry method, stop loss, closing method, position size algo, etc. But there is more.

This article talks about one more component of the trading system, i.e. confluence.


Confluence are additional criteria that, if met, are additional reasons for you to open the trade.  They increase the chances of a given trade to be profitable.  In other words, confluence if making a trade a higher quality one!

This is a list of confluence factors that you may want to look at:
  • fibo retracement level
  • key support & resistance level
  • key supply & demand level
  • higher level timeframe trend (up, down, sideways)
  • any criteria for trade opening can be a confluence in a different trading system
  • anything else that you choose to look at

Here is how it works: let’s say you trade pinbars. A pinbar is your setup and a trade opening criteria. You see a pinbar on the chart. And before you open a trade, look at confluence factors above to decide if you want to trade this pinbar or not. Is it on a key level? In line with the trend? etc.

In other words, confluence factors are odds enhancers, as Sam Seiden calls it in his videos.

See my other articles with a trading system label to learn about other building blocks of the complete trading system. 

Trade opening setups

Trade opening setups

trade open setups wordle

Trade opening setups

To have a complete trading system you need trade open criteria, entry method, initial stop loss placement, trade management plan, positing sizing method. For a complete trading plan, you need to add list of markets, broker, computer, trading hours, mental preparation, emergency plan, etc.

This article talks about one component of the trading system, i.e. possible setups you can use as a trigger to open a trade and place your entry order (order type will depend on entry method).

