Practice plan - Step 2. The trading process; Part 3: Determine the required trigger behavior (entries)

Determine the required trigger behavior - part 3  of the trading process.

I am going to focus on entries for this post, and save exits for the next.

Now we are getting into the meat of the left brain activity - where, during trading, it has a habit of taking over and looking for reasons behind decisions. The problem is, real life is messy. The left brain can't handle messy - it will take too long to convince itself of what to do. The right brain however, excels at messy. I want to get away from left brain dominated trading decisions (Is 98322 shares enough of a volume increase to warrant entry? Did that RIG break support or just get really close? Is that candle really a doji? Is my nose runny?. etc., etc., etc.), but in order to do this, I need to convince my left brain that my right brain can handle the application. The 'whole brain' trading idea says something like - allow the left brain to idealize the model (which it excels at), and let the right brain do the practical application (which it excels at). Allow the left brain to set up and convince itself that the entry presents a good opportunity for profit, and then let the right brain do the actual trading.

I think my trading has suffered from a couple of things. I don't seem to have much of a problem making fast decisions (i.e., intuitive decisions); but I don't think that my intuition has been properly trained - I have never and have not been able to -  properly define my edge. Without an edge, my intuition is rudderless. This is an attempt to remedy the situation.

I intend to start practicing with two strategies (The Finger and The Outbreak), adding others as I strengthen my intuitive skills.

Left brain activity here we go. After this, no more interference.

Determining the required trigger behavior. What would it take for me to actually buy or sell a stock?

The Finger:

Enter long on stocks hitting new highs. Enter short on stocks hitting new lows.

The trigger here is incredibly simple: buy/sell when the stock is at new highs/lows.

It is up to the intuition to determine two things. Is the available price close enough to the stop? I plan on placing the stop just below the prior candle close/open or prior high/low. My intuition will determine the acceptable visual difference between the prior candle close and entry.

For example, on RIG  (6/16/2010 chart):

Point A would not represent a good entry opportunity due to the prior candle close being significantly (visually) higher than the nearest support (prior candle close). Point B on the other hand presents an excellent entry price.

(Note: I am going to try this without using the numerical side reference, even though the charts are setup for auto scale; just going to go by candle size and see what happens.)

Prior to making the entry however, I must make an intuitive decision with respect to the market. In the case of RIG - is the market going up? Simple visual confirmation. If I can't determine what the market is doing by visual inspection, I will stay out of the trade.  In this example the Q's are indeed heading up (in fact it looks like they are hitting a new high), so I am good to go with an entry at point B.

The Outbreak:

(This is based on one of Scott's bandit trades)

Enter long on stocks breaking thru resistance, enter short on stocks breaking thru support.

The trigger for this strategy is pretty simple as well: trade when the stock breaks support/resistance.

It will be up to my intuition to determine if the stock has support/resistance. Simple visual inspection will suffice: yes or no? If undecided and out of time, then the answer is no, move onto the next stock. And similar to The Finger, is the entry price close enough to the stop?Again, the stop will be the prior candle close/open or the s/r, and risk will be determined visually.

As an example, the BP chart from 6/16/2010:

Plausible resistance is offered several times (B, C, E; classic sign of consolidation?), with support offered at the beginning of the day and constant (A). Point D breaks thru support and likely would of triggered an alarm, but a glance at the market shows a possible change in direction. Point E offers another line of resistance and point F sets off another alarm. 

Lastly - is the market going up? With the market showing an up trend (visually), and the stop tight (visually), things look good to go.

This exercise is mostly about making these strategies mine. This involves letting my left brain ask/answer all the questions it needs to, and boiling the mechanics down to simple yes/no questions that my intuition can answer in the trade environment. The Finger has two questions, and The Outbreak has 3 questions; all yes/no, all visually interpreted (I highlighted them all for easy reference). Good to go.

(Note: This is drawn from the ideas presented in Trading from Your Gut: How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader. Mr Faith applies it to swing trading, while this is my attempt to apply the same ideas to day trading.)