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Trading Philosophy

I have tried many different approaches with all sort of ways of trading and have settled on one approach which I call Trend Trading

In summary, this is not black and white but roughly the styles of trading are as follows; scalping are very short term moves that can last literally seconds to a couple of minute, you have to be very focused for this but it is fast and dynamic. Day trading is really about find a move during the day, it could be 5-10 minutes or could last a couple of hours, Swing trading is riding a trend for several day even a couple of week, position trading is holding a position for weeks and investing is about holding position over several years.

Day Trading

Day Trading is where I basically trade anything from future to equities, supply and demand with a goal to make $1000 a day; I am really looking for a “Golden Trade” with my favorite set up in a short term time frame i.e. find a trend, look for a rally base rally or drop base drop pattern. I normally find one or two good trades a day so you need good execution.

Day Trades, risking up to $250 to make around $1000 and they can run anything from 10 minutes to a couple of hours

Swing Trades last a little and I will hold for sometimes up to two days, I am not very good at letting profitable trades run so this does not happen too often. Again I am looking for my favorite golden trade set up but on a slightly longer time frame with max risk $500 and most option trades. Depending on volatility I will also look to trade spreads or sell options if volatility is very high.

Trend Trading

What I am doing here is playing the longer term trend using options, so longer term I am looking at weekly and month trends on ETF’s ( Electronic Traded Funds and Sectors), I sell premium on options in what are known as naked puts you really have to know what you are doing here as this is very risky if you do know how to manage your risk. Basically this is a very leveraged way to gain income on a regular basis whether the market is going up or down. Depending on volatility I will also trade puts and calls for a good long term “Golden Trade” set-up

Start of EVERY Day

Trade Model

Trend

I have always known I should focus on the “Trend” but as I become a more experienced trader I have learnt that focused on the trend can really help your win rate

Ok so what is the Trend?

I have defined the Trend as follows, “The Trend” is Defined By:

•                Short-Term (1-10 Days): Regression Channel

•                TREND: (10+Days):Weekly 20EMA + Regression Channel

•                Long-Term TREND: Monthly/Weekly 20EMA, (180/90/30 Day Trend)

I am always looking for three of these “Trend Measures” to line up to define a trend, for example if the 30 day, 20 Day & 10 Day Regression channel are all in the same direction then you have a “Trend” to trade.

 

Over time I have found that if I only trade when there is a ‘defined trend” I have a much higher Trade Win Rate.

 

Once you have defined the Trend you can start to define you trading opportunities, I use the following key steps:

Five Key Steps in defining Trading Opportunities

1. Establish The Trend:  Short, Medium and Long Term

2. Identify the Core Strategy

Up-Trend: Rally-Base-Rally, Rally-Base-Drop

Down-Trend: Drop-Base-Drop, Drop-Base-Rally

3. Identify the key Price Battles and Key Price In-Balance with Extreme Price Moves in Time and Tick Charts.

4. Identify the Opportunities to join The Trend

5. Look for an ENTRY that meets all TRADE PLAN RULES, make The Trade and Let it Run

Sector Rotation

Since most professional fund manager get paid for managing and investing funds when they are invested, they tend to focus a lot on sectors depending the cycle in the market, so they will rotate between sectors to beat the base market performance. Understanding the sector rotation model can help you understand where the professional fund investor feel we are in a market cycle and that can in turn help you make better trades or focus on high performing stocks in a high performing sector to beat the broad index’s. I follow this theory and although it is by no means an exact science is helpful as another data point as to where we are in the market and economic cycle.

Here is the most well-known sector rotation model; it is a little out dated and broad but still a good broad starting point

sector rotation

 

Another excellent data source is stockchart.com that track the performance of the main sector ETF Spyders that correspond the above model

Risk

Ok if you read nothing on else except my comments on risk it will have been worthwhile.

You must learn to manage risk, that is know what you will lose if thing go against you and be able to absorb the losses.

Some people think trading is like gambling and if you trade without putting the odds in your favor I guess it is, however if you lean to trade and take high quality trades with the appropriate risk to reward then long term you will make a profit.

So what do I mean about risk, Ok let’s talk about futures and most popular contract the E-Mini S&P 500 futures contract. So this contract is worth about $50k and for each tick it moved you earn or lose $12.5, so you decide to buy say two contracts, you drive to work and there is some bad economic news and the market drops and the E-Mini is capable of dropping 40 points in a day,  so that is 40 points x 4 ticks x 2 contracts x $12.5 = -$4000 let say you don’t really know what you are doing so you have three bad trading days so you could be $10,000 down in a very short time. When you are winning it seems like easy money, but when the market turns on you it can be nasty.

So here is what you need to think about when you think about risk on a trade, a good rule is always have a target of 3-1 risk to reward, that means you can be right only 50% of the time but still be profitable, that sounds better right?

Here is what you must learn how to do without fail.

Pick and entry for the trade and then have a stop order that closes the trade when you have lost say $200, so that is your risk. You target must be three times your risk so $600. So here is the math.

Trade 1 you loose and get stopped -$200

Trade 2 you loose and get stopped -$200

Trade 3 you loose and get stopped -$200

Trade 4 you win and make +$600

Trade 5 you win and make +$600

Trade 6 you loose and get stopped -$200

Trade 7 you loose and get stopped -$200

Trade 8 you loose and get stopped -$200

Trade 9 you win and make +$600

Trade 10 you win and make +$600

Win rate 40% profit +$1200

You get the idea, as a long as you get the right risk reward you can have a relatively low win rate and still be profitable. It is of course a bit more complex in the heat of battle but you get the idea and a key principal to keep you profitable long term.

The key is as follows

You can have small winners, small losers, big winners, what cannot have is big losers if you are going to be profitable long term

Let me tell you this is something you have to learn the hard way, I did but that is another story. You will keep taking this class/lesson until you get it right, most people have to be wiped out more than once to really get this, and I certainly took a big hit in the early days as a result of moving my stops, now it is a critical rule that I never ever move my stops.

I try to have win rate of 60% plus which keep me profitable, if I am not hitting this target every month, I need to look closely at my trade plan or my execution of the trade plan.