Setups you can use to OPEN the trade

  • Price Action setup, or a candle pattern, e.g. pinbar, outside bar, engulfing, etc. Search for “price action” and “candle patterns” to read more. Here is a good list of candlesticks patterns or this classic book. For price action, here is a good primer. Price action trading includes trend analysis and bars patterns such as pinbar, inside bar, bullish outside bar, etc. There is no need for me to repeat a good existing material incl. baby pips school. Fractal is also a candle pattern, a 4 or 5 bars pattern that happens at each swing high or low.
  • Indicators behavior, e.g. RSI below 30 and turned up, or CCI above 240, etc, i.e. any setup driven by indicators. It can be based on indicator value, e.g. above 70, or indicator behavior, e.g. turned up, diverge from price, indicator trend line break, etc. See Dr Alex Elder book or ask google for indicators description. If you choose to use indicators as your opening setup, make sure you really understand how they are calculated (what in fact they show). Note that indicators do not have a predictive power. They merely show if the price went up or down, or the speed of move has increased or decreased. Or, like ADX, they show a trend strength, regardless of direction. Or, like ATR, they show volatility. They can be very useful, but please understand they are merely a different way to present the price action. Another important concept related to indicators is divergences. You can read on them and learn to identify them on charts. Many key reversals are accompanied by a divergence. Unfortunately not all divergences produce a reversal.
  • Chart Patterns, e.g. head & shoulders, flag, triangle, trendlines, 1-2-3 pattern, etc. Technical analysis classic. Read about them, as anything you may want to use, please backtest it: see tens if not hundreds of occurrences of your setup on chart, train yourself to spot them, see if you think you can be profitable trading the pattern. Entry is usually on the break of the pattern (with the stop as an order type and “on the break” as en entry method).
  • News event, such as central bank rate change, payrolls data, inflation data, or even a political event. Great source for news events is forex factory calendar. News websites such as Reuters, bloomberg, marketwatch or others can be a source, too. Brokers often offer access to Reuters newsfeed. Remember though, that, as a retail trader you have no edge on news timely access. In my opinion it is very difficult to become profitable trading news. I certainly am unable to do so. Most people I talked with advise against trading the news. Daytrading during news release means higher spreads, higher volatility. A seemingly effective strategy of trading a breakout with stop orders, will often fail as the markets go up and down before it “decides” where to do.  However, I see two interesting ways of using the news.  First, is to see how the market reacted to news to gauge a sentiment. If it is not going down in spite of bad news, it may indicate it “wants” to go up.  Secondly, you can combine fundamental and technical analysis and use news events to consider longer term setups, e.g. a trade that will last a few days or even weeks, based on a central bank (e.g. go long the currency that hikes the interest rate). This can be more effective if combined with a technical analysis based entry method, e.g. use some candle pattern to time the entry and place the stop, based on a formation.
  • Support and Resistance, i.e. technical analysis classic, can also be used as an open criteria, or a filter, too. For example, short at a resistance, buy at a support. Could be “blindly” with limit orders, or waiting for a reaction at a level, e.g. if the price approaches resistance and shows a bearish candle, then go short. Otherwise, do nothing.  Or, want for a level to be broken, and enter in this direction. Or trade false breaks of the key level, i.e. see a price break the key resistance (triggering lots of buy stop orders for traders who are short and are closing their trades and traders who are entering on the break) and reverse. Join the down move. This idea is often referred to as “false break trading” or “fade the breakout” or “turtle soup system”. Search for this and feel tree to test this idea (as anything else before you trade it live).
  • Supply and demand, i.e. trading the supply and demand levels as described in my system post: these are places where there was a supply vs. demand imbalance, which we see on chart by the price moving away fast and far from the level, after a brief consolidation. This is what I use for my trading, as I found it work for me, after trying many other things.
  • Elliott Wave and harmonic patterns, geometry. One of the schools of technical analysis is waves analysis, wave 1,2,3,5 in the trend and A,B,C in correction, with waves 1,3,5, being impulse and 2 and 4 correction waves. Many people claim to be profitable trading this. Among many sources I found on this concept, the book by Robert Miner “Dynamic Trading”  was very good and explained it clearly, offering a complete trading method (vs. just a way to count waves). Geometry is an idea to look for relationships between corrections or trend lengths in time and price, often using fibo numbers. Very often they strikingly accurately work as a price turning points. However, you never know which level will work. There are ways, in these concepts to predict this by looking for areas where number of retracements or expansions are aligned, e.g. fibo retracement of the recent trend at 68% and fibo expansion of AB wave length from a potential B point is 100%. Or, more simply, 100% of the recent correction length. Combine it with a key S/R level and trend direction and it may be a good method.
  • Volume. Volume itself, you can use in many, many ways. There are also indicators based on volume such as OBV and others. There is a school of analysis called “Volume Spread analysis”, if you google on it, that claims to really reveal how the markets work, accumulation and distribution phases, how the smart money makes money by manipulating the market, price and news. Very interesting and might be the idea for you.  As I repeatedly say, everyone needs to find theirs. The method right for them, which you learn from Market Wizards books.  Another point on volume in forex… we do not know the real volume. We use tick volume as an approximation. To what extent it works is debatable.
  • Other markets. Your setup to trade may be driven or triggered by a price action on a different market. For example go long S&P if VIX (CBOE volatility index) is above 20 and turned down on daily timeframe) as this may indicate a correction end. Close a long S&P position if VIX reading is very low, e.g. 12. Another idea: use fundamental or technical analysis or USD index, to find the strongest and weakest currency pair and match them to choose which market to trade and trigger a trade, e.g. if you believe EUR is strong and JPY weak you can trade long EURJPY (which is essentially a long EUR short JPY trade). Another idea is pairs trading: look for usually correlated pairs and if their charts diverge go long the one that is “too low” and short the one that is “too high”, in a prediction that the charts will soon converge, while a directional move is neutral to you. This is a more advanced strategy and makes it more difficult to manage the risk (requires a mental stop). Carry trade is a concept you may read on. In short, go long the pair with high interest rate, short the one with low rate (texbook example is long AUDJPY) and make money (swap points, rollover) for keeping the trade. It is not a holy grail because you can loose money as a result of the price move.
  • Intuition. Read the “Trading from Your Gut” by Curtis Faith to learn about whole-brain trading (not just left brain which uses reasoning). The book is a must read for everyone, trading based on your gut feel is for more advanced trades who, thanks to hundreds of hours screentime have trained their intuitive brain to see patterns subconsciously, after they have seen thousands of times a pattern did or did not work. But again, in my opinion, before we very deeply learn a trading system, we should not trade purely beased on gut feel. But do train the intuition and listen to it over time.
  • Always in the market. Here I refer to trading systems which are always in the market, either long or short. They may or may not also have a opening (or rather position reversal) setup. For example a trading system based on moving averages (e.g. long on cross above EMA 50, short on cross below) [unfortunately it seems, based on my testing, mechanical systems like this are not consistently profitable, they are sometimes profitable: in trending markets]. Also a “buy-and-hold” which is a “system” people use for stocks in system that is “always in the market”
  • Random. Yes, however ridiculous it sounds, there can be systems with a random entry trigger and direction. Theoretically, if a trading closing method and position sizing method gives a good enough edge, then a system with a random entry could make money. Tharp says in his book that he backtested random entry system with good exits and it produced profits. I tried in Amibroker, tested hundreds of iterations of random entry systems and some of them were indeed profitable, but only if I eliminated transaction costs 😉  But it is not impossible that a system that does not has an entry edge, can be overall profitable. Just like systems based on concepts like astrology and things like this.
  • Anything else. This list is not complete. It is to list ides, while there can be many more reasons to open a trade. Again, everyone needs to find what works for them.
  • Any combination of the above. To increase number of possibilities even further, any combination of the above may also work, incl. adding some conditions as filters and/or looking at same/other conditions also at a higher timeframe! Combinations are powerful. If you have a higher timeframe trend and a key level and a price action all aligned, this is likely a high quality trade.
  • Lastly, I’d like to mention a few things that are NOT  good reasons to open a trade. Do not open a trade for the following reasons: a revenge trade, i.e. “I have just lost, so now I must open a trade to make it back, and maybe even double up”. Do not reverse just because you were stopped out. It may be OK if this is a codified and previously tested part of the trading system, but reversing a position just because the stop was hit is usually a bad thing. Do not trade because you really wanted to end this day/week/month in profit. This leads to over trading. Do not trade if your setup is not on the chart. Do not trade based on  ideas from other people. Do not trade if a minimal lot size and stop distance make the potential loss too high for you. Do not trade if you feel bad, physically or mentally, e.g. if you are stressed or distracted, as this deceases our brain’s effectiveness.

