How to create an objective trading plan

Today I'd like everyone to welcome back Dr. Barry Burns. He was a guest blogger a few weeks back and the overwhelming response was "we want him back"! So you asked for him, I called in a personal favor, and here he is again to help teach us.

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Traders who use technical analysis rely on charts to help establish a probability scenario for entering a trade.

We generally look at 3 things:

Price patterns.
Volume patterns.
Indicator patterns.

There have been countless books written and courses sold on how to use these things to predict future market movement. Despite this, countless traders continue to fail in their attempts to become profitable.

Why?

After years of watching my father trade (he had 70 years of experience in the markets) and many years of my own experience, I’ve come to this conclusion:

None of it works!

That’s right. I haven’t found a single price pattern or indicator that could accurately predict the future of the market with enough probability to make any money.

So, is technical analysis an exercise in futility?

Although I haven’t found any one single thing to prove profitable, favorable probability scenarios can be found by combining several indicators. However this has to be done in the right way.

I identify what I call the “energies” of the market, and have selected certain indicators to measure those energies.

5 of the energies are:

Trend.
Momentum.
Cycles.
Fractals.
Blockages.

The key to success is to wait until all 5 of these energies align telling you the same thing (“go long” or “go short”) at the same time.

Indicators measure these energies. Again, I don’t have much confidence in any single indicator. After all, they only do what their name says: They “indicate;” they don’t “tell” you what the market will do next.

However, when all 5 indicators align, and they each measure a different energy, then this is a time when the probability is now on your side.

You can even use this to “score” a trade on a scale of 1-5 depending on how many “energies” (indicators) align in the same direction.

You may choose to be very conservative and only take trades that are very high probability – so you’ll wait until all 5 energies align. The downside of this is that it doesn’t occur very often and therefore you won’t be very active in your trading.

You may decide you need more trades to be psychologically satisfied and keep your interest and focus on the market. In this case you could take trades that rate a 4 (4 of 5 energies align in the same direction at the same time). You will get more trades, but your
win/loss ratio will be slightly lower.

You can choose your favorite indicators to measure these 5 indicators. Which ones you use isn’t the most critical factor … as long as you know how to use them properly.

Using this approach gives you a very measurable and objective way to make decisions and track your trades.

BIO:
Dr. Barry Burns is the owner of Top Dog Trading which teaches people how to avoid the long learning curve in day trading, swing trading and investing.
He started his study of the markets under the direction of his father, Patrick F. Burns, who became independently wealthy through trading and had over 70 years of trading experience before passing away in 2005.
He has been the featured speaker at DayTradersUSA, and developed a 5 Day Course for WorldWideTrders.
Dr. Burns has been a headlining guest speaker for the Market Analysts of Southern California, given seminars around the country at many Wealth Expos as well as many Traders Expos, been interviewed on the Robin Dayne "Elite Masters of Trading" Radio Show, and is the former moderator of the FuturesTalk chat room.
He has a doctorate in Hypnotherapy and is a certified NLP practitioner, and therefore able to help people with the psychology of trading.

Back Testing for Better Trading Results

In today's guest blog post I asked Ingela Troha to talk about something that has plagued me, and millions of traders each and every year...it's back testing! Please read the full article, and put the info to good use!

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Back Testing can be a dirty word for traders who are too impatient to test their trading plan. Just the thought of it feels like an inconvenience, and a delay of getting into the live markets. Also many are confused about what the process involves, or completely unaware of how valuable it is to the bottom line of their results.

The benefits of back testing are extensive; years of experience can be gained over a shorter time frame (sometimes within hours) which further develops the traders intuition as the get to know their trading plan intimately; there is also the advantage of using your trading system through various market conditions and not just the current market type; plus testing new indicators and tweaking old ones; or creating a trading plan tailored to your own personal style.

The back testing process involves taking what criteria you have within your trading plan and applying it over at least 4 years of data – pick a period including all movements; bull, bear and sideways conditions. Your trading criteria must be well defined and not open to subjectivity – if it is get rid of it and find a new indictor. Trading rules should be very clear, for example: “Enter 1 daily close above the XX Day Simple Moving Average, with a Stop Loss 25 points away…” and so on. Trading criteria must be so precise that if you were to give the information to 10 different people they would come back with the same results. If there is too much room for interpretation within your rules, you will find it hard to repeat your successes
and avoid losing trades.

Once you have applied your trading criteria over a historical period, carefully noting each trade, you will be able to reflect on each position you took and identify a number of things; you may be able to minimize the risk of each trade by moving your stop loss closer or minimize the probability of being unnecessarily stopped out by having it even further away. For example, if over the 4 year period you made a total of 100 trades where 60 were winning and 40 were losing, you could analyze all the losing trades and see if any of those could have been eliminated or minimized. You could bring in an extra rule or indicator that would have avoided the placement of those losing trades, (however, remember that a new indicator could also have subsequently not allowed you to enter some of the most profitable trades so these need to be tested for viability).

The scenarios that you can back test are endless, and the process may at the time feel quite daunting or monotonous but it is actually deepening your feel for the market by training your eye to look for market movements and patterns that repeat…setting you up as an agile trader to effectively stalk the live markets.

Back testing of course cannot replicate the emotions you will feel that fuel the live markets, but it will add to your profit margin in more ways than one. Happy back testing…

Ingela Troha

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Ingela Troha is a professional trader with over 14 years experience
within the financial services industry – www.unearthedfinancial.com.au