“Trade what you see, not what you think”

Another draft post I’m going to go ahead and publish now. More to follow.

There are many ways to be wrong in trading, but here are two big ones:

1. Any time you use a trending strategy in an oscillating market you will be wrong.
2. Any time you use an oscillating strategy in a trending market, you will also be wrong.

This is where the oft-repeated platitude “Trade what you SEE, not what you THINK!” breaks down for me. A price level is “seen”; it is self-evident, and as long as the price quote is genuine, it an indisputable, objective fact. In order to act on this information, however, you have to “think” something! You must interpret the price level as either too extreme (oscillating, fade it) or not extreme enough (trending, follow it). Now we delve into the realm of opinion, the land where large number probabilities and the next trade win/loss binary play out. But the truth is this: You cannot put on a trade without making some kind of interpretation of data.. You have to see AND think. I believe the fallacy comes when you try to see AND think at the same time. Without making a well thought out plan before you go to trade, you are more likely to be influenced by emotion and other human biases and be caught on the wrong side of a trade.

I believe that the market hours are for seeing and trading, not thinking. If you want to think and plan during market hours, then don’t trade. The thinking should be done beforehand, via a consistent, disciplined, and tested trading plan with definite setup conditions. Again, you MUST think something at some point to interpret price and take a position. Instead of “Trade what you see, not what you think”, I believe the better mantra for trading is “Plan your trade and trade your plan”.

More to come…

Draft Trade Plan

This is a draft of my trading plan. It’s not complete and is more of an outline than a finished document, but it gives you an idea of my thinking to this point. One trade setup is detailed–buying/selling the pivot point. If price does not come within my parameters, I’ll sit on my hands at this time. I would add other setups to the mix after being able to show a profit with this one. This trading strategy is designed to be used during range-bound market days, and the parameters below define the structure that I will operate in. Future setups will be intended to address other market environments.

NOTE: Trade plan may only be changed outside of market hours! Trade plan will be followed when markets are open, or no trade.

Vital Plan Elements
1. What Trading Vehicles:
-ES, NQ

2. Position Timeframes:
-Intraday only. No overnight holds.
-Chart period: trades will be taken on a 5 min chart for ES and NQ.

3. Long Setup Description and Parameters:
PIVOT TRADES
-Above daily pivot level=long only
-No countertrend trades
-Entry setup: Long at pivot point plus 1 tick if volatility based trailing stop is long-biased and lies below the pivot.

4. Short Setup Description and Parameters
PIVOT TRADES
-Below daily pivot level=short only
-No countertrend trades
-Entry setup: Short at pivot point minus 1 tick if volatility based trailing stop is short-biased and lies above the pivot.

5. Stop Loss Parameters
-Use either fixed stop of 5 NQ or 2 ES points
-Or use the volatility based trailing stop
-Whichever is closer to market price.

6. Profit Target/Partial Exit Parameters
-Partial exit at TICK fade extreme (full exit if only 1 contract in position). Tick fade extreme is a bar where the TICK got beyond a threshold value of +/- 1000.
-Target is next pivot level (eg R1, S1)

7. Position Sizing Parameters–initial size, increase/decrease base size, add size parameters
-Base size: 1 contract
-Base size increase/decrease: when account crosses contract margin levels
-Add trade size: None currently. No adding to positions.

8. Overall Risk Parameters
-Two losses in a row = quit for day
-Down 2R for the day = quit for day

9. Valid trade entry days/times
-No entries between 12:00-1:00 ET (11:00-12:00 CT)
-No entries after 3:30 ET (2:30 CT)
-Flat before Fed/other big news announcements

There it is, a line in the sand. It’s imperfect and not optimal, but it’s something, which is better than the trading plan vapor-ware I have had up to now. Feel free to make suggestions or criticize it. If I can’t think of a good reason for why I wrote something, I probably wouldn’t want it in there anyway.