The above are setups, or triggers, or, in other words, a thing you need to see on the chart before you open a trade. And, if you follow your system, you trade only if the opening criteria are met. If there is no trade setup on the chart, you do not trade. This is often the hardest part 😉

See my other articles with a trading system label to learn about other building blocks of the complete trading system.

high quality trade open setups wordle

High Quality End-of-Day forex Trading Systems

What is a trading system?

Why End-of-Day?

Here is a review of the systems I trade or have traded


I trade or traded them at different times, depending on market conditions and my time availability, with varying results. These are solid systems that provide an edge, if traded consistently and with high quality AND they can be traded end-of-day or with a minimal attention during the working day. 

“SDH1” Supply & Demand on H1 timeframe, traded end-of-day

“Morning breakout” very fast & simple intraday trading system
Summary: look at the market around 9:00 am CET, if there was a clear trading range during the Asia session, keep an eye for a breakout. If there is a clear and strong breakout, wait for a correction. Then, place a buy stop above the breakout high (or sell stop below breakout low), stop loss roughly 25 pips (depending on pair and volatility and range height), take profit distance same or even slightly less than stop loss.  It works!  It requires 3 minutes to place an order and glance at the chart every 15 minutes after 9.00 am.“Pattern at level with trend” simple price action trading system for D1 or H4.
Summary: look for a strong reversal candle patterns (pinbar, engulfing) at a key support and resistance levels, in line with the trend. If there is a candle pattern, at a key level, in line with the trend, enter at market, stop loss roughly 10 pips below/above the pattern low/high. Take profit for half the position at 1R (stop loss distance), move the stop to break even, and trail the stop manually below/above recent S/R levels.  That simple. I did not say easy.Price action trading“, very consistent with the above, with more details, see this post! 

“Channel Breakout” trading system, simple trend following system, that I trust it has an edge, and is very well and clearly defined. It is so simple and well-defined that it could be almost traded in a mechanical way. 

