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Elements of a Trading Plan (by Greg)

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This morning I was responding to an email about trading, and it got me thinking about what makes a successful trader and I thought I'd share those thoughts with the family here on slope.  As I see it there are basically three necessary elements to consistently profitable trading, which are: 1) Context or filtering, 2) Setups, 3) Risk management. 

What I found frustrating was lots of books talk about setups or risk management or ocassionally both, but they come up short in the area of filtering.  By filtering, I mean when does a price action setup have a higher expectation of going on to do what you expect as opposed to when is it more likely not to. 


1) Context

There are many ways to get a read on the context of price action.  Personally I like Keltner Channels on different time frames.  If you study them enough, they can give setups a nice context, they can be used to quickly identify a trend vs. a range day, and they can also be used to identify scale points and targets. 

Trader1 has been very generous with his knowledge, and has explained how he reads support and resistance and how in an uptrend it stair steps up, and in a down trend it stair steps down.  From that he has his buy zones or buy like hell zones, and his sell zones and sell like hell zones.

Futuretrader71 uses volume by price or volume profiles to frame price action in a context that makes sense.

Some traders prefer to get a sense of context via pivot points such as MarketSniper.

Now all of these methods give you areas to watch or look for setups.  The key to remember is that it's not that price gets to these areas, but it's what does price and volume do once it get's there.


2) Setups

Setups are nothing more then a price action sequence that tends to resolve in one direction with a greater expectation then another.  A high close Doji or a low close Doji are but two common ones.  There are books out there that will identify a number of setups.  What I have noticed for me personally, is where I have taken a published setup and tried to trade it, I haven't had much luck with that.  MarketSniper likes to tell people the Holy Grail to trading is right between your ears.  He's right you know.  

Here's the thing.  To really be successful at trading, you need confidence.  What gives you confidence?  Knowledge that trading a particular setup in a particular way has a profitable expectation.  In my humble opinion the best way to gain trading confidence is to blaze your own setup trail by paying your dues watching live charts and observing the nuance of how patterns unfold.  My suggestion is you closely watch price and patterns unfold, while closely observing how volume builds or doesn't relative to the change in price.  While observing price action directly, keep the greater context in mind as well.  In time, what you will notice, is kind of like the approach a plane takes to landing on a runway.  I call it a volume profile.  Overtime your brain will just recognize the nuance of what volume does relative to price, and you will notice the key volume signals that will allow you to filter when to take a given setup.  Additionally as you identify your own setups, I suggest you develop your own rules for trading the setup, and your own criteria that tells you when the expectation is blown long before your stop is hit.  Also you can identify when things are going as expected, and under what conditions it's adventageous to add to the trade.


3) Risk Management

MarketSniper likes to say, get the risk out of the trade as soon as possible.  He also likes to mention trade expectation.  In 2) above I talked about identifying your own setups.  You also need to have in mind what the expectation is for price action and set you scale out points as soon as you enter the trade.  In the setups I use, I have hard and soft stops, and scale and close targets.  I also have criteria where if price action isn't going as I expect, I quickly scale down the trade, and if it is I have points where I quickly scale up the trade.

I think that wraps up the thoughts I had this Saturday Morning.  I hope it helps a couple of you put together a viable trading plan.