Principles of the Intraday Trading Plan

stress factors. It must be done in advance, to prevent the necessity of making important decisions in limited time constraints, when the proba- bility of making mistakes grows exponentially. Planning is absolutely nec- essary for intraday trading; without it, it would be impossible to have any chance for eventual success.

In addition to the choice of a currency pair, preliminary planning of each intraday trade includes four basic elements. Decisions about them should be made in advance. A trader has to decide the following four things:

1.Where to enter the market with a long or short position;

2.Where to cut loss (where to place a stop-loss order);

3.Where to take profit.

4. Whether a new position will be open in an opposite direction (re- verse), in case the stops are triggered.

Having the answers to all four questions prior to the beginning of a trade will make an ideal plan. However, ideal planning in the real market isn’t always possible. Frequently, a preliminary plan requires some adjust- ment because of constantly changing market conditions. It’s almost im- possible to foresee all the possible situations in advance, and the importance of each separate element of the trade planning is unequal.

Therefore, I follow two main rules:

1.I do not begin a trade if I haven’t decided at least the two first ele- ments, and I do not begin to trade if one or both of them are missing from my trading plan.

2.The correction of a preliminary plan can occur only inside a basic, ac- cepted-in-advance trading strategy. For example, some minor details can vary in the plan, but if the plan is already in the process of realiza- tion, I can’t change it.

The sequence of building a trading plan using the four elements stated above should be done according to the priority which we discuss next. (Elements 3 and 4 of a preliminary plan could be considered less impor- tant details of a trading plan.)

The stop levels should be determined in accordance with one of the prin- ciples of the method, which states that the market has only two possible directions in which to go. Therefore, stops should be placed only where the probability of continuation of a movement in the direction against your position grows sharply. The stops for liquidation of long positions should be placed at the point where the market gives a signal on opening of a short position. The same is true for the opposite scenario. For this reason, in many cases and according to my strategy, I liquidate a losing po- sition and simultaneously open a new one in the opposite direction.

If for any reason you can’t determine a level of placing stops in ad- vance, it is not worth opening a position at all. Such a situation has hap- pened frequently in my practice. The problem basically arises when I search for an opportunity to open a position in the direction opposite to the cur- rent market movement. In order to solve this problem, I apply some money management principles and have one more rule to follow: If I cannot find an acceptable level for placing stops in a sufficient proximity from the current market price, I refrain from making a transaction until the market builds to one that will include all the necessary elements. (Because we are talking here about intraday trading, sufficient proximity can be considered any dis- tance anywhere from 20 pips and up to an average daily range of the partic- ular currency pair you are dealing with at the present moment.)

An obligatory condition should be the binding stops to a technically significant level, that is, to support, resistance, or a trendline. Stops should be placed only where the probability of continuation of a move- ment in the direction against your position grows sharply.

Principles of the Intraday Trading Plan 115

As far as I know, lots of traders usually place stops considering money management reasons only. In such cases, the stops are placed on some fixed distance from a position open price, and typically not further than 30 to 50 pips. Sometimes, traders have some fixed amount in mind that they allow themselves to lose in one trade. Technical levels such as trend lines, supports, or resistances (frequently being close at a short distance behind the stops) are not taken into consideration. Such a practice results in stops that are triggered at the most improper moment. Too frequently, a prospec- tive and potentially profitable position is liquidated and a loss is taken.

To avoid such situations, here is another rule I always follow: Place no stops based on reasons of money management only. The binding of a stop should always be done to a specific technical level. If the nearest suit- able technical level lies on a distance more than a trader can afford to lose in one transaction, he should refrain from making a trade until the market comes close enough to such an appropriate level.

In some cases, it might be necessary to open a position against the cur- rent market movement because of the opportunity to catch the moment of a market turn. For this purpose, a position needs to be opened near the as- sumed top or bottom—a task that is very difficult to make with precise accu- racy. Then, the technique I call “postponed stops” can be applied. Postponed stops become attached, not to a specific price level, but to some specific time. More often, the postponed stops attach to the end of a trading day, ses- sion, or moment when the market finally builds a new, clearly expressed technical level. This is especially true if this new level can become a new top or bottom on which I will be able to put my new stop. Even in these cases, however, I have to be ensured against possible excessive losses and place a safety stop outside a possible range. This range is the level, which the market probably won’t achieve at the present time. Usually, I place these stops within the limits of 100 to 150 pips from the price at which my position was opened. A safety stop should also be bound to a certain technical level. I can- cel a safety stop when a postponed stop becomes invalid and a suitable tech- nical level at which to place stops is found.

A stop shouldn’t be cancelled under any circumstances or a trade be conducted without using stops. A stop can be moved (if necessary) in one direction only—closer to an open position price. In order to preserve a cur- rent floating profit, a trailing stop can also be used. When moving stops, you should always place a new one first and then cancel the old one.

CHAPTER 14

Date: 2015-12-17; view: 881