I believe that any trading should follow a trading system
System should be traded with High Quality
following Top Trading Rules
from Top Trading Books.
How do “discover” the trading system right for you? Search, create, and test, test, test.
How to create a trading system? See building blocks, trade open setups and more.
How to test and Qualify a trading system? Read this post.
Would you agree?  Please comment below or talk on my facebook or google plus page.

What would General Patton say about trading

What would General Patton say about trading

Patton traders speech wordle

General Patton speech to his soldiers during the World War II… here is what I imagine he would say to his Traders 🙂

Credit. This is where I took the idea from, the fxmonster.pl blogger who posted a speech of Patton to traders, in Polish. Here I found the English original. Version below, I created based on fxmonster’s idea and the original.

Read on if you are OK with some profanity, as in the original version…

Gen. Patton speech to Traders, 1944

“Men, this stuff that some sources sling around about trading forex being complex, is a crock of bullshit. People love to make simple things complex so that it looks “professionally”. I say f…ck it! We will use very simple setups, so simple that in a few seconds you will know if there is a chart setup to trade or not! The market pays for high quality trading, not for pretending to be an expert or using fancy indicators.

Despite being simple, trading is one of the most difficult challenges known for men.

All traders love the sting and clash of battle. You are here today for three reasons. First, because you are here to make money trading forex. Second, you are here for your own self respect, because you would not want to be anywhere else. Third, you are here because you are real men and all real men like to fight, and this is the best game of all.

“When you, here, everyone of you, were kids, you all admired the champion marble player, the fastest runner, the toughest boxer, and the big league ball players. High quality traders love a winner. Traders will not tolerate a loser. Traders despise cowards. High quality traders play to win all of the time. I wouldn’t give a hoot in hell for a man who lost and laughed. That’s why high quality traders have never lost nor will ever lose a war; for the very idea of losing is hateful to a hq forex trader. We can lose some battles, but we will not lose a war.”

The General paused and looked over the crowd. “You are not all going to fail in trading,” he said slowly. The ones who trade without a trading plan, or fail to follow their trading plan, they fail.

Yes, every man is scared when the trade is on and your hard earned money is on the line. If he says he’s not, he’s a liar. Some men are cowards but they trade the same as the brave men or they get the hell slammed out of them watching men trade who are just as scared as they are. The real hero is the man who trades according to the plan even though he is scared. Some men get over their fright in a minute under fire. For some, it takes an hour. For some, it takes days. But a real man will never let his fear overpower his honor, his sense of duty, and his innate manhood.

Trading is one of the most magnificent competition in which a human being can indulge. It brings out all that is best and it removes all that is base. High quality traders pride themselves on trading their plan and they ARE trading their plan with high quality. Remember that the enemy is just as frightened as you are, and probably more so. They are not supermen.

“All through your traders careers, you men have bitched about what you call “chicken shit drilling”. You complain that you need to stick to the trading plan, backtest the setups, find hundreds of setups on the historical charts, take best trades only and journal your trades. That, like everything else in this trading, has a definite purpose. That purpose is alertness. Alertness must be bred into every trader. I don’t give a f..ck for a man who’s not always on his toes. You men are veterans or you wouldn’t be here. You are ready for what’s to come. A man must be alert at all times if he expects to stay alive. If you’re not alert, or you don’t have a stop loss in the market, sometime, a big bank son-of-an-asshole-bitch is going to sneak up behind you and beat you to death with a sockful of shit! Statistics say most traders lose money. These are ‘heros’ who are trying to predict the market and trade with no stop!” The men roared in agreement.

The General clutched the microphone tightly, his jaw out-thrust, and he continued, “Trading is a business. It needs a business plan, emergency plan, risk management plan, journal and right mindset. This heroic stuff of trading large lot with no stop, stories about ‘secrets’, magic systems, ninety percent winners, predicting indicators is a pure horse shit. The bilious bastards who write that kind of stuff for the Forex Factory Evening Post don’t know any more about real trading under fire than they know about f…cking!

The men slapped their legs and rolled in glee. This was Patton as the men had imagined him to be, and in rare form, too. He hadn’t let them down. He was all that he was cracked up to be, and more. He had IT!

