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Found 6 results

  1. Once you’ve placed some trades with your strategy you can begin to analyze the data. A paper trade account is a great way to tweak and fine tune, but switching to a live trading account WILL change your results (this could be good or bad). The more data the better, as a rule of thumb place at least 100 trades with your specific setup before analyzing the data. Use these calculations to help analyze your data: Winning and Losing %: Winning % = # of Winners / Total # of Trades Losing % = 100 - Winning % Average $ of Your Winners and Losers: Avg. Winner $ Amount = Sum of Profitable Trades / Total # of Winning Trades Avg. Loser $ Amount = Sum of Losing Trades / Total # of Losing Trades Average Hold Time of Your Winners and Losers: How long do you stay in a winner versus a loser, are there noticeable differences? Find that sweet spot. Reward / Risk Ratio: How much do you winners beat your losers = Avg. W / Avg. L Profit / Loss Expectancy: This is the calculation that often gets overlooked, but is inevitably the most important. Expectancy forecasts your futures profits. It tells you the average $ amount you can expect to win (or loose) per trade. Expectancy = [(W % x Avg. W) – (L % x Avg. L)] – round turn commission Record Keeping Tips: Keep track of your profit loss, commission, daily winners and losers, weekly profits, and individual trade setups. This will help you spot trends in your trading and fine tune even more. In my post Ideas for Building Your Personal Trading Journal I outline some more ways to make this process easier. Tools to Help Fine Tune Your Trading Strategy Trading Journal Spreadsheets – The best trading spreadsheets around. StockTickr – A web based platform with a breadth of in-depth analysis tools and charts. FinViz – My favorite stock screening tool. Jing – Makes capturing screenshots a breeze. Both Trading Journal Spreadsheets and StockTickr are great tools to help with the analytical side of your trading and in essence do all these calculation for you. To become successful you must focus on trading effectively and not on the profit/loss. Do your research, and then act. Here is Part 1 of this article Developing a Profitable Trading Strategy Step by Step.
  2. Decision Cycle

    Being prepared to take decisive and timely action is key to being a successful trader. The inputs to making a decision must be quickly recognized in order to formulate your action plan. Defining possible scenarios, and training yourself to recognize market conditions is the first step in making the decision. Without a correct and complete assessment of the current conditions, and the possible outcomes, a rational decision can not be made. I don't like being "caught by surprise". This article will attempt to define basic and generic trading situations and then list the questions that must be asked in order to make a good decision. I am calling this a "Decision Cycle", and it is similar to a decision making flow chart. I'm trying to create a guide that is precise and well defined. I can then memorize the "Decision Cycles" and train my mind to process market conditions in a very structured and unbiased way. The goal is to create a very mechanical and "robotic" decision making system, but hopefully not at the expense of common sense. For the decision system to avoid serious flaws, it must not have an incomplete list of possible trading situations. Included is a list of possible generic trading situations we might all find ourselves in. In the past, I've created decision making documents that focused too much on details specific to my indicators and market conditions. This created an overly complicated and lengthy document that I ended up never using. When I changed the focus to something more generic and basic, I started to realize that there are only a few possible trading scenarios that I can get myself into, like, . . . "Did I make a good entry or not?" It's a simple and straight forward question. Nothing complicated. The analysis specific to my indicators can be slightly more complicated, but if I start with a simple question, then the decision making is more straight forward. But before defining the possible trading situations, I'd like to just list what I'm calling the "Decision Cycle". 1. Establish current price direction and trend. 2. Establish the current status of your indicators. 3. Enter trade on signal 4. Determine which trading situation you are in, from the list of possible trading scenarios. 5. Follow the guidelines for that trading situation, and then branch and cycle through the decision making process. 