My Trading Plan

Here's a 'detailed' explanation of my trading plan. Please tell me what you guys think of it.

Foreword: The whole thing is based off of the theory that if something is profitable beyond a reasonable area of slippage and errors (such as computer problems) then it will likely be profitable for at least the near future. It's also based off the theory that the market will likely move at least 2 points in either direction from the open in any day before making any huge moves. (The exception to this is a trend day.)

Background: I back-tested this system starting January 1st 2010 and found that it is profitable by 72 points as of this writing.

How it works:

I look at the open price compared to the close of the previous day and decide whether to trade towards the close or away from it. I make this decision minutes before market opens at 9:30 and take a position at as close to open price as possible (usually slippage means one or two tick difference). I then set a 2 point target and 10 point stop and I don't do ANYTHING until either one is hit, at which point my day is done.

Please leave ANY questions of feedback. I've live traded this for almost all of May now and it has been profitable. I am looking for validation, especially from the people with years of experience because I don't know if I'm on the right track or not.

arch1:

Return on a $50,000 account (or whatever account size for that matter) is not only a function of the performance characteristics of the system(s) that you trade, but also

1- a function of YOUR ability to trade the system(s) as effectively as they are supposed to be,

and

2- a function of YOUR risk management parameters.


#1 is mostly a psychological matter ... probably easier for some than others, in any cases a hurdle all have to face at some point (this is my current major roadblock...)


To illustrate #2, let me provide a few examples of risk management "rules" that can dramatically affect both your short-term performance level and your long-term survival :

a) never risk more than 1/2 of your trading capital ... anything can happen, and in the unlikely event of a market event that would totally ZERO your account (whatever that event is), your survival will take being able to reach to that other 1/2 of trading capital ... which should not be in your trading account at anytime

b) plan for the unlikely max drawdown ... given your system(s) performance parameters (win ratio & average win$$$ loss$$$), run a MonteCarlo simulation to figure out what a 5th percentile (or 15th percentile) max drawdown would be over 1 year worth of trading. You will use this figure for a couple of things : (i) position sizing (ii) planing ahead for how you'll manage drawdown period, ie. are you going to keep trading the same size throughout all drawdown periods, or are you going to reduce trade size - and when/how - during drawdown periods
(note : if you trade several systems - or setups - it is wise to assume they will go through drawdown periods simultaneously)

(c) position sizing ... beyond just making sure that your account is large enough to handle the max expected drawdown and leave you enough $$$ to keep trading, you also need to decide how you will adjust your position size when your account size goes up ... will you keep trading same size, or increase - again when/how ?



Given all these variables, I believe you should be looking for the following info when evaluating a trading system (or setup) :

- overall expectancy, expressed as an R-factor (R being the "standardized" risk level you want to take on each trade, say $100 for example, a 0.2-R expectancy means over the long-term, your system will generate an average of +$20 per trade)
- win ratio
- initial stop (min .. max .. avg)
- average loss$$$
- average win$$$
- typical number of setups per year on each market of interest
- historical max drawdown (not a guarantee that future drawdowns will be less, but a good comparison point for MonteCarlo simulations)
- expected max drawdown (for example, using MonteCarlo simulation)


Hopefully, it will become clear that the same system can yield wildly different returns depending on YOUR way of trading it.

Originally posted by arch1
Not looking for anyone's personal experience so much as what one can fairly expect to obtain in return for the time, risk and efforts expended in this type of investing.

Jim Kane has some good posts about this:

http://www.mypivots.com/Board/Topic/2661/1/traders-forums-unbelievable-claims#11404

http://www.mypivots.com/Board/Topic/2715/1/es-fun-math-facts

For the record, I would've done about 15 points better this month if I had stuck to my original 10 point stop 2 point target than using the 1 hour stop with Bruce's RATs as addons/modifiers.

I am no longer trading that 2 point setup as outlined in the first post of this thread but I am keeping track for a little bit longer just to see where they end up for June.

70% of the time the gap fills, if you don't use any stops. So just targeting gap fill is, in and of itself a high probability trade, but not having any stop loss strategy can be very hurtful as well. The trick is knowing what sort of stops you can use and how to create a trading plan that incorporates your money mgt strategy.

Not to sound like a commercial, but you should spend some time over at MasterTheGap.com. They are all about how to play the opening gap and have a very sophisticated and probabilistic-based approach to fading the gap which takes into consideration how it opens relative to yesterday's price action, seasonality concerns, higher time frame market conditions and chart patterns in play, and much more. They also have a blog http://www.thegapguy.com/ which has a lot of free research on the opening gap you might find helpful. I've been a subscriber of their's for 9+ months and find their daily gap guides very beneficial.

@shodson - Have you read our Fading the Gap study?

DT, I am a recent member and haven't yet looked through all the articles. Thanks for pointing this out.

Any plans of updating this article with data from the recent years?

Couple of other questions for everyone - in case anyone has done back testing:

1. For days when the gap was at least 3 points, were there any days when the gap fill failed after coming with in 1 point of filling the gap and the day ended up as a no-fill day?

2. percentage of gaps that fill within the first 30 minutes of RTH when the max gap size is only 2 points?

Thanks
Hari

Originally posted by day trading

@shodson - Have you read our Fading the Gap study?

Originally posted by hari

...Any plans of updating this article with data from the recent years?

I have run that study a number of times since that initial article and each time the results came out so similar that it wasn't worth publishing. i.e. it's still as valid today.

Thank you DT.

Originally posted by day trading

Originally posted by hari

...Any plans of updating this article with data from the recent years?

I have run that study a number of times since that initial article and each time the results came out so similar that it wasn't worth publishing. i.e. it's still as valid today.

the specific criteria data ur looking..of course noone else here has done backtesting for it. something u need to spend time doing urself.

gaps are good though at fading. just gotta find something that works and be disciplined enough to follow it.