Starting Down the Yellow Brick Road to CP

I have recently been getting a number of the same types of questions, over and over again so I think I need to say some more about how to use this blog to help you get to CP (consistent profitability).

In the next few days I will post a series that answers these "how to" questions that can act as a starting point to seeking CP. I will also post this series in KEY POSTS as "The Yellow Brick Road."

OK, you found this blog and it looks to you that we are doing something here that fits the way you want to trade. First step is to read the blog from beginning to end, including the comments, looking at the trades on each chart, trying to work out why the trade was taken. You can print out the blog/comments if needed as a reference.

Next, you read through the blog and the comments a second time now knowing a lot more about how we trade as you have already read the blog, but this time taking notes on the charts that will help you create your own trading "rules". Perhaps you will need to do this more than once. Write these rules down, this will be your first attempt at your trading plan.  Trading plans evolve so don't worry.  I'll talk about this later.

You now should have your own ideas of what a trade setup consists of. The entry trigger for these trade setups are bar close. As a first step, I would, in SIM, only look to exiting trades "all out" at the first logical scale point. This way, you can concentrate on entries and trying to achieve a high win rate without worrying about how to maximise the profits on each trade. That can come later.

The first decision you need to make is which market to trade. It should be a market with the highest daily volume in the timezone you want to trade in. There are markets trading 24 hours a day in different parts of the world so everyone can find a market that is tradeable before or after their working hours so that they can achieve CP in SIM while they are still holding down a job that pays the bills, saving up money for their trading capital.

Next, you need to setup your charts using range bars as your single trading chart. Finding the "correct" settings is easy once you use a bit of logic. The range bar length needs to look to eliminate the "noise" from the market while revealing the vertical movement clearly. The first rule I have is that the length of my range bar should be such that my drop dead stop loss should be no more than the length of two range bars plus a tick. This will give you a maximum value for the range bar. For exanple, for the ES I use 5 tick range bars as I am happy with a drop dead stop loss of $312.50 per contract. I exit most trades well before this limit is hit but I am prepared to lose $312.50 per contract on every trade should I not be able to get out cheaper. Don't have your drop dead stop too close as you will get stopped out of winning trades and you will begin using the stop as an exit mechanism rather than letting the market tell you when to exit both at a profit and a loss.

You find the correct settings by eye balling the chart. I go a step further by using a computer program to test the profitability of different range bar settings for specific setups but you can do a similar thing manually, although it takes longer to do. I'll speak about this in another post.

More tomorrow.

Today's trades below. Not much happening in the Hang Seng and it is acting quite subdued.

Click to enlarge