Thursday, March 27, 2008

Trade Rules

Considering Don’s and Bruce’s prep-talk I changed my layout to include a 10 tick chart complementing my 2min and 30min charts

Here is the current Setup:

Globetrader_04 

I will try to summarize my trade rules as I understand them now. Maybe some of you can add to the list or make corrections, so we get a list of rules, which will help all of us.

1. Trade pullbacks with the trend
That means:

a. Never sell a low

b. Never buy a high

c. You go long a test of a higher low in an uptrend
Globetrader_89

d. You go short a test of a lower high in a downtrend (see 10 tick gold chart)

Globetrader_505

2. Control

a. Buyers are in control as long as the market is making Higher Lows

b. Sellers are in control as long as the market is making Lower Highs

3. Support and Resistance

a. Resistance will be found, when the market is in an uptrend but is unable to make Higher Highs. As long as you see Higher Lows being made you might expect that resistance to be taken out eventually

b. Support will be found, when the market is in a downtrend but is unable to make Lower Lows. As long as you see Lower Highs being made you might expect that support to be taken out eventually

4. Trend

a. You see identical chart patterns develop on all timeframes.

b. Uptrend: Market is making higher Lows

c. Downtrend: Market is making lower Highs

d. To determine the trend you take a higher timeframe and then take the entry signal from the shorter timeframe

e. The longer the timeframe giving the entry signal, the stronger the move. (See example on the Chart I posted above) (30min chart showed a 50% pullback on the Easter Gap

5. Consolidation versus Trend

a. Markets swing between trend phases and consolidation phases. What looks like a trend in one timeframe can be consolidation in another usually higher timeframe.

b. Markets go from equilibrium to equilibrium. Usually the range covered in a trend phase stays constant within limits. If you know the contract you trade, you know when it has reached an extreme of a move. Take the Euro for example: A trend move usually goes 100 to 120 ticks. If on any given day a trend goes beyond that to say 150 to 200 ticks, you should expect a consolidation phase to start. That does not mean you blindly take a counter trend trade, but if you see Resistance not taken out and say a Double Top forms or even better price is unable to retest the former High, then you go short with a Stop above the highs in case the trend resumes.

c. Consolidation in a longer timeframe trend usually retraces 50% (minimum 33%, maximum 66%) of the previous move, before the trend resumes. If you see a smaller retracement, expect the trend to resume strongly.

d. What is an extreme move in one contract, might be just normal in another. So you need to know the contract you trade.

6. Stops

a. Trading without stops and instead adding contracts at a loss to get the average nearer to price works, as long as you are able to get the average entry price within the next consolidation price range. Say Euro makes a 100 tick move. You can expect Euro to eventually retrace 40 ticks from that high, so you need to get your average entry to less than 40 ticks below the high. But that means you are staying in a losing trade, which becomes more expensive with every tick against you. Even if eventually you might close the trade at a small profit or breakeven, you will have invested huge amounts of emotional energy. Not talking about the missed profits, because you stayed in that losing trade

b. Trading with Stops hurts immediately, something most traders like to avoid. But it has advantages:

  • You are emotionally free to step back and take a new look at the market
  • You get immediate feedback whether you are in sync with the market. I have as a rule: 3 Stops in a row and I’m out for the day. Tomorrow is another day and it will provide fresh opportunities.
  • You make sure you stay in this profession for the long run by protecting your account.

c. The disadvantage is, that you can bleed your account to death by a 1000nd Stops. To avoid that problem, you have to make sure, that when your Stop is hit, the entry signal was not a valid trade setup, meaning the possibility that the trade will come back is remote.

  • The better a trader you are, the smaller your stop can be without the risk of getting thrown out of a valid trade. (At least that’s what I assume)
  • The less wiggles the contract you trade shows, the easier it is to define where a stop needs to be placed to be sure a trade signal is no longer valid.
  • If you are still on the path to the expert level, you need to stack the cards in your favor to make sure you have a very high probability of the individual trade to be a winner. Only then will you be able to pay the unavoidable stops and still come out a winner.

