Analysis – TradePlan Development Worksheet

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MyTradePlan

This questionnaire provides the foundation to develop a TradePlan that will allow you to:

  • Continually evaluate your trading in an objective way
  • Trade without emotion and with minimal stress.
  • Make needed adjustments as “matter of fact” not with the emotion that plan-less trading invokes.

Make your answers to the questions as clear and succinct as possible. There is no room for ambiguity in your plan; so avoid vague, fuzzy statements. Also, where possible, always define and qualify your statements.

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Personality Profile

Countless papers have been written about how the best traders are cool as cucumbers and show no difference in emotion regardless of whether they are winning or incurring heavy losses. On the other hand a novice trades well on a simulator only to be faced with a whirlwind of emotion when real money is at risk. How do you avoid becoming a slave to emotion? With a TradePlan.

  • Why do You Want to be a Trader?
  • What Type of trading appeals to you?
  • What are Your Personal Strengths and Weaknesses?
  • What frame of mind are you in now?
  • What are Your Income Targets?

Setting Goals

Setting goals is an essential part succeeding at anything worthwhile. Goals therefore; are a big part of your TradePlan as they provide you with a meaningful (to you personally) objective to work towards. The plan provides the way to track progress. Think in terms of your development as a trader, as opposed to thinking of purely financial goals.

  • Where do you want to be as a trader in one year?
  • Monthly?
  • Weekly?
  • Daily?

Some Details

Most Plans will recommend limiting your market of focus but with a Strategy Based Trading approach that same edge can be applied to market state conditions and specific structure bias. In this approach limiting your trading to markets that are only in a NON TREND state with sentiment outside the CriticalRange to apply your deviation tactics can be even more empowering than only focusing on U.S. Stock Indices or Yield curve trades. Your personality traits will typically drive the type of trading that is best suited for creating a sustainable TradePlan. The charts and applications you use must correspond with this view.

  • Which Markets do you want to trade and why?
  • What timeframe do you want to Trade and why?

 

Tools of the Trade

Your broker and trading platform are critical to your performance, ask questions look for recommendations here is a list of concerns:

  1. The type of markets that you wish to trade. If, for example, you wish to trade U.S. stock indexes, which broker offers the largest universe of futures and do they also allow you to trade securities.
  2. The size of your account. If you have only limited capital with which to fund your trading, you need to start with mini products or micro currencies.
  3. The platform you use to trade. Which ones does your broker support if you have questions.
  4. The level of support and customer service offered by the broker. There are hands off and full service brokers see which one is the best for you – most appropriate is not always the cheapest
  • Which Trading Platform are you going to use and why?
  • Do you have experience with it?
  • What Infrastructure do you have supporting your trading?

 

Before the Market Opens . . .

To begin trading without doing your homework beforehand is like building a house without a blueprint – possible? Maybe but not recommended at all. Have a TradePlan and develop a routine to ensure that you are prepared fully for the trading day ahead; this decreases your susceptibility to seat of the pants trading and emotional mistakes. In addition it builds self-confidence and improves your ability to trade more intuitively.

  •  What is your Daily Pre-market Routine (or post close routine)?
  •  Do You Analyze Yesterday’s Trades?
  • Do you consider the Fundamental Market Conditions?
  • What does your trading day look like by the Hour?
  • Do you keep and update a trade watch list of markets that are in your preferred market state?

Risk & Money Management

This is the crux of ANY trading successful trading endeavor period. Failure to apply sound risk and money management principles will, almost certainly, be financially ruinous. First of all, let us define the difference between risk and money management. Risk management focuses on the steps necessary to minimize losses by assessing market state conditions, sentiment bias influence, volatility expectations, risk-reward, probabilities and the proper use of stop loss orders etc. Money management, on the other hand, focuses on the steps necessary to maximize profits by the use of trailing stops and adjusting position size etc. This is summed up perfectly in that giant of trading axioms: ‘cut your losses short and let your profits run. It is important that your feelings about risk are compatible with your TradePlan.

  • What is Your Attitude toward Risk?
  • What is your Overall Market (account) Risk?
  • Do you understand your Broker and Hardware Risk?
  • Do you understand the risks associated with your trading tactics? Please explain

ALL strategies break down. This is due to the markets constant transition from one trading environments to the next. It is crucial to identify what market states compliment the criteria of a trading strategy or tactic and monitor its performance during different market state themes. Markets are constantly in transition and we need to constantly update our tactics as conditions change.

