Enter/Exit Strategies (8-21-2010)

It is has been nearly 9 months since I started documenting this trading experiment in a public forum, and what a journey it has been. Hands down, the greatest benefit of starting a blog has been the introduction to the online trading blogging community. There is a lot of trash out there, but somehow I managed to stumble into a great group of people. A large part of my blogging has been a process of coming to grips with myself, challenge after challenge after challenge; and it has been other bloggers that have walked me thru and shown the path, without them I would probably have given up by now.

I have learned a lot over the last 9 months, but by far the most critical lesson has been the importance of a trader's mindset. I never would of imagined that the simple act of trading sets up the mind-numbingly crazy emotional roller coaster that it does. Mr. Douglas ties it to the virtually unlimited freedom of creative expression that the market provides: every moment in the market provides a new opportunity for expression. No controls! No limits! Incredibly exhilarating - and - as one soon finds out, incredibly frightening.

A trader must set his/her own limitations and constraints to protect his/her self, no one and nothing else will. The idea of unconstrained freedom of expression is incredibly powerful and seductive, but without a certain knowledge of one's self, it is a recipe for disaster (as this blog has documented).

So here I be.

I found the roadmap.

Now I need to establish some playground boundaries - somewhere I can safely explore and find out about myself and the market, establish a baseline of confidence and the habit of a new belief system.

Towards that end, I came up with an edge based on the last few months of trading. I intend to trade within these boundaries for at least 20 trades (per Mr. Douglas' advice). If this proves to be profitable (via paper), I will continue to use this while I nurture and develop my new belief system and confidence (I am convinced that confidence alone is not enough, I also need to actively and aggressively pursue the new belief system).

My edge:

Enter trades just after candles form doji’s on or near prior support/resistance (including new h/l), with the wick piercing thru prior candle h/l, positioning against the s/r.

Enter a trade just after a relatively large candle with big volume (in terms of the day’s activity), in the opposite direction of the big candle.

Add after there is a pause in the trend and a signal of continuation. Move the stop when size is added.

Exit when there is a signal in the opposite direction or when I would be crazy not to ('the crazy not to' defined within the daily context).

To provide some type of baseline, I picked several random days from the last 120 days to try this out on. I did this manually on TNA (signals only on the Q's) and with a fully formed chart in front of me. Steps included:

1. Choose a random day
2. Draw S/R lines on the Q's (visual distinction being the only criteria)
3. Mark the Q's with entry signals (blue dots)
4. Draw a red (short stop) or green (long stop) arrow at the stop for the entry on TNA
5. Follow the chart until stopped (yellow diamond) or reverse entry signal (indicated by a new stop)

I did not indicate 'add' signals or consider an 'add' in the PnL, but there were several. Three of the stops were out of control (>$0.30) but I placed them there regardless. In actual practice I will trade on the signal, but only if the price comes within my stop tolerance (< $0.30). I also did not exit on the 'crazy not to' criteria (I am thinking that this will be  >$1.00 for the most part), and used the opening price of the next candle for the exit/entry price.

Interestingly enough, while placing some of the trades on the charts, I had some 'I know I would probably do this' thoughts, mostly in terms of panic, or fudging the rules, and I tried to give that some consideration. For example, one day there were not many signals, and the Q's showed a marginal big candle. I could feel myself wanting to get in on the action, so I went ahead and placed the trade.

I am going to have to make a concentrated effort to stick to the rules as strictly as possible for the first few weeks.

That is the thing about discretionary trading: not all signals are so cut and dry, how much leniency do you allow yourself? How well do you articulate the signals? It is easy for me to keep going deeper and deeper into the details, so I tried to be careful not to. I think I came up with a good compromise.

The results give me enough confidence to move forward with this system for now. If you find any inconsistencies, feel free to point them out:

Have a great rest of your weekend. I am going to spend the rest of it trying to convince myself that the market can do anything... at any time.