It is so simple!

It is so simple.

trading action plan wordle

 

How to become a consistently profitable trader?

Here is the action plan to become a pro trader, in its simplest form:

  1. find and learn to trade a profitable trading system
  2. execute it flawlessly

That’s it.  Simple yet hard. 

I am not there yet. Writing helps me clarify my approach. Those who traded for a while will understand what I mean.

If I had a chance to read this “action plan” a few years ago, I would probably think: “blah, blah, just share a profitable trading system and I can make money”. Yeah, this is less simple, now I know. Read on.

To actually execute this action plan, we need more answers. 

How to find a profitable trading system that is right for you?

What is a trading system? A trading method, strategy, approach. This is what I mean here, not necessarily a mechanical “system”.

How to find the system that is right for you? Or more than one, for different market conditions or use depending on how much time you have available.

How to effectively learn to trade it? What tools, methods, how to test and qualify it? How to tell if it is good?

How to build discipline to execute the system with consistently high quality? Managing the risk, taking trades only if and always when all criteria are met.

Each question above can be answered in one sentence, or it can be a topic for a book, or a blog post. This will be topics for my posts over next months, feel free to subscribe if it looks interesting.

If you are earlier than me in your trading journey, in case you think “just share a good trading system rules and anyone can make money trading it”, here you go:

  1. Find a trending market. It will have higher highs and higher lows. EMA 20 above EMA 50. EMA 50 slope up (reverse for downtrend).
  2. Look for a candle that touched the EMA 20. It is called pullback or retracement or a correction. In uptrends, we want the low if this candle to be below EMA 20. We still want it to close above EMA 50. This is a trigger candle. It should be a relatively small candle in terms of its range.
  3. Place a buy stop order above the high of the trigger candle. Stop loss below the low of the trigger candle. Position size such that – if the stop is hit – you will lose a small amount of money that you are comfortable with losing. If the next bar does not make a higher high and so your order is not filled, update the order.
  4. If you are filled, trail the stop behind the last low, or the last bar, depending on your preference on letting the winners run vs. grabbing a quick profit.

Notes

  • You can experiment with different EMA parameters.
  • Before you trade it, qualify this setup.
  • Of course this is not a holy grail, but I believe this is a potentially profitable trading strategy. It is simple. It looks for low risk places to join the trend.
  • Choice of markets is also key, scan many markets (forex, stock indices, commodities, ETFs) and apply this strategy to ones that are trending. Watch out for correlated positions.
  • Timeframe is anything from hourly to weekly, depending on how much time you have available, as you should check the chart every bar.


Will you do this? A few things make it hard: there will be series or losing trades in a row, there will be “giving back” a lot of paper profits, most of the trades will be losers, but, if executed right, there will be small number of trades that are big winners, a few times bigger than initial loss, making this overall potentially profitable.

If you are more experienced than me in your trading journey, and reading this anyway, please feel free to share any comments or insights. I will appreciate it a lot, I am trying to learn a new thing every day.

Zen Habits

I recommend a Zen Habits blog by Leo Babauta at zenhabits.net

His guidance for simplicity, meditation, focus, ways to implement good habits… I am finding all of this very related to forx trading!

Think about this. Good habits, which Leo on his blog provides lots of ideas how to build, are something you need to become a consistently profitable trader: habit to journal the trades, to test new systems, to properly review the markets, to approach trading in a calm and controlled way, etc.

Another one is simplicity that he is calling for… simple trading systems are ususally the ones that work best. Often thing as simple as buying on the break of the candle that touched the EMA 20, if we a re in an uptrend is better than a very complex system with lots of indicators.

See it for yourself 🙂
I am finding Zen Habits materials very helpful and I hope you will as well.

BTW, I am repeating myself, I shared a link to this back in my January 2014 post 😉

Back to basics – Trend Following and Channel Breakouts

Trend Following – and a specific system well-defined

trend following channel breakout

“Trend is your friend” and trend following systems provide an edge, and forex is the right market to trade the trend following systems because it often trends… lots of good books and pro trades say this.

OK, great, but many people including myself ask: “Fantastic, sounds good, I buy it, but how?”  How exactly to trade? How do I do “trend following”?