“We have the right trading system that is right for us, the best risk and money management plan, the best spirit, and the best traders in the world”, Patton bellowed. He lowered his head and shook it pensively. Suddenly he snapped erect, faced the men belligerently and thundered, “Why, by God, I actually pity those poor sons-of-bitches , on the other side of our trades, that we’re going up against. By God, I do”. The men clapped and howled delightedly.

“My men don’t take stupid trades”, Patton continued, “I don’t want to hear of any trader under my command taking any trade unless there was a setup as defined in our trading plan. Even if you lose once or twice or more, you still trade your plan. That’s not just bull shit either. The kind of man that I want in my command is just like the trader I met last year, who, after eight losers in a row, he reviewed his journal, he saw that he was trading with high quality, and he continued to do so, regardless of losses, and his money management plan kept him alive despite the losing trades. And then, next few days, he made four winning trades in a row, each of them three times the risk! He was back in profits, large ones!

Patton stopped and the crowd waited. He continued more quietly, “All of the real heroes are not storybook combat fighters, either. Every single trader in my team must trade the plan. Don’t ever let up. Don’t ever think that any element of the plan is unimportant. Every point in your trading plan is a vital link in the great chain.”

What if every trader suddenly decided that he didn’t like to wait for the setup, and just opened the trade because he felt like the market was going up? The cowardly bastard could say, “Hell, it’s no problem, it was just one trade”. But, what if he thought so every time?! Where in the hell would we be now? What would our trading account, our business, our future, our loved ones, our homes, even the world, be like? No, Goddamnit, my high quality traders don’t think like that. Every trader does his job, every trade. Every point on your trade opening checklist is important in the vast scheme of this war. The initial stop loss placement is needed, the trend filter is needed, the trade open setup is needed, the right entry method is needed, the position size plan is needed, the trade closing plan is needed, even the journal entry with trade learning is needed!

“Thanks to the trading plan you will know how to trade, when to take a trade, how many lots, where to place a stop and how to take profits. Right money management and position size will let you go through tougher times. And journal will let you see mistakes you make and fix them.”

Patton paused, took a deep breath, and continued, “Sure you all want to make money trading forex”, Patton continued, “but you cannot make money without discipline and sticking to the plan. Trading is a continuous learning and getting experience. The faster you learn discipline, the sooner you will start making money, consistently!”

The men roared approval and cheered delightedly. This statement had real significance behind it. Much more than met the eye and the men instinctively sensed the fact. They knew that they themselves were going to play a very great part in the making of world history. They were being told as much right now. Deep sincerity and seriousness lay behind the General’s colorful words. The men knew and understood it. They loved the way he put it, too, as only he could.
Patton continued quietly,

“Sure, we want to avoid losing money. We want losing streaks over with. The quickest way to get it over with is to cut the losers short and stick to the plan. The quicker the losing trades are whipped, the quicker we can go home. Close the losing trade! Let the stop loss order be executed! The shortest way home is via following your system.”

Trading is a bloody, killing business. You’ve got to take their money, or they will take yours. Rip them up the belly. Shoot them in the guts. When shells are hitting all around you and you wipe the dirt off your face and realize that instead of dirt it’s the blood and guts of what once was your best friend beside you, you’ll know what to do! You wait for the next setup and trade the hell out of it!”

“I don’t want to get any messages saying, “I am looking at the chart.” We are not looking at f…cking charts! We are sticking to the plan and wait for our setup. And once we see the setup, we see it immediately, we have seen it hundred times in testing, and we are going to twist its balls and kick the living shit out of it all of the time. Our basic plan of operation is to trade our setup and to keep on trading our plan regardless of whether we have to go long, go short or stay flat. We are going to go through the trading session like crap through a goose; like shit through a tin horn!”

“From time to time there will be some complaints that we are pushing our people too hard. I don’t give a good Goddamn about such complaints. I believe in the old and sound rule that an ounce of sweat will save a gallon of blood. The harder we push, the more pips we will make. Any setup you trade must be backtested, for long hours, hundreds of times seen on charts, practiced all over again, until you are consistently profitable in training, before you trade it live. I want you all to remember that.”