Advanced Risk Management Topics

When it comes to assessing the specific risk associated with a proposed trade, most traders focus only on the risk-reward ratio. Unfortunately, this is only a part of the picture, unless probability is factored into the equation. Here’s why: suppose the risk-reward ratio is 4:1 – a gain of 80 points while only risking 20. In isolation, this looks excellent. However, if the probability of a trade being successful is only – say 20%, i.e. the probability of a 20 point loss is 80%, suddenly the proposed trade does not look quite so attractive! To assess the probability of success of a trading strategy we must start by standardizing our TradePlan to market state and structure conditions. This needs to be precise with no ambiguity. “IF the market is in this state and structure; THEN my strategy is to does that”. This is vital in order to build the foundation to create a sustainable trade program.

  • Do you understand the Probability of a Successful Trade?  What is the real risk of an opportunity?
  • Do you understand the Risk-Reward Ratio of your strategies?
  • Do Calculate the Risk Per Trade?
  • How do you make decisions on where to place Your Stop Loss Orders?
  • At what point will You Cease Trading for the day?

 

General Money Management

Your trading capital must be money that you can afford to lose and be set aside from everyday expenses. If you lose the lot, it should make no difference to your standard of living. Clearly define in your plan the extent to which you will credit additional funds to your account in the event of large drawdowns and debit the account when it starts to burst at the seams with huge profits.

  • Large Drawdowns and Profits – What will you do?
  • What Money Management Approaches do You Use?

 

Specific Money Management

Utilizing a trailing stop to lock in profits once the trade is on the right side of break even has two clear advantages. 1) At worst, you may end up with a scratch trade – but no losses. 2) At best, it allows profits to run which enables you to take a sizeable chunk out of the expected move. Part of standardizing a TradePlan should consider how trial stops adjustments should be anticipated in different market state and structure conditions to reduce profit give-back as much as possible. Profit Give-Back refers to how much unrealized profits do you “give-back” on a trade. This should be a function of the opportunity as well as the overall risk management aspects of a TradePlan.

  • How do You Determine Your Position Size?
  • How do you lock in Profits?
  • Do you use a Profit Give-back ratio?
  • At what dollar amount of unrealized profit would cause your mental state to change?
  • What is your profit give-back ratio [the amount of unrealized profit you would “lock in” with a trail stop] for the following scenarios?

Unrealized                         Expectation                        Profit Give-back Ratio

+100                                      +300

+200                                      +300

+200                                      +500

+200                                      +750

+400                                      +750

+400                                      +1500

+400                                      +2500

+750                                      +1500

+750                                      +2500

 

Exit Strategy

Exit strategies are harder to get right than entry strategies. Unfortunately, they are much more important because, self evidently, they control the profit and loss. Arguably, for discretionary traders, the best exit strategy is one that is dynamic and market controlled, as opposed to a rigid mechanical strategy imposed upon each trade, regardless of market conditions. A dynamic, market controlled exit enables you to take some money off the table offered by the eventual losers and let the big winners run to realize a greater proportion of the increased gains on offer. These additional profits could transform an overall trading strategy from one that barely breaks even into one that is profitable beyond what we thought possible.

  • Losing trades – Do You Exit before Your Stop is Hit? Explain
  • Losing trades – Which Signals Will See You Exit Early?
  • Winning Trades – Which Signals Will See You Exit before the Initial Target is Hit?
  • Winning Trades – Which Signals Will See You Close Half?
  •  Winning Trades – When Will You Close the Remainder?

 

Trade Strategies, Setups & Entries

Strategies will vary in their profitability and usefulness according to market state conditions and structure alignment. Virtually all strategies fall into one of three generic groups: BREAKOUT, FADE (retracements) and REVESALS. Within these groups are a multitude of trading tactics, but basically follow one of these themes.

Based on your Personality Profile you may gravitate towards one entry strategy type but should be comfortable with each theme and a solid understanding of what market states they will work best in.

  • Which Market States do you like to Trade?
  • What are tactics do you apply and what are Your Setups?
  • How do You Find Your Setups? 
  • Which Signals Will Trigger Your Entry?

 

After the Market Closes

Once you have finished trading for the day it seems like you should just walk away from the stress. The process should include examining both winning and losing trades. It is essential that you know what you did right and, just as importantly, what you did wrong.