Read on for my take on the channel breakout system, as defined by Courtney Smith in his book called: “How to Make a Living Trading Foreign Exchange: A Guaranteed Income for Life“.

It offers a specific, almost mechanical set of rules to trade forex, in a trend following method, on an end of day basis.

The system, in a nutshell… Channel Breakout: it is to place a buy stop above the last 55-days high. Stop loss at the last bar. Exit if the price does not close above the channel for the first two days, exit if ADX turns down from 40, and trail the stop to last 20 days low. Reverse the rules for short. You can also use a multi-unit tactic and exit half of the trade, for profit at around 1R, i.e. a distance of the initial stop.

ADX shows a strength of a trend. If it is above 35-40, it means trend is very strong, if it then turns down, it indicates a trend may soon reverse or at least correct.

Buying the break of 55 high ensures we will participate in a big trend, if there is a big trend. Last bar stop and a rejection rule make our losses small. Trailing the stop lets the profits run and not exit on a noise, while exiting on ADX turn down often let’s us exit close to the top.

Lastly, there is an ADX filter: the buy stop order should be in place only if the ADX is raising, i.e. the trend is gaining strength. Buy stop order needs to look at Ask price, sell top at Bid, of course.

For buy stop and sell stop orders, we add 3 pips for majors and 5 pips for crosses to avoid some false breaks. See below how to try to profit from some false breaks.

We can trade a “ride the rejection rule” setup, from the Courtney book. If the price fails to close above the breakout channel level for the first two days, we exit at market on close and reverse the position, and close it on the following day, hopefully at profit, while the stop loss on this setup is above last bar high.

For a full description of the system, please get the book. I am not selling it, this is not an affiliate link, I just recommend it.

I believe it is a good approach to forex trading and am starting to test it now, you can follow it in this journal on forex factory.

Price Action by High Quality forex trading

Price Action trading system

price action trading

This is my take on “price action” trading. There are many places with similar approach described, and I make no attempt to be innovative here. This is what works for me, and I learned it from many sources, other traders and mentors.

This is what I call Price Action at its core, in a nutshell, simplest, best to make trading Effortless. Now, am I consistently profitable trading this method? I wish I could say yes, let me say , in all honesty, that I believe I am on track. Read on to see a complete approach defined here, incl. how to get organized.

Trading systems rules

Time frame
D1 and H4 only. Also look at weekly for trend analysis. May look at H1 for candle patterns.

Logistics


Weekly review of all markets (~20 forex pairs), update key levels on weekly and daily, analyze the trend and write a text label on chart with W1 trend, D1 trend (up, down, or range). On weekend. Decide if I am going to trade this pair this week, only if the market looks “clear” and I “understand” it. Write down a plan, such as “trade long, if the market retraces to this level and shows a reversal candle pattern there”. Mark this level with a rectangle on chart.  This takes 3-4 hours.

Daily end-of-day review of all markets and open positions. Adjust levels if needed, in case there was a big reversal this week. Update the trading journal. Trail the stop on open trades. Enter new trades on D1 if setups are in place.  This takes 15-30 minutes.

Every H4 during the day, in my case 7.00, 11.00 and 15.00 CET. Optional, only if time allows, take 5 minutes to go through the markets (10 seconds per chart) and see if there is any price action signal at the area defined during the weekly review. Trade ONLY IF there is a price action signal there, on a rectangle placed on a chart during a weekly review. This is the trading plan to execute. Nothing else.   This takes 2-5 minutes.

Opening a trade

1. trade only if there is a candle pattern (price action setup: pinbar or engulfing or outside bar)
2. at a key level (support of resistance, identified during a weekly review)
3. in line with the trend (defined as higher highs and higher lows or LHs, LLs on daily chart)
4. ideally if there is also some confluence (e.g. level is also a Fibo retracement, or there is a chart pattern such as triangle or head & shoulders, or “big round number” such as 1.3000, or fundamental outlook such as interest rate decision).

Entry method

Entry at market on close of the D1 or H4 candle.

Alternatively can use limit entry on a roughly 50% retracement of the bar of the candle pattern traded (e.g. 50% of the pinbar). This gives much better R ratio, but is a lower probability trade (if the trade goes against us, we will get a fill, if goes directly where we want, we will not get on board).