The General paused. His eagle like eyes swept over the hillside. He said with pride, “There is one great thing that you Traders will all be able to say after this war is over, and you are home once again. You may be thankful that twenty years from now, when you are sitting by the fireplace with your grandson on your knee and he asks you what you did in the great World War II, you WON’T have to cough, shift him to the other knee and say, “Well, your Granddaddy shoveled shit in Louisiana.”  No, Sir, you can look him straight in the eye and say, “Son, your Granddaddy traded forex, with high quality, with the Great Third Army and a Son-of-a-Goddamned-Bitch named Georgie Patton!”

“Now you know how I feel. I will be proud to lead you, Traders, to fight for your pips, anytime, any market. That’s all.”

Ahh, I feel much better! See Ya!

General Patton on high quality trading wordle

Effortless trading

Effortless trading

effortless trading wordle

Imagine Your trading is effortless

By effortless I do not mean “with no effort”. This is not possible.

Imagine your trading feels effortless. You like doing it, you feel no stress, no pressure, no worries.

Imagine that

  • you know your trading method very well (this gives you confidence and removes guessing or futile attempts of predicting the market)
  • you know exactly if there is a trade setup or not (you know exactly if your edge is present, it prevents over-trading)
  • you have the discipline, to trade only if your setup is present and only if you feel ready (think mindset, your state)
  • you have patience, you understand that the market is not going away, that there will be trading opportunities in the future, and that you cannot rush to become profitable (so you do not trade if there is no setup and you take time to forward test your method on demo)
  • you look at the chart for 10 seconds and you know if the setup is present
  • it takes a minute or so to decide if you should trade this setup, e.g. based on confluence; and where to place the initial stop loss order and how to manage the trade (e.g. how to move the stop or place a take profit order)
  • there is no stress
  • you do not care about the next trade outcome; this is because
    • your position size is right, so that a single loss, or even a series of losses is totally acceptable to you (as long as it is not much longer than the longest in backtest)
    • you trust your method, that it gives you an edge, and
    • you trust yourself, in your ability to follow your plan, so you know that, on a large sample of trades, you will make money (so you do not worry if you are going to be profitable for the year, you know you will if you follow your plan)
  • trading takes as much or as little time as you want
  • you feel comfortable and relaxed at all times
    • and if not, you have techniques at hand to improve your state of mind

My idea of “Effortless Trading” name is inspired by The Effortless Life book by Leo Babauta.

And the scenario above is based on, as most of the material here, on reading top trading books, conversations with experienced traders, and my experiences.


What do you think?
Does this scenario look compelling? 

What do you think a result of effortless trading would be on your account balance? 

What needs to be true to achieve this state?  

Here is what I think: to trade effortlessly you need to know and trust your system,  trust yourself,  follow your trading system and your trading plan. Simple, right? Easy? No. But certainly possible! 

And the result? I think the result is a stress-free  and  consistently profitable  high quality trading. 
 
This what I am on a learning path to achieve 🙂

Update: if you read my later post on what would General Patton say to his traders, you may think this is all but “effortless”. Am I contradicting myself? I believe these are two different perspectives, but let me share how I reconcile this: if you put in a hard work (as in Patton’s speech) to prepare (learn, backtest, forward test, mindset), THEN the trading can become effortless (as envisioned in this post).

effortless forex trading wordle

Building blocks of the trading system

Trading System building blocks – for a complete trading plan

building blocks of the high quality forex trading system

I said on this blog that to be consistently profitable,  you need to have your own trading system.
What makes me think so? Top trading books and insights from experienced traders.

How to create or discover the trading system that is right for you?

Let’s have a look at the building blocks of the trading system, i.e. its elements, so that you are clear on what you need to decide on and write down as you create your own trading system. [ You may have a look at my trading system ]

Building blocks of the trading system

Without getting into discussion on what element is the most important, e.g. trade opening criteria, or the way to close the trade, or position sizing method or psychology, let me just say that ALL the things mentioned below are CRITICAL. Really.