7. Profits

a. Let the profits run.

b. Don’t give profits back.

c. Say you are long, the trend is up and the trade is showing you a profit. Where do you exit? Buyers are in control until Sellers are able to take control from them. That means you exit

  • at Resistance on a longer timeframe, because resistance usually is not taken out on a first try, or it would be no resistance.
  • If the market is making a Double Top. That means you need to sit through a pullback first. This pullback should have its low above your entry. That’s why we have the rule: Never go long at a top. If the market is unable to take out the previous high, you exit
  • If you trade (just) 1 contract, you take profits at certain targets, which have been proven in the past to be the average maximum range a trade goes before you see a pullback. It’s better to build your account step by step. The home runs are for a time, when you have mastered trading 1 contract.

d. I use an achievable daily goal of 375$/day per contract traded. Once I reach that, I stop trading,

  • if I’m at it for more than 6 hours,
  • if I have taken already 5 or more trades,
  • if I feel like I want to do something else. I trade to have free time for other things, so you need to take that time or the ultimate goal is not a real goal.

e. If I make my daily goal in one or two trades, I continue trading and see what the day will bring further. I limit my loss in that case to the profits made so far. A day in green, where you made your daily goal already should never end red, as that’s a big emotional blow to your trader psyche. It’s like a contract making a new all time high and then reversing to close below yesterdays lows.

8. Number of contracts

a. If you can’t trade 1 contract profitable, why do you assume you will be able to trade multiple contracts profitable?

b. With 1 contract you can achieve a daily goal of 500 to 1000$ / day by taking 3 to 8 trades a day. To build your account that’s for sure good enough. On the other hand you protect your account from overleveraging yourself in case something goes terribly wrong. And it teaches you to trade for bigger gains, which makes it easier to pay for the unavoidable losses.

c. I use an internal Margin of 7500 $ / contract traded unless the contract needs a higher intraday margin, then I use at least that margin (eg: the DAX is traded with an internal margin of 17000$. So I allow myself trading a second DAX contract only when my account statement shows at least 34000$)

9. What to trade

a. Trade what speaks to you. It really doesn’t matter what you trade. You need to be comfortable with the contract you trade, you need to know it in and out.

b. Trading different contracts is fine. But it will extend the learning curve as you need to learn not 1 contract in and out but multiple contracts. Each has its own quirks, each his own personality. Compare a Bond chart with an oil chart. It’s something totally different. There are groups of contracts which behave similar. Most indexes will move in a similar fashion, most currencies, a lot of commodities show comparable moves. But just because one contract is rising another must not fall or rise in sync. If you trade different contracts be sure you know the correlation between these contracts or you will be fooled by the markets.

c. If you trade Forex or currency futures be aware how each currency trades against each other. There is no longer 1 major currency in the world. We have 3 major currencies (US Dollar, Euro and Yen) and moves in one pair can be expressed in the other two as well. You might take a EUR/USD trade, but you might as well take a EUR/YEN and USD/YEN trade to get the desired position. The cross rates (major ones are EUR/YEN and GBP/YEN) need to be watched these days, as the carry trade was and is made or unwound in these currencies (If the interest rate differential between the EU and the US widens the new carry trade will be the EUR/USD, something we are already starting to see in the high Euro / USD exchange rate)

That’s it for now I think

33 comments:

Markus said...

Hi Christian,

I like your rules which indeed correspond with my own trading guidelines.
One difference is that I do not have a profit stop (nor a target) for the day. I think you should catch every opportunity the market offers. Your opportunities or trade set-ups can be compared to business volume. If you have an edge more volume means more accumulated profits. The nice part of your profit stop are the "ifs", and so it makes quite more sense. I myself trade everyday the same hours, independent of the number of trades or profits made, but I have a stop loss for the day. I am a full-time independent prop trader for more than 2 years (Eurex futures).
Btw, I assume you trade Eurex futures and so you try to make 25 ticks per contract/day with about 5 trades. Is that your average profit per contract/day or just your target? How long is your average holding time?

Thanx,
Markus

Globetrader said...

Hi Markus, you are right, that one should press on, when it is going fine. I just learned over the years, that consistency is the goal, not pressing on and giving back the other day or even in the afternoon. So you need to know, when to stop.
I trade DAX, FTSE, CL (oil), EUR and at times ZG (gold) futures. My profit target is usually between 10 and 30 ticks trading from a 2 minute chart. I look for 20 to 25 ticks per day per contract, but if I don't get it, so be it. In march I made actually 23 ticks/day on average, which is really nice.

DanielV said...

