Thursday, January 23, 2014
The first principles
The single most important factor in your success is your ability to distinguish when a given market is tradeable and when its not. Until you are able to make this distinction, you will never be a successful trader.
The primary criteria for trading is the presence of a trend or potential for a trend. A trend simply defined is when swings in one direction are disproportionally larger than swings in the opposite direction.
This brings us to the first primary skill that a trader needs to work on. The ability to notice that longs were the direction to trade in the AM today until about b35 or so. The ability to notice when the swings are no longer disproportionate is an integral part of the same skill.
Once you identify swings are larger in one direction and smaller in the opposite, the trend direction is obvious and you should only take trends in the direction of the trend. When the swings are large, it may be possible to trade swings in both directions such as when the trend turns into a broad channel but my advice is to avoid counter-trend trading until you are profitable trading with-trend. If a trend is present but the swings are not large enough (shallow trend), you should not be trading. Learn to sit out of the action.
The second criteria in trading is knowing whats a reasonable target for your chart. Your target needs to be larger than your stop. Ideally, your target should be twice your stop or better. Otherwise, the win-rate you would need to be profitable is unrealistic. In case of CL, 20t seems to be a reasonable profit target on days with good trend action. For example, b1,b11 and b29 all went 20t before pulling back.
My investigations into MAE have shown that 5t is a reasonable stop for the best trades and therefore, I can trade with a target at 4x the stop size. I have eliminated setups that would require larger stops. I have also eliminated ema and related setups. I expect to exit my position fully at 20t in more than 90% of my trades.
The heaviest losers in trading lose because of three reasons. I call them the three Cs
2. Counter-trend trading
The first two great evils can be controlled by trading only setups at the trendline. (Chop is much harder to avoid (I'm still learning) and we shall talk more about it in future posts.) Indeed, the trendline is all you need to draw, and in many cases, it may be obvious enough to be superfluous.