  • Do You Recorded Today’s Trades?
  •  Do you note if you executed Your Trades According to Your Plan in a journal?

 

Discipline

Having trading plan with detailed entry and exit instructions and excellent risk and money management procedures all count for nothing if you lack the necessary discipline to implement them. The next questions are about ensuring that you stick rigidly to the commitments that you have made to YOURSELF . Adhering to your plan is relatively easy during periods of profit. However, the real test will be your ability to stick to it even when your trading is not going so well.

  • Have you Back Test or Forward Test (Sim) your strategy?
  • Do you have any Promises to Yourself [consequences of following or not following the Trade Plan]?
  • What Questions do You Ask after a Winning Trade?
  • What Questions do You Ask after a Losing Trade?
  • What Steps are You Taking to Learn More about Trading?

 

 

 

 

Analysis – Personality Profile Overview

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PERSONALITY PROFILE QUESTIONAIRE OVERVIEW

The personality profile questionnaire utilizes the NEO Five Factor Inventory derived from the research of Robert McCrae and Paul Costa. This assesses personality on five trait dimensions that have been found to be relatively stable across the lifespan:

1. Neuroticism – the tendency toward negative emotions.
2. Extraversion – an outward orientation toward people and life.
3. Openness to experience – a desire for novelty, variety and risk taking.
4. Agreeableness – the tendency to get along well with others.
5. Conscientiousness – the capacity to be reliable, steady and trustworthy.

Findings

  • From our findings the traders who reported the greatest success tended to score high in conscientiousness. There were very steady and reliable.
  • The traders who reported the greatest problems with their trading tended to score high in neuroticism and openness. They were experiencing many negative emotions and tended to use trading for excitement.
  • The conscientious traders tended to be highly rule-governed in their trading. There was little excitement in their trading. Instead, they very consistently developed their plans and followed them.
  • The neurotic and risk-taking traders tended to make their decisions impulsively, without prior planning. They tended to revel in telling stories of their great wins and losses.

The key to the study is that success in trading is related to the ability to stay consistent and plan-driven. Traders fail not because of their emotions, but because their emotions deflect them from their purpose. In developing their rules and systems, the successful traders had found a way to immunize themselves from the emotional effects of market volatility. Indeed, in many respects, the successful traders appeared to be every bit as fearful as the unsuccessful ones. It’s just that the fears of the successful traders were not those of drawdown or missing a market move. Rather, they feared deviation from their plans. Dedication to purpose was the cornerstone of their success.

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Development Path to Success

The following are some thoughts on developing a path to success:

1. There is no quick or easy way to success. Success in trading comes from years of hard work and dedication.

2. Develop strict money management rules. Execute your money management rules instinctively and without hesitation. Never change these rules when trading, unless it is in the more conservative direction. Remember, anything can happen in the markets at any time. Always stay defensive and preserve your trading capital.

3. Top traders know human psychology better than they know technical analysis. They are also aware of their own psychological profile, and are able to profit from this knowledge. Many experienced traders have stated that they wished that they had spent more time learning psychology of the markets rather than technical analysis.

4. Top traders are humble, and spend a lot of time studying markets because they enjoy it.

5. Top traders treat a trading loss as a learning experience rather than a failure. Top traders never quit after a trading loss. They are always ready to trade again with new market knowledge.

6. Start a trading career the same way that you would start a business, because trading is a business.

7. Develop your “OWN’ trading plan. A trading plan that works for one trader, will not work for another. Each one of us is unique, and only you know what your trading plan should be. This ability shows dedication to your trading career and discipline.

8. Constantly refine your trading plan. The markets are constantly changing. What works today will not necessarily work tomorrow. Successful traders stay constantly in-tune with current market activity and themselves. Each day is a unique market experience.

9. Watch the markets you trade every day and how they behave in different market states. Top traders spend years learning their markets so well that they can instinctively anticipate a change in market direction and profit from that activity. However, do maintain balance with some off time and quality of life considerations.

10. Use market state and structure as a tool to support your instinctive anticipation of a market movement. Systems that only use technical indicators as strict “buy or sell” signals are rarely consistently profitable and must be optimized.

In summary, to be a successful trader requires that you treat trading as a business and a job that you enjoy above all other jobs. It takes years of hard work and dedication. There is no short cut path to success.

