One "so-so" Trade

As I continued to reject setups that didn't meet my strict criteria, and watched them produce anticipated profits, I thought I had come across a setup that had a good potential.  But it ended up getting stopped out.  In hindsight, it really wasn't a highest quality setup, nor did I exit at the first sign of failure.  So, selection wasn't good, and execution was mediocre.

In the past, one losing trade would make me try harder to immediately get back my losses, potentially setting me up into revenge trading mode.  It's like the old Lay's potato chip slogan, "Betcha can't eat [trade] just one."  Now, one of my trading rules is to have a 15 minute cooldown after a loss or trading error.  Today, I only had one trade (a loss), so yes, I DO have the ability to just trade just ONE and be done!

GSK - 5min, buy above high of 10:35 bar - Beyond the FE16 setup

GSK-5min-at time of setup

Flag #1

Now that I'm in armchair trader mode, it's easy to see that even with the gap up (although not above the prior day high), this stock was choppy in the opening range, with little of the typical "juiced" behavior of a gap stock.

Flag #2

However, it made a relatively strong move, and what attracted me to this was the consolidation that was taking place for at least 4+ bars.  And when a trendline of the swing lows were drawn, it intersected with the big green bar seen on the chart.  That was a sign there were many looking at this chart.  But the other concern I can clearly see now are the wicks in the bars during the consolidation.

Once the stock broke out and didn't run, there was an opportunity to exit with a reduced loss.

GSK-5 min   Uh oh....

Flag(s) #3

There was a big red bar that broke and closed below the (1) $43 support, (2) the upward sloping trendline, and (3) the 5ema.  If that wasn't enough of a reason to get out, then I'm not sure else is.  I knew I should be exiting, and that this was likely a fakeout breakout.  However, I was thinking to myself how nearly all the other trades I passed that morning worked well, so this one should recover.

WRONG!

I let it hit my stop below the consolidation, increasing my loss by maybe $.10 over the more ideal exit, and decided that's my first and last trade of the day.  It was time to evaluate what went wrong, and why I took this trade.  I believe now that since I saw many successful trades go by, and saw something better in this GSK setup than reality.  I would grade this setup as barely a C, a trade I should NOT have taken.

Next Step

Time to refocus and build some exercises to help me visualize and burn into my mind, (1) What is a quality setup, and (2) How I act upon seeing it.

Charts: I'm Simon Cowell, and the fish that got away

On the first day of following my strict "diet" of only taking the very best setups, I found myself feeling a little like Simon Cowell during the golden days when he was on American Idol.  One after another, as the setups approached, I found myself telling them, "Go away", "You're terrible", and "Stop! Stop! Stop! Thank you, good bye."  And when something halfway decent appeared, the very best I could say was, "Not bad."

Bottom line, I took ZERO trades today.

It's not to say there weren't any interesting setups -- there were many that I would have taken in the past, and many would have been quite profitable.  However, I had my plan to follow, and for whatever reason, "missing" those trades did not bother me.  I've heard enough people say that's just the way it'll be and you just have to suck it up and deal.  So I'm adjusting, and surprisingly, I feel fine.  My mission is to follow my plan, I did, and there's a sense of accomplishment to it. 

Although I didn't take any of these below, here are a few charts of interest and some that "got away":

$GG - 5min

GG is not likely a chart I would trade since it's a bit choppy, but this chart stood out for a few reasons.

• The trendline on the chart below the two swing lows of the morning was extended upwards.  And as you can see, it helped to predict timing of when the consolidation broke out (first blue up arrow).  
• I also realized that the R3 pivot levels were off by default, so when I turned them on, it was nice to see that the consolidation took place between the R3 and the 161.8% Fib Extension.
• Ignore the 2nd blue up arrow, since that was just something I wanted to track (I had a feeling it would fail)
• But look at the consolidation in the light blue box.  It faked out on the downside, then ended up making a double top.  Once price returns back to the consolidation range, this is usually a sign of a reversal pattern.  It worked in this case, and the vwap was a good target.

$PANL 5min

PANL had a relatively wide bid/ask spread around $0.05 to $0.15 or more, so it had choppy price action.  However, the first blue up arrow was maybe what I would consider a B grade "pullback to the retracement zone" trade.  It looked pretty good, but it just didn't have a nice green hammer bar -- I'm looking for near perfect setups.  And I'd say this was a pretty big fish that got away.

