Trading Plans

BarroMetrics Views: Trading Plans

Through the years I have been asked: what would you recommend – a discretionary or mechanical trading plan?

My answer has always been the same: “it depends on what best suits your personality and experience”. My preference is for a discretionary plan; but before I get into that, let’s define what I mean by the two terms.

Mechanical: a set of trading rules that are always followed.

Discretionary:  a set of trading guidelines that contains a guideline that says it’s OK to deviate from the guidelines. With this definition, I give room for my intuition to come into play. 

The reason I added  ‘experience’ in the second paragraph is because for intuition to play a part, there must be an experiential foundation. The less experience we have, the more likely ‘intuition’ is merely a pseudonym for ‘into-wishing’.

So, what sort of elements come into my ‘intuition’?  Bottom line, a trade must feel right.

A great example of this was the trade I took as a day-trade on the GBPJPY last night. As a general rule, I avoid day-trading for reasons I won’t go into here. Indeed, I have a separate day-trading with a broker different to the ones I use for my ‘normal’ trading. In this way, I can quickly and easily see if my day-trading is profitable. 

Turning to the GBPJPY yesterday:

Figure 1 is a 12-month swing chart. The pattern at ‘A’ is what I call a Negative Development Buy signal where the minimum target is the Primary Sell Zone around 251 to 235. Currently we are at resistance zone 163.00 to 158.90.

The Washington crisis has tended to result in relative Yen strength and relative Pound weakness.

Figure 2 is a relative strength chart of the Yen and Pound. What we see is from Sept 20, the Yen has been rallying as has the Pound. But following the FOMC surprise, we have been seeing the Yen continue its rally with the Pound heading South to flat. (Figure 2). This normally suggests a down to sideways market. (Figure 2).

 That provides the context for the day trade. 

Turning to the actual trade.

  • Looking at the 240-minute and 60-minute as the GBPJPY rallied to the Value Area High (VAH), I had a strong feeling we’d see a Death Zone trade setup. In other words, before the trade setup occurred in the 158.80 to 159.00 area, I had a strong feeling the GBPJPY would sell off from there. I have learned to respect these strong feelings.
  • Figure 3 shows the 240-minute chart.  
  • Figure 4 shows the 60-minute chart where a Negative Development Sell setup and trigger occurred – a failed push to new reaction highs (that takes place at resistance).
  • Figure 4 shows the entry, initial stop and target. My win rate says that my minimum reward:risk is 0.90:1 for day trades. I had better than this ratio in this case (about 1:1)
  • The exit was based on the fact that the high of the day at time of entry was 158.83, ATR at the moment is in the 130-140 range with a std deviation of 12. I expected at least a normal day’s range, so I estimated the low should be around 157.53 to 157.03. I took roughly the mid-point of the range. 
  • Once I had ‘the feeling’, I worked out my probable stop and range of entry points. Knowing my win rate, the entry zone calculation tells me the lowest price I can enter. In other words, I worked out my entry, stop and exit parameters BEFORE the signal took place. So that once I saw the signal, my brain ‘automatically’ executed the entry. 

What’s important to note is I respected the ‘feeling’ and worked out what I would do IF my guidelines came into play. This was a classic case of left and right brain co-operation.

01-12m.png

FIGURE 1 12-M Swing

02-csm.png

FIGURE 2 Relative Strength

03-240-min.png

FIGURE 3 240-minute

04-60-min.png

FIGURE 4 60-minute

3 thoughts on “Trading Plans”

  1. Dear Ray,

    Currently, Global Markets are witnessing a Rally & US Dollar has weakened…Also While US Markets have corrected..The Markets are positive.

    Due to See this trend reversing as in panic US Dollar should strengthen…

  2. Hi Vishal

    The context for my call, the US stocks down, US$ up, was a panic type situation.

    So far, there has been no panic.

    The blog on Monday will look at the reasons I believe we have at least a 50-50 chance that the crisis will go beyond Oct 17. If it does, we are likely to see the panic set in

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