  • Trade opening setup. This is WHY you open a trade. This includes the “setup” that you need to see on the chart, or a fundamental news that you may use to trigger the decision to open a position.
    • Examples: bullish outside bar price action setup, RSI below 30 and turned up, triangle pattern breakout, MACD divergence, RSI trendline break, retest of the area of previous volume spike, retest of the area where previously there was a very strong move away from it (supply & demand), news event, inter-market analysis outcome, random coin toss, any other.
    • a full blog post on trade opening setups is here
  • Trade opening filter. Additional CRITERIA to be met before you open a trade. Some systems may not use any filter.
    • Examples: higher timeframe trend, price above EMA 200, or EMA 9 above EMA 21, MACD histogram slope up on weekly timeframe, no upcoming high impact news event, etc.
    • Some things can be both a filter and setup, i.e. a filter for one trading system and an opening setup for some other system, e.g. price cross above EMA 200 can be used as a condition (i.e. enter long trades only if the price is above EMA) or as a setup (i.e. open a long trade of the price crosses above EMA)
    • a full blog post on filters is here
  • Trade confluence items. Additional REASONS or confirmations to open a trade. This can be the same things as opening setup or filters.
    • Examples: the setup is pinbar and a confluence if that it is at a key support or resistance level, or a fibo retracement level, or that some indicator behaves in a certain way.
    • Generally the more confluences the trade has, the higher quality it is. However, waiting for everything to line up mean missing trades. That’s Ok, just need to find the right balance.
    • a full blog post on confluence is here
  • Trade entry method. This is HOW you open a trade. This includes specific order type to be used.
    • Examples:
      • At Market on close of the last bar (immediate execution at a current market price) on close of the last bar (when the new bar opens, be it daily, hourly or any other one),
      • At Market immediately once the setup is visible (without even waiting for a bar close, but risk is that by a bar close the setup will be invalid),
      • Limit Order (i.e. to buy at a lower price to get a better R ratio, but risk is you will not be filled at all, and will always be filled if the trade is to be a loser). Limit can be placed e.g. at 50% retracement of the last bar, or 0.2*daily ATR(14) below, or in the middle of the S/R level, or at a top of the Demand level, etc.
      • Stop Order (i.e. enter only after a certain price is reached, i.e. buy at a higher price, which is an additional confirmation and you may not even enter the trade at all if it should be a loser, and you will never miss a trade, but the entry level will be not as good, so R ratio worse (assuming same stop level). Stop order can be placed for example above the last bar high to enter long, i.e. entry “on the break of the high”
      • optional plan to pyramid the trade, i.e. add to a winning position.
      • optional plan to average, i.e. add to a losing position. This should be used with extreme care, if at all,  because this is increasing the risk on the trade.
  • Initial stop loss placement. This is WHERE your STOP LOSS is. In my opinion this is very important and a good practice to set a stop loss order, at your broker. This enables you to upfront define your risk, i.e. how much money you are willing to lose on this trade, defined by the right position size (i.e. how many lots to trade). It also helps psychologically: once the stop is hit the trade is “done”, gone, you can “forget” it vs. keep seeing a loser.
    • Examples: last bar low, last swing low, last fractal down, few pips below support, 5 pips below demand level, 0.2*daily ATR (14),  0.5 * ATR(14) of trading timeframe, parabolic SAR level, on close below support (but this type of stop cannot be placed at a broker, needs to be executed manually, which is at risk of discipline), one pip below last low, “a few” pips below last low.  [examples were for long positions, reverse for short]
    • The Stop Loss order should never be moved against the position.
    • Note that where to place a stop should not be driven by how much money you are OK to lose.  How much money you are putting at risk is controlled by the position size. Where the stop is should be driven by the market structure (how a chart looks like).
  • Position size setting method. This is HOW MANY lots or contracts you will trade. This is critically important for risk management and is closely related with stop loss placement and your accepted risk level. Position sizing method is how you define how many lots to trade. Position size combined with stop loss placement lets you control your risk per trade.
    • Examples: equal dollar risk per trade (e.g. you always risk $50 per trade), equal account balance percentage per trade (e.g. you risk 2% of your account, so as it grows you risk more), method based on variability of the market, etc.
    • There is also a method of fixed number of lots or contracts (e.g. always 1 lot), but I am finding it has little sense because in this method the risked amount is determined randomly by a stop distance
    • Use broker with microlots to be able to precisely determine position size and risk small comfortable amount of money even if stop loss distance is big
    • Position size should also consider other positions / orders you have open, especially on correlated pairs / markets
    • Whatever method you choose, the risk you take should be comfortable, i.e. it should be an amount that you are OK to lose, you accept it.
  • Trade exit plan. This is how you will MANAGE the trade. This is how you will close the position. Position can be closed if your stop loss order is triggered, which is always one of the options OR it can be closed manually once certain criteria are met  OR  it can be closed automatically once your trailing stop order is hit.
    • Examples: take profit at 2R (i.e. 2 times the stop loss distance), take profit at next resistance level, exit manually if there is a reverse trade setup, exit if RSI is above 80, trail the stop behind each bar low, behind last swing low
    • optionally you may scale out, e.g. close half of the position at 1R or 2R, and use trailing stop on the other half, to enable potentially larger profit, but accept a scenario where you will give back some unrealized profits
    • you can use any filters or trade setups used for trade opening, also for trade closing
The points above are all necessary to be clarified, written down, to have a complete trading system.
To have a complete TRADING PLAN, your overall business plan for trading business, the following elements should be added…