Click here to get started by taking a Personality Profile.

 

 

Peak Performance through a Standardized TradePlan

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The purpose of this document is to provide awareness on the steps needed to apply JSServices Analytics to Standardize a TradePlan and make it sustainable.

Knowing personality traits associated with successful traders and things you “should” do to succeed in trading does not bring us any closer to achieving success unless we are practicing what we know to be true and are doing it consistently.

The problem is that we know but we don’t do.  For successful traders, this trait to “do” is innate and there is no issue. For most however it is the challenge that keeps trading success elusive.

The reason is trust. Trading strategies must be based on a foundation of truth to succeed. Good market awareness allows you to “see” the truth more clearly so you have more confidence “doing” and executing the proper tactics.

How do you improve your market awareness and start to take the steps to develop a path to success: Self-Identification.

Core Strength Assessment – Who Are You?

personalityprofile-image

Traits

Before you can define who you are, you have to understand your personality. Ask yourself a question, such as “What do I like to do?” or “who am I?” When you can answer that question, then you can use the information to discover what your personality is and how it affects your decision process in trading. Personality does not just influence how we move and respond in our environment; it also causes us to act in certain ways which is reflected in your trading methods. By understanding your personality you are better able to modify behaviors that are detrimental to your trading and create a trade plan that supports the behaviors your have. There are many different personality types, and it is sometimes difficult to classify a person into a single type as there are many different personality traits you can possess. Personality traits are simply:

  • Actions
  • Attitudes
  • Behaviors you possess

Personality Type

Your personality type can be determined by many factors. You can approach it the scientific way, by testing yourself and having a psychologist analyze you or by taking a personality test which is rather simple. By answering a few questions about your likes and dislikes and where you would like to go in life, a professional can give you a report detailing the type of personality you have.

In psychology, there are five factors that determine different personality types. The big five factors are:

  1. Openness is appreciation for a variety of experience.
  2. Conscientiousness is planning ahead rather than being spontaneous.
  3. Extraversion involves work environment.
  4. Agreeableness is, as it says, being agreeable.
  5. Neuroticism refers to worrying or being vulnerable.

Your personality test assesses how much of each of these five factors you possess and provides you with insight into who you are and the actions you need to take to developing a TadePlan that puts you on a path to success.

Personality Profile

A personality profile is a knowledge management tool used to provide an evaluation of a trader’s personal attributes, values and life skills, in an effort to maximize his or her performance. Questions in a personality profile test are designed to seek out information about a trader’s temperament, decision-making methods, trading style, general attitude and commitment towards work, along with quality of life considerations. The information can be used to match the right trading approach to natural skill set. Behaviors can be modified; however the core of who you are is difficult to change. Why force yourself to be something that you are not but rather develop a plan built to support your attributes and leverage your core strengths.

Profile Results

The best profile results come from taking an honest assessment. One reason a lot of traders struggle is that they believe by following a TradePlan that works for someone else it will work for them. This is not the case (unless of course your account is a direct “mirror” of that trader’s program). The reason is that the strategies they are applying are designed around their personality not yours. You are unique and your path to success will be your own. To achieve the best results in your profile commit to your feelings and have a bias in your answers. When faced with a question you are not sure of, press yourself for a bias and avoid non committed neutral answers. Uncommitted “neutral” answers do not help or provide insight into who you are. There are no “right or wrong” answers. The more honest you are, the quicker you can get on that path to sustainable profitability. Honest, biased answers provide you with the personality facts you need to build a TradePlan that works for you.

  • Personality Assessment link [The following link provides a complimentary OCEAN 5 Factor assessment questionnaire. It is recommended that you read this the document in its entirety before you take the assessment.]

Acumen Alignment – What Works for You?

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TradePlan Profile

A TradePlan is the rules that cover the entire trading program and is how you define your edge which will tip the balance of probabilities toward your success. This set of rules is your trading business plan and are the standards that allow you to measure your results and quantify your improvements. No plan will guarantee success. However, a good plan when adhered to, will provide consistency and enable you to stay in the game a lot longer than if you do not have a plan. By aligning your TradePlan rules with your personality traits and core strengths it makes it easier and more enjoyable to follow that plan.

