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

This is the re-visited version, I changed the exit strategy per yesterday's discussion. Helps to have my thoughts laid out and as simplified (yes/no) as possible. This defines my edge.

Determine the required trade triggers

The Finger

Entry: Is the available price close enough to the stop? Does the market support the expected direction?

Exit: Is the stock still moving in the expected direction?

• Have the candles changed size (from larger candles to smaller candles)?
• Has the candle closed on the opposite side of the 7-period EMA?
• Is this the largest candle of the day? Has it retraced more than a third of the way?

The Outbreak

Prior to Entry (alert setting): Does the stock show clear lines of support or resistance?

Entry: Is the entry price close enough to the stop? Does the market support the expected direction?

Exit: Is the stock still moving in the expected direction?

• Have the candles changed size (from larger candles to smaller candles)?
• Has the candle closed on the opposite side of the 7-period EMA?
• Is this the largest candle of the day? Has it retraced more than a third of the way?

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

Now for a condensed and simplified version of the last two posts. The point of this weeks practice is not to figure out how many times I can be right /wrong, make money/lose money, or to find a better strategy; it is about forcing/strengthening a reliance upon my intuition.

Determine the required trade triggers

The Finger

Entry: Is the available price close enough to the stop? Does the market support the expected direction?

Exit: Is the stock still moving in the expected direction?

The Outbreak

Prior to Entry (alert setting): Does the stock show clear lines of support or resistance?

Entry: Is the entry price close enough to the stop? Does the market support the expected direction?

Exit: Is the stock still moving in the expected direction?

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

Determine the required triggers - part 3 of the trading process.

This entry will focus on exits.

Well, I have put it off for as long as I can. I have to come up with an exit strategy if I plan on practicing tomorrow. So here it is (after an evening enjoying Father's Day with family and friends and a couple of glasses of red wine to facilitate the philosophical/introspective process):

I am going to stay in the trade for as long as I judge that the stock is still moving in the expected direction (by visual inspection), or after a big move in the expected direction (by visual inspection).

Heh.

Nothing new here... at least at first glance. The distinction however (I am counting on it at least) is that I don't think that I have ever let my intuition have free reign in the exit department. Not that I haven't tried to - but I can say with certainty that up to this point, they have all succumbed to left brain thinking As with all the other practice applications, from here on out, there will be a self imposed 15 second time limit - the lack of a decision means the stock has stopped moving in the expected direction.

I may even pull out the stop watch.

Ok - paper trading for the week, following the established yes/no time limited guidelines. After a good nights sleep. Simple is as simple does.

May your analysis be fuzzy and your trades expedient.

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.)

Practice plan - Step 2. The trading process; Part 2: Hunt for good stocks

Hunt for good stocks - part 2 of the trading process.

I will be monitoring 3 classes of stocks:

1. Tradable stocks - as measured by liquidity, price level (in light of my account balance), and spread.
2. Stocks to watch - tradable stocks and stocks that may present potential trades if they move the right direction.
3. Potential trades - stocks that are ready to trade, pending a review of the market conditions.

Mr. Faith outlines basic market mechanics (repetitive patterns in the markets and the psychology behind them), suggests a strategy and idealized model for swing trading, and then shows some practical application. This is the gist of the 'whole brain' trading idea - 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).

I tried to apply his rebound strategy to day-trading charts, but I couldn't find any charts that actually worked (my left brain activity for the afternoon). So I decided to adopt two of Scott's strategies: FNG's The Finger and one that I am calling The Breakout, and apply the same principals: find the idealized model and let the right brain have at it next week.

To re-cap The Finger: Enter long on a stock that is hitting new highs. Enter short on a stock that is hitting new lows.

How does this apply to monitoring? Nothing new here: 

1. Tradable stocks: liquidity (> 800,000 shares daily average), price level (< $100/share), spread (up to $0.05).
2. Stocks to watch: tradable stocks with daily average price movements >$2.
3. Potential trades: stocks nearing/hitting new high/lows.

Not a lot for the intuition to do here, but not a lot for the left brain to do either - these can all be used to set filter criteria; letting the computer do what it does best: left brain activity. Intuition will come into play on the definition of new highs/lows: glancing at charts - is the stock approaching a new high/low? Easy to evaluate visually. 

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

For monitoring:

1. Tradable stocks: liquidity (> 800,000 shares daily average), price level (< $100/share), spread (up to $0.05).
2. Stocks to watch: tradable stocks with daily average price movements >$2.
3. Potential trades: stocks showing resistance/support.

Again not a lot for the intuition to do - but there is a little: is the stock setting up resistance/support? The question needs to be answered visually and quickly or I need to move onto the next stock. 

During practice, I will be more concerned with timeliness rather than right or wrong. Again, key to letting the intuition take over is time. Too much time and the left brain tries to analyze.

(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 endorses swing trading, while this is my attempt to apply the same ideas to day trading.)