Here is my gift to all, something what every trader must understand, something what every trader must REALY understands. One of my mentoring classes.
I wish to take this opportunity to wish you all a happy, healthy and prosperous New Year
Ivica Juracic
Market action & Trading Plan
This is a very important subject. A successful trader should have a trading plan before they enter any trade. Generally that means a solution for every possible scenario. Whatever you trade (futures, stocks, commodities, equities) you should have a trading plan. Everyday I give you a watch list. You can see I include an entire trading plan. I like to do that after market is closed because at that time I can concentrate on making an objective trading plan. Since I trade using technical analysis my main tools are charts. When I find a chart that I like I continue with it and make a trading plan.
Every trading plan should include:
1 Entry
2. Stop
3. Partials (if is that part of your style)
4. Possible target area (something what you will look for exit)
First let me explain how the market works. I know this is really basic knowledge that most of you already know. I’m not sure that all of you have that in mind when you look for patterns. This is simple but most of traders forget this part. Whatever you trade everything has same action: move-rest-move. That is universal, that is the base for everything. If you accept that from start and if will keep that in mind you will see that everything after that is an upgrade on that basic knowledge and will continue to make sense. When trader really understands that, it is then he/she can trade with logic and use that knowledge in the future. If you will try to learn something without a foundation of knowledge you will not finish well.
I will try to explain it this way: let’s try to that move-rest-move action we change with numbers. First move is 1111111111, rest is 222222222 and continuation is 3333333.
Please open this chart:
http://www.ivicacharts.com/diagrams/class/OIexample.jpg
You can see that 11111111 is a move, 222222222 is rest (on this example that is a triangle) and 333333333 is a continuation move I will look for. This is a book example what I will look for and what every trade should look for whatever style that you use. Scalp, buying pullback, selling tops any style. All is same if you want trade with low risk setups. I saw a lot of different entries, but I want to NOTE again: I’m only focusing on low risk setups and I’m not interested in anything else. I don’t care about high risk entries methods, while they can be profitable you will not find them in my room.
Trader focus must be on whole action. Important is to 111111111 pace and volume, and from that we can look for expectations after 22222222 (pattern breakout). If 11111111 pace is strong with higher volume we like to see strong breakout because that will be prove about interest for that chart. If 111111111 pace is very slow then I will not be interested in that for that trade. All this is very important and I always have that in mind. It is logical that if move toward consolidation is slow, then there is no reason why I should expect a strong breakout.
These our tools, without them as technical analyst traders we can’t trade, when I say trade I mean low risk reasonable trading. We always can trade, but is that low risk trade is what we look for. What does 22222222 (rest, consolidation) give us? It gives us an opportunity to trade with small risk and with good risk/reward. If my stop is to big and my profit move to small then it is doubtful I will ever be a profitable trader. In this triangle example you can see that triangle becomes tighter and tighter and with that our stop amount is smaller and smaller. Again that is one of most important tools. Can you make a reasonable trading plan without pattern? There is no way to do that.
Ok now let’s back on the trading plan. Entry in this case and for me in every case is above previous high. On the OI daily chart that is above previous high in the triangle pattern as you can see on the chart. I always use previous high because for me that is a break proving itself. The same is for a flag or base action. I always use previous high for entry.
Stop. Stop is big part of trading plan. I don’t know any trader who wasn’t mad or sad when trade hit stop and he/she takes loss. That isn’t funny, but you must look at a stop with a different perspective. The stop is our best friend and stop keeps us from getting a large out of control loss. Without a stop our risk management (what is another big part of trading picture) would not be possible. Every trade you can break a rule and don't take a loss when price go under stop area. Sometimes that will be good because price could come back you will feel very smart and proud of yourself. That is completely the wrong feeling and wrong, that will always come and bite you very hard with a loss that hurts. I lost 90 percent of my account not taking a stop. So don’t look at a stop as your enemy, contrary think of it as your best friend in the trading plan. The number I use for stops is the previous low in the OI example. You can see that on the chart. But that is not the only way to use stops, I use all support/resistance areas for that. That can be a whole number, previous high/low or moving average support/resistance area. I use them for trailing stop too, when I move my stop with price action. It is very important to have entry and exit price before you take any trade. Without that you are blind because you can’t count your risk and without that you can spin circles and you won’t be ever be profitable trader. You must count your risk very carefully.
Partials are part of a trading plan but are not a set rule. You can use it or not depends on each and every trader. I don't use it. There are several ways to use partials. First you don’t want use it at all. You can take something out (30%, 50%, 70% depend on trader) when stop is covered. That mean if your stop is 35 cents when you are up 35 cents you will take partials. You can take partials when come to first resistance area (reversal for shorts), and you can ignore partials but when your stop is covered you just move stop to breakeven area. It is up to trader what he/she will use. Some like to take partials when a stop is covered if it is day trade. On swings it is better to look for resistance/support areas. It is all up to trader, but it is important that you feel good with your decisions, because your mind must stay clear at all times and that is very important. I don’t use partials, I use trailing stops to save my profit or cut my loss, but again that is up to trader. That way I have a number of small profit or breakeven trades. That is ok with me and I can live with that, but when I have target area when it gets that far I make most of my profits.
The Exit is probably the worst problem for traders. Did I go out to early or did I stay to long? How to find that? As you can see I really like to use equal move for targets, and of course at same time I watch for others support/resistance zones (whole number, ma's, pivots). Only using equal move is not important. You must have whole picture in your head. Like to repeat that again; whole picture in your head move-rest-move. The is the basic's and is a very important part of trading. Please ask questions if don’t understand that. It will be much easier to continue if all is understood. That is reason why I always have (when I scanning) on my screen monthly, weekly, daily, 60, 15 and 5 min chart. I want see any possible resistance/support. If I don’t see enough room for trade I won’t take that trade. There is enough opportunity to wait for a better chance.
http://www.ivicacharts.com/diagrams/class/yhoo.jpg
On this chart you can see an equal move target. At same time there is a whole number resistance zone and that is reason why I was looking for 30 as the target zone. Now you can see that entry is above previous high, stop under previous low, partials when stop was covered (if you use partials) and target was at the equal move and the whole number. That was full trading plan. Without that I will not take the trade. If I start to change my trading plan that probably will not lead to success. The reason is it will not reflect my style and I will start to lose money. The plan can only be changed with reasons like trailing stop or poor pace. Now what happens if plan not work? Then you must research past (your journal) and see what happened. Why didn’t work? Did I mess with any part of my trading plan? Of course you won’t change plan after first stop.
When you learn to make reasonable trading plan you just need to use it. Very simply: make your plan and trade your plan. As a beginner you must avoid mistakes like to early an entry or to early of a stop. That will come with experience. You just need to trade your own plan. If not you will change that plan with reason, not with emotions.