Hi Christian,

I arrived to your site thanks to Dr. Brett.
I really like your charts, but most of all the effort you have made to rationalize your trading plan.
I have though, looking at your charts a simple (stupid) question.
How do you calculate the HH HL LL LH?
I do not use Ensign, I use MetaStock right now.

Thanks in advanced,

Daniel

Anonymous said...

Hi Christian,
Great post and I agree more on the importance of trading rules.

With regards to your trade rule on trading pullbacks with the trend, You go long a test of a higher low in an uptrend. I see you have your chart annotated HL. At which point do you enter? A close/break above previous bar high or previous bar close at the HL or you wait till another higher swing low (above HL) appears before going long above previous bar high?

Thx, Alex

Globetrader said...

Daniel,

the HH, LL, HL and LH markers are placed by a study in Ensign. In hindsight it looks great, but in realtime a marker is only confirmed when the next marker is being set. For my style of trading that's good enough, as I use these as Support and resistance levels, which is the reason for the line added to the marker. In another chartpackage you might try to build them by looking for reversals after a certain range has been traded and then placing a marker on the High or Low of that marker. Hope that helps.

Globetrader said...

Alex,
that's where I'm thankful to Bruce and Don, 2 traders from a chatroom I'm in. Look at this chart.

http://www.globe-trader.de/Globetrader_506.png

Say I'm looking for a long on the DAX, because the 30min Dax is still holding the good support at 6600 to 6590.
The 2 min is trading down to 6607, 6605 was the daily low (marked with an orange Arrow)
Now I look at the 10 tick chart and see a support level marked at 6607 marked as LL (which is done automatically of course), this level is tested again but not broken. So I go long 6608, depending on what I get and look for an initial 10 to 20 tick profit, Stop is usually 20 ticks below, in this case I might place it at 6602 or 6597 depending how DAX trades. On follow-up you see that 6615 is a top, so I would exit the trade on the possible double top at 6614 for a 12 tick gain.
http://charts.dacharts.com/2008-03-28/Globetrader_98.png

DanielV said...

Christian,

Thanks for your reply.
If it uses Hindsight it is definitely like the zig zag function in MetaStock, you can use it but you have to be clear that it uses Hindsight and cannot be used for backtesting scenarios.

Thanks a lot once again,

Daniel

Anonymous said...

This is a great post. Thanks for sharing your trading rules!
-vel

market said...

Hello globetrader.
Thanks for yor post i think is very good.
can you tell wich studies of ensign do you have on the charts please.

Thanks

Globetrader said...

market,

on the homepage take a look to the right and look for "My own links" Click and download the "Ensign Chart Template" in your \Ensign\template folder

Anonymous said...

Hi Christian,
First, thank you for publishing your trade rules. I like the layout of your charts.
Looking at the right timeframes is very important. I like a top down vision. First study the major indexes on weekly and daily to have an idea for the larger timeframes. It is always better not to fight the big trend. You can use Heikin candles or ma’s. Then zoom in like you do on a 30 minute, 2 minute and 10 tick chart but in your mind are the larger frames. This because it is the path of the least resistance. Also an extra trade rule is to look for divergences between the various indexes en futures. For example if the SOX is not confirming the NDX a rally will be suspicious.
Furthermore I like a strategy to buy 2 contracts at once with a strategic stop. For example on the NQ mini’s a first target and a stop both 3 point’s. When the first target is hit you can let the other contract run for bigger profits without any risk and without moving your stop. Remember you went in a position on a strategic level and moving your stop from there will cause you much faster to be stopped out.
For your current template, can you explain what indicator’s you are using there. Did you stop with rangebars? What are your trade rules for the POC and how do you use it. Do you look also at the tick, trin, ticks, put call ratio, advancing versus declining issues etc?
B-Trader

Globetrader said...

Hi B-Trader,
on my current template I mark possible S/R levels, I don't trade the POC, as it is an area around which prices swing, not a S/R level in itself. The 66% volume range around the POC often serves as S/R levels and these I mark. I have Ticks on my trading platform, but usually don't look at them unless they are at extremes, which might indicate a possible countertrend is coming, if we are near a S/R level. I no longer use Rangebars, as I found it makes comparison of charts difficult. If you know how a contract should behave compared to another, then you can gain valuable information, if these 2 contracts are not behaving as they usually do. But to get that information the charts need to be comparable and you get that only if the timeframes are identical.

Best regards,

Chrisd

market said...