Alternatively can use a stop entry, which is a higher probability setup (we are on only if the price goes in our direction, but offers a lower R ratio as the entry price is not favorable, and anyway offers no guarantee of course).

Trade management method

Stop loss at a high / low of the candle patten (pinbar, engulfing or outside bar high / low) plus 1 pips, plus spread (in case of going short, because trade will be closed at Ask price while the chart typically shows a Bid price).

Take profit for half of the position around 1R. This is to eliminate risk from the trade as soon as possible. You can use a limit TP order at a broker for half the position (technically it requires using two order for entry, two different positions technically), or do this manually once the price is around 1R, i.e. the profit roughly same as a stop loss distance.

Move the stop loss to break even, at the time of closing half of the trade at 1R.

Then, the other half of the position, if holds and is not taken out by a stop loss, trail the stop loss manually, behind each next support or resistance level. Do this “slowly”, it is OK to give back some profits, also because this is only a half of the position and the trade is already a winner. But of course, do not give back too much, for example when the profit is 2R, the stop loss should be at around 1R, so that , in the worst case, we give back 1R of profit.

Alternatively you can choose not to scale out and close half of the position at 1R. Many people say, and even prove mathematically, that if you have an opening edge, it is better to have a 2 or more R profit on a full position. While I do not argue with the arithmetic, I do believe that for psychological reasons, to enable us to consistently trade a system with quality, it is better to take the 1R profit and eliminate the risk of a loss.

Position size

Adjust such that if the stop loss is taken, the loss is totally acceptable to you. It can be 1% of your account, or less, or slightly more, it can be higher % of the account if your trading capital is somewhere else, but key is that each loss, in monetary terms, to be OK.

That’s is… above is a complete trading approach definition. 

Now we “just” need to learn how to trade it with high quality and effortlessly. 

My recommended drill is this… write your trading plan (as above), find 40-100 historical examples on charts and take screenshots and review, do this on simulator, then on demo, then live using microlots, then gradually increase the size.

Key thing is always to trade best setups only. This method should offer roughly 1 to 5 trades per week. No more. I count my trades and if I take more than 5-7, it likely means I over-trade.

I hope this is helpful for those who find this post. It is a price action trading in a nutshell, simple yet complete, and I believe this is a good starting point, while surely there is a lot of work needed to turn this one-page post into a capability to become consistently profitable trader.  Good luck.

Become consistently profitable in Simulator first

The power of simulated trading

trading simulator wordle

Get a year of trading experience in a few hours!

A very powerful tool available for us on a learning journey to become consistently profitable trades is a trading simulation software.

With a good trading simulator you can “trade” on historical charts. What is great about this is that, unlike in demo, you can fast forward the time 🙂  Of course, to get the value of learning, we should not “cheat”.

You can literally get a year of experience in a few hours. This is a fantastic way to learn and test your trading system, before you go live.

In my post on how to Qualify a trading setup, one of the steps is to backtest it. With a trading simulator this process can be much more effective.

How to use it? Very simply, choose a tool, and go ahead, treat this seriously, start trading your system, your trading setup, on historical charts. Of course you need to download high quality data.
Stating the obvious… if you are not profitable trading your setup on tester, you will not be profitable live. Unless by a short term coincidence, but not consistently.

To share my own experience, I am working to qualify and add to my arsenal a new system, called morning breakout. For a long position, it waits for a range to be formed during the Asian session, then it waits for the solid breakout around London open, then it waits for a correction, and places a buy stop above last high, stop loss around 20 pips, take profit at 1R, set & forget, 3 minutes to do it. And, I am intensively testing it on simulator!

OK, so what tool and where can I get it? There is a number of options, do a search for “trading simulator”.

The simplest and free is… no tool. Just open your trading platform, scroll back, and start scrolling it bar by bar. In MT4 use F12. In other platforms it may be right arrow. Place imaginary trades and stop losses and note the result.

If you search for “MT4 trading simulator”, you will get some free options available, some are free although not very user friendly. I used this one for a while.

I also know Ninja Trader tool has the capability.
There should also be an add in available for Amibroker for this.

Lastly, a very powerful tool is Forex tester 2. This one costs money. I am not affiliated with them in any way. This is not an affiliate link although they have an affiliate program. The demo version is great. It has a limit of max 1 month of history though. You can try to e-mail them and ask for a rebate coupon, I did.

