Registered: May 2006
05-01-09 06:14 AM
I received this PM just now:
"Hi, i'm a futures trader and following your journal. In particular i'm interested in how your entry strategy works. I know from reading several posts you're not willing to discuss your exact strategy, but wondering if you could help me with an example of some kind or information on how i should approach creating an entry strategy..."
The clearest way I can answer this question is as follows:
My intraday strategy is for the most part stop-and-reverse, which means I hold a position until it is no longer meaningful to hold, at which point I look to reverse my position. As such, my style of trading is not particularly sensitive to exit technique. I do employ profit targets to filter out equity curve volatility (huge drawdowns and huge runups), but this largely only serves a psychological purpose to help me maintain more discipline in execution. In the end, it is the result that counts, and that is net profit, pure and simple.
That being said, I am largely concerned with two areas in this strategy. The first is determining market bias. The bias is synonymous with what traders also refer to as "setup", meaning discovering the direction of trade we would LIKE to be in at a given time.
Setup is NOT the same thing as execution, which is EQUALLY important to proper setup identification. I already mentioned in the OP that when the market moves up, I am looking to get long. When it moves down, vice versa. It is literally as simple as that, and there is no reading between the lines here. It is the simplest way of describing support and resistance trading. When a defined resistance is breached, we look to get long. When a defined support is breached, we look to get short.
This is NOT the same thing as saying we enter long or short as soon as the setup appears. If we do that, we will have a nice downward sloping equity curve ending in financial ruin. It is the mechanical form of the trader's bad habit of "chasing the market." Hence, entry is EQUALLY important to setup.
It's up to trader preference and creativity about how to elegantly enter the market once bias has been determined. I won't be discussing my technique, as it literally IS my edge. How do I know I'm on the right track? In live trading, I notice that my system, for winning trades, is generally competing for execution fills in areas where the market is reluctant to fill. On the flip side, the losing trades tend to be filled without resistance nor hesitation.
Once the setup appears, the trader's job is literally to read order flow to find a prime entry. I have several mechanical methods I have devised to do this, and use one of them in this strategy. Without reading the order flow, the trader is going to be chasing the market trade after trade.