The second blue up arrow indicates a "tell" that prices are about to go higher.  Multiple bullish candlesticks supported by a rising 5ema was a good sign of potentially more bullish action.  I'm not sure if I would have taken this trade, since the price action was still choppy, but this is a chart I will study further.


 $NEM - 5min

When NEM setup on the 4th bar with that green hammer (first blue arrow), my gut was telling me to take it, it's going higher.  However, I couldn't justify taking the setup since it wasn't a setup in my trading plan.  Sure, I could have fudged and called it a Beyond the Opening Range High setup or something else, but I'm going to be honest with myself.

The 2nd trade was also something that nearly screaming to buy.  It was essentially 2 different setups, the vlb (vwap line bounce), as well as a not as well ranked "pullback to the opening range high."   The vlb setup provided an excellent entry on the 2min chart, provided little heat, and the risk reward was great.  But again, the setups were not a part of my plan, so they were not taken. 


As mentioned earlier, zero trades today but I feel like I accomplished a lot.  I wonder if that's how Simon feels after rejecting and demoralizing so many people and crushing their dreams?  Well, at least the markets don't even know or care what I say about it.

Rules of Engagement - Trading Plan for week ending 8/26/2011

Criteria to determine when (trigger), where (stock), and how (order entry) a trade will be executed. 

Primary goal this week will be to test my ability to follow my trading rules (i.e. maintain discipline).


PREREQUISITES
Charts - 5 min candlesticks

Fib levels - Generally calculated over the high and low of the opening 15 minutes.  In some instances, opening range might be expanded to 30 minutes due to a large initial swing

Moving averages - 5ema, 100ema

Intraday vwap

Source of watchlist - Gap open scan via TradeStation

SETUPS
The following two setups will be in scope:

(1) Pullback to retracement zone [pb2rz]

• This is the "classic pullback" or "perfect pullback" as described by Trader-X
• Trade entries only between 9:55 to 10:30 AM

(2) Beyond the opening range high/low/FE [btorh/btorl/btfe]

• Breakout/breakdown of a consolidation (4+ bars) occurring at a significant level
• No trade entries after 2:00 PM

SETUP EVALUATION CRITERIA
Risk/Reward - Prior to entry, evaluate if potential profit is 2x risk (ideal is 3x+). If not, pass!

Setup quality - The quality of the setup should be A or solid B.

PROFIT TARGET
Profit target - Place limit order at the FE at time of order entry.

STOP MANAGEMENT
The stop will be place above/below the setup bar, unless there is clear and compelling reason.

The stop loss will remain at the original location unless:
(1)  There is a clear candlestick pattern showing a reversal pattern
        OR
(2) There have been 4 bars elapsed since entry, and a clear level or pivot point has formed which will indicate a reversal of the trade

TRADE RISK MANAGEMENT
Risk per trade = 30 basis points (0.3%) of portfolio size. Shares will be rounded off to the nearest 100.

ACCOUNT RISK MANAGEMENT
Max daily account loss = 1% of portfolio

Max intraday drawdown = If profits > $500, drawdown will be kept < 30% of max profits (i.e. highwater mark)

GENERAL REMINDERS
Find ANY REASON to pass up a trade -- I don't have to trade

ZERO trades a day is encouraged!

My strengths - Analysis of my best performing setups

Now that I have completed additional analysis beyond the preliminary trading journal analysis from 1 week ago, I know know which setups currently work best for me. Those setups will then be incorporated into my trading plan for next week. 

Improvements to Tradervue

But first, a significant change on my analysis has been the improvements made to the Tradervue trading journal by Greg, the developer of that website.  He has enabled the ability to split (and merge) groupings of trades to allow a more detailed ability to analyze your trading records.

Add to that the new ability for the use of the "AND" criteria in the filter, which enables you to analyze combinations of multiple tags (I currently these tags).  Based on my requirements and usage of a trading journal, this has really made Tradervue into quite a powerful journal and statistical reporting tool, and has made the results of this analysis much easier to generate.

Historical figures are even better

After I split some trades into more detailed records and retagged them, the revised figures now show that my profits were even higher than the results stated in the preliminary analysis last week.  At this point, the absolute figures don't really matter, since I already knew taking only A and B grade trades was the path to success.  The new data further reinforced it.

