August 10, 2015

Simplified Trading System

When it comes to a great trading system, just about every successful trader can agree on one characteristic: KISS (keep it simple stupid). Furthermore, a significant body of research in cognitive science highlights the limited capacity of the human brain and how difficult it is to retain even a few pieces of information in working memory (check out Dr. Brett's article for example). Because of these points, I wanted to condense my own detailed trading system down to its most crucial points. If I can succeed in creating a simple trading system that can be intuitively recalled in the heat of trading, I stand to gain immense confidence and decisiveness in the face of rapidly changing price action, horrendous volatility, and seemingly unpredictable markets.

What I learned while trying to condense my trading system into a simpler form is that it ain't easy. It takes a lot of effort! Additionally, simplicity isn't enough on its own. I realized over time that I had to pair simplicity with compartmentalization. What is compartmentalization? Basically I had to create main groups and sub-groups, much like chapters in a book. That made it much easier for my brain to quickly jump to the page/subject I needed answers to like "risk management." Once I mentally jumped to the risk management chapter, I could easily recall the condensed principals for that chapter. Let me show you what I mean by different chapters and simplified principals (check out this page for explanations of abbreviations and terms used below):

First, I condensed my daily routine down to just 6 critical components:

What are my best setups? Focus on these setups.
Trend or Spike: Join it; Trading Range: BLSHS top/bottom 3rd.
Number 1 trading goal today? Follow my trading process, plan, and rules, then celebrate when followed! Celebrating anything releases dopamine in the brain which is very addictive. That means you become addicted to the right goals and the right habits that lead to success.
No trade is better than a bad trade! Surf the web if you get bored.
Analyze today's trades (What did I do well? Was my chart analysis correct? How was my execution?). Check out Mike Mike Bellafiore's priceless advice in "The Playbook."
Analyze stocks for tomorrow and detail the trading plan.

Next, I condensed my trade process to 5 principal components:

Trade Process:
TA and MMs
Pattern (trend vs. trading range) now vs overall day
Analyze Signal bars
Risk to swing high/low or signal bar, scale in plan
Exit 1R or 2R, MM or sup/res, good reversal signal, or H2/L2 DBs/Ts

Next, I condensed my entire trading system down to 2 main trading strategies:

Spikes and strong trends i.e. one-sided trading, sense of urgency (bet BOs succeed):
Breakout trading, enter for any reason with-trend, 1R minimum, swing part with a wide stop
Buy H1s-H3s, BOs, close of any trend bars, 20EMA, TLs, BOPBs, BO tests
Watch out for signs of weakness (dojis, counter-trend bars) which may indicate a trading range or a reversal. If there's a good reversal signal, consider switching to BLSHS strategy below

Trading ranges and weak trends i.e. two-sided trading, big up, big down, big confusion (bet BOs fail at top/bottom 3rd of range/channel, fade extremes, bias to previous/current trend):
BLSHS top/bottom 3rd or beyond of range, 1R ok but 2R preferred, scale in, pullbacks ok but get out beyond any strong trend bar or H2s/L2s, can always get back in
Sell H1s-H3s near top 3rd of range as well as swing high BOs, close of strong bull bars, 2nd entry reversal L2s (don't need a good signal)
Watch out for signs of strength after range BOs (strong or subsequent trend bars) which may indicate a successful breakout. If the BO is strong, consider switching to BO trading

Finally, I condensed risk management down to 2 main strategies:

Risk to previous swing high/low or signal bar, then switch to entry bar after beneficial price action, don't allow H2s/L2s, can always get back in
For every trade, but swing part in new or strong trends
Exit 1R (high prob scalp) or 2R (low prob scalp)

Risk to previous swing high/low, trail stop
For new or strong trends
Exit 2nd entry reversal or MM target or major sup/res

And for repetition's sake, I reiterated critical laws of market behavior:

Key points
80% of attempts to reverse a trend fail (therefore join the trend)
80% of attempts to reverse a trading range fail (therefore bet BOs/BDs of the trading range fail)

And there you have it, my compartmentalized and simplified trading system that is far more easy to recall in the heat of trading. I'd be happy to hear your thoughts, let me know below in the comments.



  1. Hi -- Can you post a link to a definition of all the acronyms used in this post ?

    1. Definitely, I'll start drafting up a post to cover all the definitions/explanations of terms. Thanks for the idea!

    2. Here you go:
      Thanks again for the idea my friend.