Additional building blocks to have a complete trading plan

  • List of markets to trade. As simple as that. WHAT markets to trade using this system.
    • Example: just EURUSD, forex top 10 majors, forex top 15-20 pairs, forex all pairs, S&P500 index, all stock indices, specific stock, industry or all stocks, bonds, commodities, interest rates, anything else that moves 😉
    • in general, a market to be tradeable should be liquid (always able to close the position, no big spreads), volatile (there should be some movements to capitalize), actively traded (similar to liquid)
    • consider market open hours and hours when there is volatility vs. hours when you can trade it
    • take note of correlated markets
  • Broker. Needed for your orders EXECUTION.
    • broker selection criteria choice here.
  • Time. That is WHEN you trade, when you analyze the market and place orders, what days, hours, e.g. daily around 10 pm local time, or Tue-Wed, 8.00 – 12.00.
  • Trading room and computer. This is how you are ORGANIZED, i.e. your trading platform, screen, maybe a mobile phone app, broker phone number just in case, comfortable place with no distractions, software for screenshots, trading journal, system description readily available, etc.
  • Preparation. This is about YOU. What you do to be READY to trade. This is also known as trading psychology or mindset. Our mind is the most important factor in our trading result. It is our decisions that create the result. We are fully accountable for our trading performance. Stress makes us less effective. Consider relaxing techniques or breathing exercises. You can try things like meditation or visualizations of success. It is difficult to say if it works, many people recommend this, some are sceptical, and I am pretty certain it does not hurt. 😉  I am sure that how we feel (physically, mentally, emotionally) has an impact on trading. In short, trade only if you are in a good shape!
  • Emergency plan. If something goes WRONG, and we are under stress, our decision-making quality goes down. It is good to have a written plan what to do in case of emergency such as power loss, computer crash, broker bankruptcy, account confiscation, password loss, hacked computer or account, etc.
  • Your system description. This is a document that defines ALL the points mentioned in this post. With a lots of examples: charts of entries and exits according to your system rules. Winners and losers. Specific steps of market analysis and order entry, i.e. action plan. This is your checklist. High quality trade is only if all boxes are checked.

 

All are important

I wanted to provide a complete list of elements needed to build a trading system and your trading plan. That is why this is a long post.

What do I mean by saying that you need to discover the trading system that is right for you? The point is, no one can give you a trading plan. You need experience, try many things, and discover what works FOR YOU, and even then, keep learning. When I first heard this I did not agree. I thought: “come on, give me the system list of rules and I can trade it, and if your rules are good, I will make money”.  Now after a few years I see it does not work this way. Although trying to explain why it is so requires another post, this is long enough already 😉

I hope this list of elements needed to have a complete trading system and a trading plan is helpful. The job of a trader is to create their own plan, using the building blocks listed above, and then backtst test it, forward test it, adjust if needed, and then execute it consistently, live and with high quality.

Feel free to post your comments or question. I am learning all the time and I can add to this list.
Thanks for reading.