A TradePlan is not a trading strategy but a good plan will always contain a strategy. The goal of this section is to highlight parts of your personality that will affect your decision making which should be taken into account in the development of a TradePlan.  The objective is to end up with a plan that is tailor made to suit your personality, ability and resources.

The TradePlan should be developed around these key factors:

  • Motivation
  • Risk
  • Reward

Motivation

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Why do You Want to be a Trader? “To make money”, is a generic answer that is applicable to all traders. It is not personal to you and, therefore, it is not helpful to your plan. It may be that you have a need for excitement which can easily lead to catastrophe if allowed to go unchecked. Perhaps you have heard stories about traders making exorbitant amounts of money in a single day? Without doubt, some do; but they are only a small fraction of traders who make any money at all in the markets. Overwhelming disappointment is often the reward for uncontrolled greed. Dreams about trading via a laptop, sipping champagne in the islands, are entertaining, but they are hardly grounded in reality. Such fantasies may help to motivate you to study the markets, but the emotions that accompany them will not help you when it comes to trading the markets. Just as the trader with a thirst for excitement is doomed to fail, the fate of a trader motivated by greed or reacting to fear is almost certain to end in disaster. These thoughts and emotions are not the problem and they occur naturally; it is how you allow them to impact your trading that is the problem.

Do not pretend to be someone you are not. Be honest with yourself to uncover the real motivations, fears and desires that fuel your ambition. Some of these will be helpful while trading, others will not. How you allow them to impact your trading is what, to a large extent, what a TradePlan will measure. To ensure that the impact of your motivation is a profitable one, you must start by examining your real reasons for trading and, hopefully, learn more about yourself in the process.

Question your true motivations. Are you certain that trading is the right business for you? If you believe that the markets exist for the sole purpose of showering you in vast quantities of easy money – then think again! Beware: trading is NOT the easy option and the effort needed to run a trading business must be respected.

Risk

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What is Your Attitude towards Risk? This may seem an odd question, but it is a good starting point to ensure that your feelings about risk are compatible with your trading style. Opinions on risk vary. Some traders think of the stock market as a hot potato – the longer you hold a position, the greater the chance of getting burned. To these traders, market risk is measured by the amount of time you are in the market. It could be seconds, minutes, hours, days or weeks. The longer you are in the market the greater the chance something will go wrong. Therefore, the trading style that keeps you in the longest can also be the most risky. There are many traders who will totally disagree with this and feel much happier and sleep better at night by holding medium to long-term positions. For them, trading momentum plays in volatile Indices intraday carries far too much risk.  Understanding your risk tolerance is a key factor in developing a sustainable TradePlan.

Reward

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What are Your Income Targets? There are numerous reasons for becoming a trader; making money is the one reason that unites us all. It is important to know your financial targets and to break them down into daily/weekly time frames. It is much easier to focus on short term goals than feeling the pressure each day to make your objective. Needless to say, if your strategies only generate 5% a month, it is counterproductive to have a target of 1% per day. Your targets are not idle fantasies; they must be based upon your back and forward testing results.

Setting goals is an essential part succeeding at anything worthwhile. Goals therefore; are a big part of your trading plan as they provide you with a meaningful objective to work towards and a way to track your progress. A well done plan will help give you all the motivation needed to get the job done because it is personal to you. When developing a plan think in terms of your development as a trader, as opposed to thinking of purely financial goals. By developing yourself as trader first you are able to identify a method that works for you and create structure to capitalize on the opportunities presented. Decide how you will achieve your goals.  Reward yourself once you do. The rewards should be specific and meaningful to you.

Application- How To Do It?

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Analytics Alignment

Self-Identification attained through a Personality Assessment and the development of a TradePlan, provide better awareness of what works for you. What you are comfortable with and willing to commit to too achieve fulfillment as a trader. It should be understood that every trader’s path is unique and building a strategy foundation from your core strengths and risk tolerances will provide for the best chance to create a sustainable trade plan. Improved awareness in how you respond to market conditions, gives you insight into developing strategies to capture opportunity. By knowing yourself and your own responses to specific behavior, you understand the market better and are able to identify shifts in market state faster and implement the correct strategy. Creating a sustainable TradePlan starts with aligning this awareness to market state conditions, structure and strategy themes that compliment your acumen. What market state environments are most comfortable to trade and whose characteristics align with core strengths? Are pivotal structure points favorable or is foundational structure better for risk tolerances? What strategy themes support profit expectations? JSServices Analytics identify the market state, structure and strategy themes that core strengths can be aligned with to create a sustainable TradePlan.

