NoDoji's Trading Plan Development

February 19th marked the 4-year anniversary of my first trade. When I decided to try day trading, I joined Elite Trader, practiced day trading on paper for a while, then joined ET’s chat room and began trading live. I documented a good portion of my journey here (NoDoji’s Day Trading Log) as I tried day trading and swing trading, and eventually after many trials in the market, settled on simple price action trading.

As many here know, my favorite price action book is Al Brooks’ “Reading Price Charts Bar By Bar”. It requires a large time commitment to read and comprehend, but those willing to put in the work with an open mind will very likely reap some reward; if nothing else, you’ll learn not to throw money away counter-trend trading incorrectly.

The strategy you choose to trade really doesn’t mean all that much. There are successful traders who trade with a trend, trade counter-trend, trade with tight stops, trade with no stops, average down, average up, trade complex strategies such as option spreads, trade simple strategies such as breakouts. There are just as many total failures who attempt each of these.

It’s not the method or style of trading that improves ones chances of success. It’s the research, development of a trading plan, and sufficient practice that make or break those who set out on the path to trade for a living.

Wanting to become a trader is the 1% inspiration required for success, The R&D to develop a plan and the practice are the 99% perspiration required for success, and can take months or even years.

Even then, mastering the psychology behind implementing a well-defined plan is where we separate the men from the boys, the women from the girls. Many who have everything they need to succeed fail because they’re searching for something more. Usually, the “something more” is certainty. In the markets as in life, there is no such thing as certainty. Like Dorothy in Oz, they’re wearing ruby slippers, which have the power to fulfill their greatest desire, but they simply don’t realize the power they have because they seek certainty and perfection.

Once I defined a successful method, I helped several other traders here via informal mentoring, answering PMs, posting ideas and charts on ET, referring to certain books or web sites where price action trading is described in detail. I’ve been doing this for some time now and have reached the point where I realize that no one can teach a particular method and expect the student to mirror the teacher’s positive results.

I can answer questions and continue to post charts and recommend books and on and on and on, but until you do the work and make a method of trading your very own, I’m wasting my time. Instead of continuing to do these things, I encourage anyone interested in how I trade to read Al Brooks’ book and to peruse these threads:

http://www.elitetrader.com/vb/showthread.php?s=&threadid=220303

http://www.elitetrader.com/vb/showthread.php?s=&threadid=235350

 

I would like to leave ET with my method for developing a trading plan. I believe I posted this stuff on ET before, but it’s such a key to success that I want it to be easy to find here:

I chose my preferred time frame, then studied charts at length until I found patterns X that resulted in price movements Y 60% of the time or better. I memorized these patterns both visually and descriptively, meaning I wrote down in words what was happening and memorized those descriptions until I got to the point I could see the pattern and immediately describe to another person what was happening, what was more likely to happen next, and why.

Getting from recognizing patterns on a static chart at the end of the day to recognizing the pattern forming in real time is a bit trickier. What I did each day is, I took a day's chart and scrolled the time window back until it looked just the way it did when I turned on my platform in the morning and the rest of the day's price action hadn't yet occurred. (I use an 8-hour time window on the 5-min chart and when I scroll back I can see the 8 hours price action leading into the moment I turn on my platform in the morning.)

I revealed one bar at a time until one of my high probability patterns appeared to be forming (the setup). At that point I knew that if price then did X, price action Y was more likely to follow than not. Price doing X was the signal to put on a trade. I quickly calculate where the stop loss will be placed, what a likely minimum profit target will be and if the risk:reward in that case is positive. If it qualifies, the trade is on when price triggers the entry.

Learning how to properly manage the trades required that I look into the 5-min price action via a 1-min chart so I could choose survivable stop loss placement, when to move stops to break even, when to take profits early, and when to let a winner run further than target.

Once you do all this enough times, then start trusting your setups in real time so you don't hesitate and miss out, then screw up lord knows how many times mismanaging trades because it always looks different at the raggedy right edge when price is actually moving back and forth, eventually the whole process becomes more and more routine, much like driving a car:

It's a nice day out (pullback long setup forming) and you want to drive up to the nearby mountain top (price should find support on this pullback, head back up and break to a new high), so you get in the car (place a buy stop just above this pullback bar's high), start the engine (price triggers a trade entry), fasten your seat belt (place a protective stop just below the pivot low), and head on your merry way without much conscious thought about it, until you either reach the mountain top (profit target attained), or something happens that prevents you from reaching your goal - you take a wrong turn and get lost (mismanage the trade), the car breaks down (setup fails and you exit break even), you get in an accident (stop loss is hit, but the injury is minimal as a result of it).

 

The most important things to consider once you have a technical strategy that offers a statistical edge ("clear good patterns") are:

1. Determining the potential loss per lot (single contract or 100 shares) traded when placing a stop loss at the price level where the setup confirms failure.

2. Then determining the position size that fits within your "max loss per trade" parameter.

3. Finally, based on the statistical edge you've determined by evaluating at least 6 months of data through varying market conditions (strong trend, weak trend, range, chop, and extreme volatility), determining a minimum profit target per trade that produces a net profit (net of commissions and average slippage) that fulfills your financial needs.

My personal plan involves intraday trading using price action entries in a 5-min time frame. Price action entries are entries based on buy or sell stop orders that trigger a position when price confirms strength or weakness in the direction of a trend off a key support or resistance level (such as a trend line, 20-period EMA, or consolidation range extreme), or counter to a prevailing trend when a pullback setup offers high probability of success.

My six months of manual daily backtesting determined that 95% of trades initiated this way that meet my minimum profit target have a maximum adverse excursion of less than 20 ticks. Therefore my maximum stop loss on any trade is 20 ticks.

My backtesting also demonstrated that the strategy I use produces a win rate greater than 65% when a minimum profit target of 20 ticks is implemented, and offers at least 20 trading opportunities on average each day (some days a few less, other days a few more).

The result of all this work allowed to me create a trading plan that involves:

1. Placing a buy stop 1 tick above, or a sell stop one tick below, a level that demonstrates enough strength or weakness to take price to my minimum profit target 65% of the time.

2. Placing a protective stop loss that never exceeds 20 ticks.

3. Targeting a profit of no less than 20 ticks per trade.

 

In my final post, I have a special message for Jeff & Jerry, two traders I’ve spent several months with on Skype, (not quite as much time as with my initial “plan development” crew, but pretty close):

Both of you have a Holy Grail in your hands and ruby slippers on your feet. Just click your heels together three times and say “There’s no place like DOM, there’s no place like DOM, there’s no place like DOM…”

 

I'm waiting for blotto/zenster to show up to Poop in the punchbowl because you said the word "Holy Grail" and "mentor" in the same thread

 

Thx for posting this, ND. I always appreciated your insight and hope this REALLY isn't the end of your ET experience (as you were once chased away before).

 

There goes the last female trader on ET.

 

Just wanted to add a personal thank you for all your help in last few weeks. Wishing you continued success- you deserve it!

 

I clicked on the first link and saw a chart posted by baro-san.

He/she said in the post, "You might have something there."

After I studied the chart, smoke started coming out of my ears.

Is this normal?

 

Dear Ms.Nodoji,

Thank you for your sharing of knowledge.
It has helped me alot.
Once again, Big Thank You.