Focusing on my best setups

So for my next trading exercise, what I needed to do was to refine and focus which one of the A and B grade setups I would focus on, based on how well I did in the past (focus on my strengths).  I have to keep things simple, so that I can easily measure my ability to to execute.  Right now, I need to prove to myself that I have the discipline to follow a trading plan and to execute near flawlessly.

Here is the summary of the best/most interesting setups from my A and B trades.  Metrics are based on the R-Multiple:

"Setups" are the actual setups that trigger an entry, and I have tags for many different setup variations of each core setup (see glossary here) to produce better reports and metrics.  Note that in some cases, more than one setup tag will appear on a trade (which would drive some statisticians bonkers).  Therefore, although there appears to be a lot of setups in the matrix above, there are only 6 core setups in reality (see groupings by color coding).

"Setup conditions" are metrics for additional conditions that took place at the time of a particular setup.

Additional thoughts

I was a bit disappointed in the accuracy of the vlb (vwap line bounce) scalp trade (only about 50%), but I believe this is a factor on my ability to execute.  Therefore, I will be monitoring this closely.  I was also disappointed with the lack of success (and occurrence) of the 5 minute "quick hit" (2 bar opening breakout), so I'll be dropping those.  However, I believe the 15 minute version could likely work better, although I just don't have the data to prove it.  And I love the ascending and descending triangle setups, however, they don't occur as often, so I won't include them next week.

What next?

For my trades in the next week, I will focus on the following setups:

• pb2rz - Pullback to the retracement zone - the classic Trader-X setup.  As he says, it has great numbers, and you really can make a good living on just trading this one setup.
• btorh/btorl/btfe - Beyond the opening range high/low/FE - another classic Trader-X setup, this setup is generally based in conjunction with a cbo/cbd (consolidation break out/break down).

In the future, it will be interesting to look back and see how my trading evolves. But for now, I will focus only on the setups above, and prove to myself that I have the discipline to take only A and solid B grade setups.

Why focus on your strengths

Under the comments of Trader-X's post from April 22, 2011 (which itself is based on an excellent comment from a reader), Flowtastical mentioned the following:

The key to consistent money is knowing what you do best and executing only what you do best. I spent a good 5 hours writing that in my journal yesterday and it was amazing how much time I spent on executing things that aren't my strengths. Make your own private blog and post your most profitable trades every single day. Over time it will add up.

If you spend today writing in excruciating detail what you do best and execute exactly what you do best next week, your numbers are going to improve.

I don't think most traders overcome odds. I think they overcome themselves.

Spend some time on traderfeed.blogspot.com. Specifically read all his posts on "solution focused" trading. 

There are many other excellent comments under that post -- I now realize it provided a critical building block in my development as a trader.  I admit, when I initially read about focusing on your strengths, I wasn't as sure how much more that would help vs. working on improving your weaknesses. 

As I continued to understand and believe why this made sense, I recently ran into this excerpt from Dr. Brett's book "Enhancing Trader Performance" which really demonstrated the power of focusing on your strengths:

The question "Can anyone become a successful trader?" generally is framed within the contexts of weaknesses.  The questioner feels that he might be too emotional, too undisciplied, or too cerebral to succeed as a trader.  My sense, however, is that it is not the weaknesses that keep people from trading success; it's their strengths.

...I am thinking of three highly successful traders whom I have known personally.  All have made more than a million dollars trading for multiple years.  Each of these expert individuals possess just about every flaw you read about in trading psychology texts.  They are hyperemotional when they trade, they become stubborn and hold onto positions when they shouldn't, and they rarely if ever engage in systematic planning before markets open.  They succeed because their strengths overwhelm these weaknesses.

 ...other traders who are less emotional, more disciplined, and more systematic may fail because they lack strengths that readily translate into trading edges.

Tomorrow will be 4 months since that Trader-X post, and based on all the trades I have analyzed on my trading journal, I have finally done additional analysis to begin understanding my strengths.  As Flowtastical mentioned, he discovered that he spent a lot of time trading in ways that were not based on his strengths.  And when I did my preliminary analysis, wow, so did I.  And wow, how profitable I could have been.

As I realize how I much I have executed on Flowtastical's advice -- learn from Dr. Brett, start a blog, setup a trading journal, etc. -- taking those steps have finally made me feel like things are starting to come together.  I've had some setbacks along the way, and I'm still oh-so-very-far from my destination, but I'm getting closer day by day.  I keep reminding myself, with a sense of urgency, it's my moment, I can't let it go.