6. Once critical and high priority decisions have been made, immediately re-evaluate the current trend and indicator status. Decide ahead of time what the possible next scenarios might be, and what possible combinations of different signals might mean. 7. Once a new trade signal happens and/or the trade is exited, re-establish what the current price direction, price trend, and indicator status is. Match the current market conditions and trade situation to your defined trading scenarios and follow the plan COMPONENTS OF DECISION CYCLES ENTRY EXIT RE-ENTRY - IMMEDIATE RE-ENTRY ON RETRACEMENT REVERSAL GOOD ENTRY or GOOD RE-ENTRY BAD ENTRY or BAD RE-ENTRY GOOD EXIT VIABLE, BUT LESS THAN OPTIMAL ENTRY PROFITABLE, BUT LESS THAN OPTIMAL EXIT BAD EXIT TWO BAD EXITS IN A ROW THREE BAD EXITS IN A ROW STATE OF MIND CHECK RESET I don't think that the above entries and exit's need to be defined. They are self-explanatory. But I do want to note something about the "BAD EXIT" BAD EXIT - I'm not defining a "Bad Exit" as a loss. You can't have 100% winning trades. So not every loss is a "Bad Exit", . . . it depends. A loss on a trade could have been an excellent trading decision. A "Bad Exit" is when you let the loss run more than you should have. And letting the loss run more than you should have is about making a poor decision. And making a decision in a bad situation is based upon how negative results affect you emotionally, and then how you deal with the discomfort. So a Bad Exit is defined as much by how well or poorly you dealt with negative results and discomfort, as it has to do with the amount of the loss. In fact, the amount of the loss is almost immaterial if it is within an allowable range of your strategy, and your strategy makes money. Definitions: Confirmation - An indication that the price is moving in the direction of your trade. Reversal - exit one trade and immediately re-enter another trade in the opposite direction. DECISION CYCLES ENTRY Enter on Signal Watch for Confirmation Confirmation happens Manage trade - Switch to "GOOD ENTRY" cycle [*]Confirmation does NOT happens Exit or reverse immediately Switch to "BAD ENTRY" cycle [*]EXIT Before the exit happens, determine whether the next exit could be a reversal point. Exit or Reverse on signal After exit or reversal determine what the trend status is If the exit was a reversal, then switch to REVERSAL cycle [*]RE-ENTRY Weakness in trend and/or Retracement possible Determine how big the retracement could possibly be, and wait for entry signal [*]Watch for Confirmation Manage trade - Switch to "EXIT" cycle [*]Confirmation does NOT happens Switch to "BAD ENTRY" cycle [*]REVERSAL Look for confirmation of trend reversal Trend reversal confirmed Switch to GOOD ENTRY cycle No reversal confirmation Immediately exit or reverse back in original direction Switch to BAD ENTRY cycle [*]GOOD ENTRY Take the time to re-evaluate all your indicators, and the long and short price trend Evaluate what the next phase of the trend could be, retracement, reversal, conflicted or consolidation. Switch over to the exit cycle [*]BAD ENTRY or BAD RE-ENTRY Look for signs of a conflicted market or price consolidation. Price consolidation will mean a choppy, and sideways price range that can be confusing and difficult to trade. Evaluate the longer trend. A conflicted market creates seemingly undefined trends, with no real direction and no discernible reason for price behavior. It may be a period of indecision. Check your state of mind, and ability to deal with the confusion. Evaluate long trend Long trend still the same Switch to VIABLE, BUT LESS THAN OPTIMAL ENTRY cycle [*]Long trend has failed or shown a reversal signal Reverse [*]GOOD EXIT Evaluate short and long trend status Trend still valid Switch to RE-ENTRY cycle [*]PROFITABLE, BUT LESS THAN OPTIMAL EXIT The assumption here is that you either made a mistake and mis-read market conditions, or the price overshot a normally legitimate exit signal. I often see situations where the price continues strongly, but then retraces. If you chase the price, you can get caught entering an order exactly at the wrong point. If you wait to long, you can miss the opportunity. But once you get into the mentality of chasing price and feeling bad that you missed an opportunity, you can start trading the wrong part of the price cycle. If price overshot the exit signal, it could mean that there will be a substantial retracement in the trend. [*]VIABLE, BUT LESS THAN OPTIMAL ENTRY Determine how big the retracement (drawdown) could possibly be, and whether exiting and re-entering would in the original trend direction would minimize loss and maximize profit. If you decide to stay in the trade and take the draw down before the potential change in the direction of your trade, make sure that support or resistance (depending upon a long or short trade) for the retracement is not broken. You must have criteria for how much retracement is valid before it becomes a trend reversal. Decide ahead of time what your action plan is for another, second price move against your trade. If you can not come up with an action plan based on signals, and the signals meeting a certain criteria, then exit the trade and switch to STATE OF MIND check decision cycle. Watch for confirmation of the trend moving in your favor, if that happens, switch to the EXIT cycle. Trade move against you to the point where it's obvious that it was a bad entry. Count this as two bad entries. Switch to TWO BAD EXITS. [*]BAD EXIT RESET [*]TWO or THREE BAD EXITS IN A ROW Are you in the wrong State of Mind to be making good trading decisions? Switch to the RESET decision cycle. [*]RESET Start from the very beginning of the process. Re-evaluate the short and long term status and trends of price and all indicators. Wait for a viable entry setup. [*]STATE OF MIND CHECK Can you recover quickly from the bad state of mind? If not, consider exiting existing trades, and take time to recover. Reset
