Saturday, January 29, 2011

The rule of ten: A trading plan

You are a rank beginner and you have no idea how to start trading. This is my advice on how to get started. The first step is to trade on SIM only until you unlock the following achievements.

The rule of ten

  1. At least 10 points every week
  2. For 10 consecutive weeks
  3. With at least 10 days of no losing trades
  4. At least 10 consecutive winning days
  5. Biggest losing day at most half of average winning day (i.e. if your average winning day is +2, your max loss day should be -1)

All the above proves is that your technique is right. You should now start trading real money. You will probably start to lose money right away. That's ok, because you know that your technique is right and you only need to work on your emotions. If you are entering a lot more trades per day than you would mark on the chart at the end of day, then you have to work on your emotions. Eagerness and impatience are signs of a losing inexperienced trader. Caution and patience are signs of an experienced winning trader. When you feel any urgency to enter a trade mark that on your chart and see how it went at the end of the day.

My best trades are A2, W1P, DP and fBO. You should start with A2 and stick to A2 only. Why? Because trying to trade W1P may trick you into seeing reversals everywhere. Similarly DP and fBO may trick you into seeing breakouts and failed breakouts everywhere. With A2, there is a very good chance the trend is going to continue.

Trading SIM is like juggling 4 flaming knives while riding a unicycle. Trading real money is the same, except a monkey sitting on your head and messing up your act. So the first thing you do is juggle only one flaming knife. A small one. That's A2. The next thing you do is get off the unicycle and stand on firm ground. That's basically watching only one chart, either the regular trading hours or 24 hour chart and nothing more. There really is not much you can do about the monkey, just hope he gets older and calmer with time.

Once you consistently make money with A2 and satisfy the rule of 10 with real money, add W1P only to SIM until rule of 10 is unlocked for it. Then you can trade both with real money. Then you can add DP to rule of 10 and finally fBO.

At this point you should be catching most of the big moves of any day, dont worry about any small moves you have missed. You can't hope to catch every move with high probability.

Finally you can choose to add the following: failed first channel breakout, G2, 1st pullback of the day, first reversal of the day, L1 and H1 on hard trends and expanding triangle.

Note that having a lot of trades in your toolbox is not the important factor. What is much more important is how consistent you are with any given trade.

See Also:

Trading plan: Trading Range day
Trading plan: Trend days
Trading plan: Hard Trends
Trading plan: Soft Trends
Trading plan: Spike and Channel days


  1. Thanks, is really great for me!!

    Cadaver Thanks for posting


  2. Very good advice for every beginner.

    Just want to highlight a couple of lines: "Eagerness and impatience are signs of a losing inexperienced trader. Caution and patience are signs of an experienced winning trader."

    The feelings are really more important than we think when we finally go real.

    Anyway, point 5 sounds very ambitious to me right now... :-) And point 3... not even a little one during 10 days? Quite hard...

  3. Julian, Over 10 weeks you will certainly have 10 days that do not have losing trades. Breakeven trades are ok. Its not impossible if you have the dicipline to take only the best trades.

  4. I like this plan, very concrete and direct, now I just need to follow it :-).
    I do have a question on the best trades listed. I have been reading Al's book for about a week now. Maybe I have just missed the answers to my question. I was able to find two, guessed on a third, but am stumped on the 4th. Here is what I have, maybe you can confirm and fill in the blanks:
    A2: two legged pullback to EMA
    W1P: ??
    DP: Double top or double bottom pullback
    fBO: Failed breakout?

  5. ApplePie, all those are correct. W1P is first pullback after W reversal. Brooks does not mention it. Check the glossary page for symbols

  6. Hi Cadaver, Thanks for the info in this blog. Would you recommend starting out with swing trading or just scalping a couple of points each trade? Also How many A2 setups do you get in an average day on ES. Thanks, Paul

  7. Paul, if you can get into a 1Rev or 1PB early in the day, you should swing it. A2 and W1P are also swingable on trend days. Beginners in general have a low success rate ( less than 60%) and will lose money if they focus on scalping.

  8. I trade the first two hours of the sessions till the european close. What setups do you recommend beginners start with? 1 or 2 that in your experience have the best success rate that i should look in the morning price action.


    1. Start with 1PB. Its a bit tricky, but once you learn it, its usually the best setup.

      An alternative is to take the first 2L PB to a HL or LH. These may not setup every day, but when they do they are the safest setup.

  9. Hi Cad,
    Can you blog on how one can work on one’s emotion, thank you.

  10. Minami,

    I'm preparing a set of posts to address emotional and psychological issues.

  11. cadaver,
    One of my bigger problems is handling pullbacks during winning trades, sometimes they turn green into red and I get shaken out. How do you deal with them? Thank you.

    1. Generally, if you cannot handle a pullback, it means you have not accepted that risk. My goal in trading is to enter only on setups where I expect 4t of pullback at most. This allows me to enter on a 5t stoploss.

      Accept your stoploss; its small, let the market take you out just like a stop has taken you in.

      If you only enter on deep pullbacks with shaved or 1t bars, you should be able to do with a 5t stop. Never enter mid-bar. Never reverse on a whim. Once you build discipline and realize that a win of 8t vs a loss of 5t will net you 3t even if your odds are 50%, you will be better able to handle the pullback.

    2. Good morning Cad, I just exited a good trade on the SPY (when price hit the 20EMA on the 5M chart) entering on b6 and b11. I have been studying your posts starting last week and finally I could "see" myself going in the right direction with my trading. I now realize some of the differences in good trading by the Pro's vs. the bad trading by the amateurs. I know I can say to you "thank you" another 100 more times, but instead I will put into action by donating to your blog and I hope to do that soon!

  12. "There really is not much you can do about the monkey, just hope he gets older and calmer with time."...that's funny!

    I'm wondering if you'd consider writing a piece about your background? What it took to become successful, if you trade for a living etc etc...

  13. hi cadaver when you say 1 tick how many pips is that in total?