Hi Globetrader.
Thanks for you awnser,i see you use IB as broker, in your trading style what type of orders do you use with dax futures ,market orders?
(I trade Dax CFD`s) but i`m going to bigin trading dax futures, are you satisfayed with IB?
Thanks a lot for sharing This

Anonymous said...

Thanks Christian. You mentioned about a chat room. Is that a private chatroom or open to all? Would be interested to join in...

Alex

Globetrader said...

Market,

I'm trading with Limit orders only. I might, depending on the contract use Stop Market orders, but normally these are Stop-Limit orders as well. I'm very satisfied with IB. Adequate margin requirements, so nothing to complain.

Globetrader said...

Alex,
I'm in IRC:othernet in the #tradingspace and #trade chatrooms. The chat I mentioned was the Yahoo [Trading] (former NQoos newsgroup) and the Yahoo [Sanuk] newsgroup. Sanuk has an invitation only chatroom using eChat and ventrillo. You can join after you have been accepted into the Sanuk newsgroup. I strongly suggest, that you join a chatroom only after you have completed your trading day. Chatrooms are distracting and might influence you into taking bad trades. People often are helpful there, still if someone you respect posts a Short and you intend to go long, you will question your own analysis and eventually leave a good trade on the table. Trust yourself only! ... of course it takes time to get there. I usually make it a habbit to minimize the chatroom the moment I intend to take a trade.

pat said...

Chris: Many thks for posting the rules and other information on your blog. I use the Ensign temp now & same setup 30 min, 2min & 8T chart..I am trying to look at min info on chart so I could make a quick decison on trade setup ..
If it is not too much to ask..Could you pl post 1-2 trade setups that you take which work out or not & some explanation ..
Thks again for your generosity ..

Pat

Jeremy said...

Hi Christian,

Just wanted to say thank you so much, I've been trading indicator systems for around 6 months now and have come to realize that all indicators lag and are hobbled without an understanding of fundamental price action.

Conversely however when combined with that understanding they take off, and I now trade simple pullbacks in the direction of the trend between areas of support/resistance on a higher timeframe, with an ever-decreasing reliance on the psychological crutch of indicators. The beauty of your rules is the conciseness of them, I've seen Don's rules at Sanuk but your succinct presentation is a boon and has made a measurable impact on my trading.

Thanks again and take care, you've been a real, real help,

Jeremy :)

Globetrader said...

Thank you Jeremy,
it's really good to get the feedback from all of you. Actually I've written the rules also for myself, as trading them has turned my trading around as well. But reading your comments shows me, that maybe someone else might as well profit from it and that maybe it will shorten the way to your own edge in the markets.

Chris

Benjamin Lee said...

Well defined trading rules. You have explained the mechanics of the market well. Especially I like your "Never sell a low & Never buy a high." Patience is the key to wait for the market to deliver the trade for us.

Thanks again.

asiafxonline said...

thanks for the posting. that's very helpful for me.

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dorla said...

Very nice - easy to follow, simple, and working. Thanks for the knowledge!
More templates easy to download

Anonymous said...

HI
Christian,

I Looked through yor links but no template found , could u plz help me to download it.

I. Vybot said...

One difference is that I do not have a profit stop (nor a target) for the day. I think you should catch every opportunity the market offers. Your opportunities or trade set-ups can be compared to business volume. If you have an edge more volume means more accumulated profits.

I. Vybot said...

I also want to say that I arrived to your site thanks to Dr. Brett.
I really like your charts, but most of all the effort you have made to rationalize your trading plan.

Forex Stealth said...

Great post!nice chart....
Trading system which suits your trading style and trading habits the best. Simply put, do not try to pick up new way of thinking just because you found an apparently working forex trading system. Do not forget, it is always the trader who sets the rules and makes the decision for the system and definitely not the other way round.

Marketing strategies said...

You clearly set this chart trading perfect. I'm just studying the trends of it. My best reference of trading chart, i vote for this.

CSS Investment said...

Hi,

Your trade rules as well as the guidelines are really good.Your chart rationalize about the trading plans.

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Day Trading System said...

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Day Trading Sim said...

Christian, these are pretty good trading guidelines. Thanks for sharing these tips with us.

But just a question. What are some exemptions to these rules? Like when would it be a bad idea not to follow these steps?

Overall, thanks again for sharing these informative tips.

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