Where to get the high quality forex data from? Ask your broker, some brokers offer a high quality data feed if you deposit certain amount of money. Also Dukascopy data feed is considered high quality by many people. There are also paid services as well, but I do not think you need them, unless you are testing very low timeframe and require volume data.

In short, I very much encourage you to become consistently profitable on simulator with any new setup you trade. Without risking any money, you can see if you are able to profitably trade a discretionary setup.

Note that Brett N. Steenbarger, author of a great book “Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology” recommends simulated trading, too, as a part of the learning plan. Also Mike Bellafiore uses simulators to train his traders, if you want a reason to believe.

What’s your experience with simulated trading?

Enjoy the process and keep learning

Enjoy the process and keep learning

Enjoy the process

enjoy the process of becoming a consistently profitable trader

Today I felt like sharing some of my recent insights on trading.
Here they are: enjoy the process, keep learning.

Let me elaborate a little bit. Becoming a consistently profitable trader is hard, few people are able to achieve this, it requires significant and consistent effort, and it takes time. Given this reality, it is much better, and you will be more effective, and certainly more likely to persist, if you enjoy the process. What to do to actually enjoy it?  Well, it is a matter of mindset and attitude isn’t it? Surely we should take out the monetary pressure away, while we learn. Trade small size, focus on high quality execution, not on making money.

The process learn trading I largely described here, in my post on how to Qualify a trading setup. It is a step-by-step action plan on how to take a trading setup and make it your own, and become consistently profitable trading it.  It does take time, so it is better to enjoy it.

The outcome may be that trading will become Effortless. But I think we never achieve a “final” state. Markets evolve, so should our approach, the setups we trade, maybe the markets and time frames that we trade, etc. Luckily the trading business offers endless opportunities if you think how many markets, time frames, and trading methods are available out there.  Key is to find the one that works for us.

And how to actually find the trading system that is right for us? While this is a topic for another post, and I wish I had a shortcut available, but what it seems to me that you need to search for it on your on, test and qualify different methods, and at some point you will find it. Actually, it is best to have a few trading systems / setups / method.

And in choosing the system that is right for us, we need to consider issues such as: how much time we have available for trading (scalping five minute charts is OK if you can dedicate a few hours of full attention to trading a day), what markets we understand and like, what approach feels logical and right for us so that we trust it (momentum trading, trend following, mean reversion, fundamental trading, etc.) and many others.  In terms of the sources: think books, forums, talk to traders for inspiration, or to get a fully documented “ready” system, but even in that case, always test it and make it your own.

Trading quotes

Trading quotes

Collection of my favorite trading quotes

trading quotes for high quality trading

This list is a continuous work in progress. I will be adding new trading quotes as I find them.

Persistence is instrumental to success. Most people faced with the early failures of some of the Market Wizards would have given up” – Jack Schwager

Market success is a matter of finding the methodology that is right for you, not finding the one true methodology” – Jack Schwager

Successful traders find a methodology that fits their personality” – Jack Schwager

So what exactly is your methodology? If you cannot answer that question, you are not ready to be risking money in the markets” – Jack Schwager

To make money you need to have an edge and employ good money management” – Jack Schwager

I always want to be better prepared than someone I am competing against. I prepare myself by doing my homework each night” – Jack Schwager

The hard work in trading comes in the preparation. The actual process of trading, however, should be effortless” – Jack Schwager

Trading is about skill development and discipline” – Mike Bellafiore

A man must believe in himself and his judgement if he expects to make a living of this game” – Jesse Livermore

The only time I really ever lost money was when I broke my own rules” – Jesse Livermore

Source of many of the quotes above is Jack Schwager on twitter and his book “Little Book of Market Wizards”.

Books added to top trading books list

I added two new books to my list of top trading books

“One Good Trade” and “The Playbook” by Mike Bellafiore.

See my recommendation added at the end of my post on top trading books.

Both books by the author are very good. While he talks about prop trading desk, trading U.S. stocks and ETFs on a 1 minute charts and “tape reading”, while I trade forex End-of-Day, so a very different approach, but everything about trading mindset, psychology, how to think, how to develop, how to learn – I am finding all of this very relevant and helpful for high quality end of day forex trading, which I do. 

You can also visit their blog.