TradeStrategy Development

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The awareness the analytics alignment provides is a knowledge management tool to develop a TradeStrategy by creating a decision template based on truths. Do you like to trade with momentum or against it. If you like to trade counter trend do you want to take advantage of the initial turn or prefer to wait for a confirmed reversal. Are you a directional trader or would you rather base your strategy on volatility movement. Does your profile show you have a need to always be “involved” or do you want more selective strategy that only trades a couple of times a day. Do you prefer a mechanical automated approach or more “seat of the pants” discretionary trading? The answers to questions like these form the foundation of a standardized TradePlan which must be normalized into a TradeStrategy. This is done using JSServices applications which integrate into your daily work-flow and provide context for a consistent execution of a TradePlan. Every market state has its own characteristics and structure that defines it. Certain strategy themes that are inherent to these conditions will have better alignment than others to a trader’s unique standardized TradePlan. By normalizing favorable market state conditions that compliment a TradePlan with specific entry and exit points which define the market structure alignment, the optimal TradeStrategy can be achieved.

Optimization

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Every trader has certain trading tactics they have acquired over the years that provide the basis of the method they use to trade the market. Although the applied practice and theory may resonate and bring a high level of trust, the success ratio without a standardized TradePlan and normalized TradeStrategy will undoubtedly lack consistency and not be sustainable. Applying TradeTactics within the construct of a normalized TradeStrategy improves their effectiveness and can be optimized when executed within defined MarketMetrics and by incorporating dynamic order book events. For example, if you have a deviation tactic that uses multiple oscillators in different time periods to identify an extreme overbought/oversold reading, the TradeTactic needs to be normalized in the TradeStrategy development process during “trending” market states. A deviation strategy will work well in a neutral sideways trading environment in either direction but will most certainly fail when applied to fading a trend move. To optimize the TradeTactic it should be executed within defined MarketMetric thresholds that surround TradeStrategy entry and exit points. Performance can further be enhanced by incorporating dynamic micro structure events in the orderbook.

Peak Performance

The key to attaining peak performance is related to the ability to stay consistent and plan-driven. Traders fail not because of their emotions, but because their emotions deflect them from their purpose. In developing their rules and systems, the successful traders had found a way to immunize themselves from the emotional effects of market volatility by having a TradePlan standardized to core strengths and aligned to market state conditions. Indeed, in many respects, the successful traders appeared to be every bit as fearful as the unsuccessful ones. It’s just that the fears of the successful traders were not those of drawdown or missing a market move. Rather, they feared deviation from their plans. Dedication to purpose was the cornerstone of their success. Knowing who you are and what works for you makes it easier to stick to your plan and achieve sustainable results.

Consistency is improved by having a structured framework to execute a TradeStrategy. By normalizing entry and exit points to specific market structure levels trade execution becomes more constant and uniform. It becomes easier to identify when something is working or when it is not, as there is a standard to compare like events. Traders build self-trust and are able to trade more intuitively. Trade management decisions become a harmonious flow with steady execution of position, risk and size adjustments.

Peak performance is achieved by putting the process into action. All thinking is stripped away to action or no-action. TradeTactics are optimized at defined areas where TradeStrategy signals can be accepted. A trade or no-trade price threshold that supports a do or do not intuitive process. New technological advances offer additional ways to improve the effectiveness of a TradeStrategy by incorporating dynamic order book events. Through JSServices integration partners the unique ability to visualize specific order flow events offer an optimization tool to improve the effectiveness of TradeTactics and help traders achieve peak performance.

 

Get Started

STEP 1. Take the Personality Profile and have an Assessment created.

STEP 2. Send the your scores to info@jsservices.com and schedule a consultation to discuss the path that is best for you.

 

 

Optimizing TradeTactics

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TradeTactics can be optimized when executed within market metric thresholds and their effectiveness improved by using real time order book events that identifying areas of intensity of trade, resting paper and liquidity shifts.

Overview

  • Market Metrics are the price thresholds for signal acceptance around a PriceMap level.
  • Intensity of trade is defined as an increased flurry of activity that is supported with good volume. This is displayed as a volume dot or circle on our integration partner platforms.
  • Resting Paper identifies price levels that have a significant amount of volume that has been “resting” for some time that identifies potential support or resistance.
  • Liquidity Shifts identify significant increase or decrease in volume at a specific price point which signal an increase or decrease to interest that that level.