  3. The main reason people fail at a new venture is a lack of experience. Entering the world of trading, you are up against the best and brightest minds in the world that have years and year of experience on top of you. The #1 tool that can help speed up the learning curve is the implementation and use of a trading journal. "Trade to trade well, and the money will follow." Whether you journal by hand, on the computer, by audio recording, or through video, there is no right or wrong way. The ideas discussed here are simply a template to get you started. Be creative and adapt them to your own style that what works for you. Establish the End Goal The first thing to do before creating a journal, before placing a trade, even before picking a market to trade is to pull out a piece of paper and write down your answers to the following three questions. * If you had an unlimited supply of money, what would you spend your time doing, and who would you spend it with? * What will happen to you 20 years from now if you do not learn the skills necessary to become a successful trader or investor today? * Why trading? Given the four basic ways to make money (employee, self-employed, business owner, and investor) why do you want to be a trader? Take some time to think about your answers and reasons behind them. Once you’ve done this you are then ready to create a goal. This trading goal might be something like, “I will make an income of $10,000/mo.” or “I am a consistently profitable trader month over month.” Most people and goal setting workshops will tell you to attach a date to your goals and for most goals that is the case, however with major life goals attaching a date will only set you up for disappointment. Not reaching your goal by that date may deter you from moving forward and many will give up. You must commit to doing whatever it takes no matter what or how long it will take. Don’t let anyone discourage you. This concept applies for any major life goal. Purpose The purpose of a trading journal is to build confidence in your trading system. When you trade with confidence you are able to trade objectively. By taking detailed notes about your trade setups, emotions as you enter, manage, and exit the trade, accompanying market activity, and profit/loss (to name a few), you are able to break down which things are working and which are not. My Trading Journal Now that you have some ideas on how to begin I’d like to share how I organize my trading journal(s). I use handwritten notebooks for my emotional and daily market summaries and excel for the analytics and market analysis. I have attached the excel templates with examples below, feel free to tweak them and make changes as you like, if you have questions go ahead and leave them in the comments section below as often times many share the same question. I have attached my... * Trading Log * P/L Report * Daily Notes * Market Analysis Trading Log: How I use it I use this spreadsheet for recording and tracking the effectiveness of my individual setups. I break out the setup and the win percentage to see what setups are working the best. Things I learned After a few weeks of inputting trades it was really clear that the micro timeframes I was trading were not as profitable and in some cases the only negative trades I was having for the week. The result, I went back and tweaked my entry for these setups and then reduced the number of contracts I was trading for the setup resulting in decreased losses and increased profits. P/L Report: How I use it Have you made money at the end of the day? This is the bottom line report. Things I learned This report keeps the commission expense in check and helped me see that my biggest days were sometimes the days with the fewest number of trades. It also makes it clear that the month is made up of a few big days and a number of average days. On days when the market is providing quality setup after quality setup I continue to trade, days where the market is slow and I have a couple scratch trades I usually lock in gains that I may have and stop trading by 10:30 CST. Daily Notes: How I use it This is my go to spreadsheet that I use every day. I began this in a handwritten notebook, but after drawing the same boxes and diagrams day after day