Market views and Trading Plans

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By :  ,  Financial Analyst

One of the interesting dilemma’s in Technical Analysis and trading, is the danger of holding a “view”. Often market notes are written from a biased point of view. The writer may hold an underlying position or in market talk, the writer is simply talking his or her book. The book, being the writers account holdings of which they hold an interest in being right.

One of the more profound human biases is “confirmation”, meaning that so much information has been rounded up to form a point of view, it just can’t be wrong! Really!!? And if it is proven wrong then it often blamed on some other extenuating factor that came into the picture. Really again!!?

One of the better book reads I completed in 2018 was, “Extreme ownership” by Jocko Willink and Leif Babin. The book written by these two Navy seals intimately describes the process around ownership of your immediate environment, taking responsibility for everything that goes right and everything that goes wrong.

Many market analysts and traders could learn from the principles described in the book. Planning the mission, and just as importantly planning the escape if it goes pear shaped. Sounds like a trade doesn’t it?

Trading plans don’t have a “view” they have two scenarios written in as the entry point and the exit point, for both the winners and losers.

Like anything in life unpredictable events in trading occur on a continuous basis - in the markets, future price is unpredictable.

As analysts and traders we can create a “view” on sound technical analysis techniques, but the reality is, it has nothing to do with futures prices that are always unknown. So the trading plan must account for this, in the form of taking profits and taking losses.

When having to take a measured loss in the form of a stop loss (when it was part of the plan) makes the trade event a success, as both potential outcomes were planned for.

Maybe not the outcome we wanted, however as you know trading plans when based on back tested results would show a win loss ratio anyway.

And this really is the measure of success - did you follow the plan?

Trading plans are built around what can be successfully replicated, and all successful businesses are built around the same concept.

The first item of the trading plan could be the setup or trigger for entering a position. This is something that is recognisable from past occurrences of the same price pattern.

Let’s take a look at one simple pattern that is replicable, the reversal pivot point.

trading patternFollowing a price movement down, the market makes a further low followed by a price bar that closes over the high of the bar that makes a low, this simple price observation can be tested to see how it pays off in the next 1 or 2 or 3 trading periods.

Trading pattern 2Here is an example of the outcome after 3 bars. Entry on the close of bar 1 and the position remains in profit on the 3rd bar.

Trading pattern 3This second example shows the same type of pivot point setup that while in profit on bar 2 met the Stop Loss on the 5th bar.

Working through your price charts and documenting the outcome from a simple price pattern, the results can be very sobering when it comes to understanding your potential success rate. It should be pointed out this applies to all time frames including intraday charts.

In summary - the first principle of trading is believing not everything works, and having a contingency plan in place to deal with the outcome, including taking profits.

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GAIN Capital Australia Pty Ltd, 100 Harris street, Pyrmont, NSW 2009 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

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