Introduction to Trading Preparation and Following a Trading Plan
Traders that approach the markets without a plan are setting themselves up for failure. Consistently successful traders on the other hand always follow a plan and generally have a daily routine that they follow rigorously in preparation for the trading day.
Trading without a plan and a trading strategy to execute that plan is like going to war without a gun. The markets tend to reward those who have a plan and the patience to wait for the right moment when their plan comes together.
Here are three important things to consider when preparing for your trading day:
- Formulate an expectation of what a market could do on the day you want to trade.
- Know what your plan will be in advance when the market follows your expectation (or when it doesn’t).
- Execute your trading strategy when your market follows your plan (or be flexible to change your plan when your expectation was wrong).
Expecting what price movement may do in the future is vastly different from forming an opinion about what price should do. Opinions are often rigid ideas that traders find difficult to change when the market they are trading does not follow their opinions.
What follows next will be a demonstration of how I planned for a recent trade ahead of time and how I used my strategy to execute that plan when price followed my expectation.
Trading Strategy Overview
Every day I open my trading platform and look at my favorite markets, I only want to do one thing:
Find the end of corrections within a trend and enter a position once the main trend resumes.
To do just that I need to employ a strategy that helps me formulate an expectation of what price action could do and how to enter trades when price action follows my expectation. What follows next will show you how I went about planning for a setup and how I executed that plan.
Recent Trading Plan on Crude Oil
This was the chart I looked at on the 17th April 2018 and on it I drew an upward sloping trend channel with Fibonacci extension levels. I like using a 4 hour chart to determine trend direction, find possible levels where corrections may occur and to set my targets.
When I looked at that chart I made the following conclusions:
- Crude Oil was trending upwards.
- It recently pulled back after testing the trend channel middle line (purple dashed line).
- If price were to continue higher then it would do so after the correction downwards and target the upper Fibonacci levels.
Next, I zoomed into price action a bit closer by looking at my 30 minute chart. I use this time frame exclusively to determine the following:
- Does price action provide me with clues as to which corrective pattern is underway?
- Where is this correction most likely to end if I’m right?
Asking myself those questions gave me the following answers:
- The highest high, before price moved lower (labelled B) was made with only 3 waves going into that high. That price behavior was typical of an Expanded Flat correction.
- If I was dealing with an Expanded Flat correction then I would expect such a correction to end with 5 minor waves (labeled i-v).
These answers formulated my expectation of what price could do and allowed me to label the last leg of the correction from i – v, expecting that the fifth minor wave would end this correction before price resumes the upward trend.
Note that I used a Schiff pitchfork to help me identify an area or price zone where I expected that correction to end at. All of this was done ahead of time and if price did follow my expectation then I would execute my plan if my strategy warranted an entry.
This is a perfect example of what happens when your expectation about direction was right but the area that you expected to see a change in direction never happened. To trade successfully you need to continuously adapt and have the willingness to chance your analysis on the go.
It was evident that price was following my direction but it was not finding support within my original entry zone. I therefore quickly drew another Schiff pitchfork and identified a lower entry zone.
The smallest time frame chart I look at is the 5 minute chart from where I enter trades but only after a certain set of confirmation signals present themselves. My first entry condition states that I need to see price touch or cross an area of market geometry. This happened when price touched the lower red line of my Schiff pitchfork.
The second condition requires that I see momentum divergence at the same time price touches that line, which was evident at the time on my MACD-Histogram.
Lastly I need to see a reversal candlestick formation at that same area before I finally place my entry orders. In my case there was no clear bullish formation at that low because I only follow 3 specific reversal formations. This prompted me to look for a secondary entry at a later stage which finally played out in the shape of a Symmetrical Triangle formation (orange lines) labeled as a-b-c-d-e.
I knew that Symmetrical Triangles end in 5 waves and after I spotted momentum divergence at the end of the 5th minor wave (labeled e) and the presence of two inverted hammer candle formations that it was time to place my buy order.
The results speak for themselves. After my buy order got triggered I was fortunate enough to be on the right side of momentum after I correctly anticipated where that correction should end.
I also knew beforehand where I should place my targets and this was one of those trades that hit targets in rapid succession.
This trade ran for a total of 215 ticks with an initial risk of only 10 ticks. I also managed my open position as my first targets were hit by trailing my stop upwards to appropriate levels.
The results on the Crude Oil trade was outstanding and testament to what is possible if you have a good plan that manages to pinpoint the end of corrections with great accuracy. I was fortunate enough to meet my targets quickly on that trade but sometimes it can take much longer and requires a lot of patience.
I will also be wrong sometimes and have losing trades but my risk is always very small and I know how to manage my open positions for maximum profit potential. You only need a couple, or even one big trade like this per month to be profitable even though you may have plenty of smaller losses.
The point I want to make is that my strategy correctly allowed me to formulate an expectation of what may happen and when price followed my expectation I had a plan in place to execute a trade without fear or hesitation.
Trading preparation and having a trading plan in place before you start trading is a crucial part of a successful trader’s routine.
If you would like to know more about my trading strategy then be sure to check out my course here.
Until next time
All the best