I moved it to excel. I have condensed it down over time. In the beginning I would record the market internals every 30-minutes and this was the sheet that kept track of this. I have since added an indicator in my Thinkorswim platform (my charting package) that tracks this for me. Things I learned This spreadsheet acts as a checklist as I fill it out each night for the following day. During the trading day I record my trades on this sheet as well. Market Analysis: How I use it I record all my market data on this spreadsheet. It may be a little overwhelming at first, but after years of recording this data each night it becomes pretty easy to spot patterns and trend changes. Things I learned I look to the internals each day to really gauge the strength or weakness of the market. This spreadsheet has helped me uncover very interesting patterns and occurrences that may only happen every few months, but result in big trend changes in the markets. These indicators are talked about in the book Mastering the Trade by John Carter. End of Day Questions: At the end of the day assess your trading by asking yourself these questions. * Did I follow my rules? * Did I take all the valid setups? * Did I hold to my targets? Review the setups for the day and congratulate yourself if you followed your rules, took all the valid setups, and held to your targets. If you do this the money will follow, as I can personally attest to. Since incorporating these journals into my routine back in 2007 I have been able to increase the efficiency of my strategy and continue to become more profitable each year. Being disciplined and keeping a methodical approach has really helped me trade consistently over the years. If you’re interested in more reading on the subject of trading for a living check out Trade Your Way to Financial Freedom by Van Tharp. If you’re not into keeping hand written journals and don’t quite get the whole excel coding thing, Trading Spreadsheets has some great tools for you to setup a journal. I hope by sharing my trading journal you have uncovered a number of ideas to create and build your own. If you have more ideas (as I’m sure I haven’t touched on them all) please share them in the comments section for everyone to enjoy. Thank You!
  4. Trading The Wyckoff Way

    Richard Wyckoff was a pioneer of technical analysis. While Dow contributed the theory that price moves in a series of trends and reactions, and Schabacker classified those movements into chart patterns, developed gap theory, and stressed the role of trader behavior in the development of patterns and support/resistance, Wyckoff contributed the study of the relationship between volume and price movement to detect imbalances between supply and demand, which in turn provided clues to direction and potential turning points. By also studying the dynamics of consolidations or horizontal movements, he was able to offer a complete market cycle of accumulation, mark-up, distribution, and mark-down, which was in large part the result of shifts in ownership between retail traders and professional money. Wyckoff sought to develop a comprehensive trading system which (a) focused on those markets and stocks that were “on the springboard” for significant moves, (b) initiated entries at those points which offered the highest probability of success, and © exited the positions at the most advantageous time, all with the least possible degree of risk. His favorite metaphor for the markets and market action was water: waves, currents, eddies, rapids, ebb and flow. He did not view the market as a battlefield nor traders as combatants. He counseled the trader to analyze the waves, determine the current, “go with the flow”, much like a sailor. He thus encouraged the trader to find his entry using smaller “waves”, then, as the current picked him up, ride the current through the larger waves to the natural culmination of the move, even to the extent of pressing one’s advantage, or “pyramiding”, as opposed to cutting profits short, or “scalping”. “Trading Wyckoff”, then, is more than just relating price and volume. It is a complete trading strategy, ranging from finding the most attractive opportunities through strategy development and trade management to the best moment to close the trade, all with the least possible degree of risk. Below are copies of Wyckoff's Studies in Tape Reading, which has been reformatted into The Day Trader's Bible and is as good a place to start as any, along with Reminiscences of a Stock Operator by Jesse Livermore, a contemporary of Wyckoff's. We've also included a chapter from Wyckoff's original trading and investing course. This chapter consists of Wyckoff's analysis of an entire year of price action as it relates to the essential elements of Wyckoff's approach: volume, support, resistance, climactic activity, tests and retests, etc. . DTB, 1919.pdf RSO.pdf Wyckoff Analysis 1930-31.pdf
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