Practical Application

Order book events provide insight for two types of events:

  1. Momentum REVERSAL
  2. Momentum BREAKOUT

When order book events occur within market metrics thresholds they provide additional clarity for TradeStrategies that have been normalized to specific PlayBook Themes. Performance is enhanced and the effectiveness of TradeTactics is optimized by incorporating order book events within market metric thresholds.

The following is a practical application of combining order book dynamics and market metrics to optimize execution tactics of a PlayBook strategy theme.

PlayBook Example:  ES PlayBook Oct 14 2016

es-full-pb-oct-14-2016

R=CRX+

In the PlayBook example above the ES is in a BEAR TREND with the R LEVEL above the market at the CRX+. In this market structure bias (MSB) the negative sentiment of the BEAR TREND will remain intact below the CRX+ R LEVEL. The CRX+ is a validation level that will confirm or deny an upside CriticalRange BREAKOUT.

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The FACT that the R LEVEL is equal to the CRX+ and is in the context of a BEAR TREND market state, makes it more likely that the CRX+ will contain an UP BREAKOUT. The R LEVEL in this position creates a “resistance band” to FADE momentum and accept exhaustive signals within the CRX+ – UP price band, anticipating a resumption of the BEAR TREND condition.

Optimal Strategy Theme

The OPTIMAL PlayBook Strategy Theme for the market structure bias is a SELL R FADE and a SELL UP REVERSAL. These strategies are in alignment with the general underlying BEAR TREND outlook that looks for sell signals below the R LEVEL.

The image below shows a successful performance for the Optimal Strategy theme for the ES on OCT 14 2016.

orderbook-int-trade-post-1

Market Metrics

By incorporating market metrics and the dynamics of the order book TradingTactics are optimized and performance enhanced. The image below shows the PriceMap overlay with market metric identifying the area of signal acceptance for the SELL R FADE and SELL UP REVERSAL.

orderbook-int-trade-post-2

Using the above image:

  • SELL R FADE – The market metric AD (Alert Distance) should be use as the initial entry for any FADE STRATEGY (R-AD in this example). By definition a FADE anticipates momentum to turn “in front” of the figure. Entry TradingTactics are enhanced by aligning them with the metrics that define the optimal threshold for signal acceptance. Without this intelligence good trades are missed which did not “make it” to the figure. By definition the “best” FADE is one that “exhausts” in front of the figure within the Alert Distance and Variance (VAR) Market Metrics.
  • SELL UP REVERSAL – A REVERSAL by definition is a “false breakout” that 1st violates a PricMap level and then trades back through it. The market metrics can be used to confirm a REVERSAL using the AD (Alert Distance) on both sides of the figure. First to signal a breakout by having price action exceed the UP+AD and next to confirm the exhaustive failure or REVERSAL by trading back through the UP-AD.
Order Book Dynamics

Order book dynamics optimize TradeTactics by providing key intelligence to the facts of the moment. The PlayBook identifies specific macro themes that TradeStrategies can be aligned to and normalized at specific PriceMap action levels. Market metrics define “where” a potential shift in momentum or state will occur by outlining the threshold of signal acceptance. Order book dynamics complete the optimization process by improving timing and identifying “when” an opportunity will occur and if it is valid. The image below shows how incorporating the micro structure of the order book enhanced the effectiveness of the execution of the SELL R FADE and SELL UP REVERSAL PlayBook Strategy Themes.

orderbook-int-trade-post-3-bm-2

Using the above image:

  • SELL R FADE – The context of the PlayBook Strategy Theme “FADE” and normalized PriceMap entry level “R” provide an expectation to anticipate a rejection from the R LEVEL which is the price point that represents the peak for any corrective action of the BEAR TREND state. The market metrics further improve vision by identifying the threshold area surrounding the R FADE to anticipate a rejection. Using this intelligence as the macro context of the SELL R FADE opportunity the order book dynamics provide the micro confirmation.
    • Order Book Events
      • Intensity of Trade – As price action breaks out above the UP there is a flurry of buying in-front of the R-AD metric. As the MKT trades into the signal acceptance area (R-AD) there is less intensity identifying a divergence of interest.
      • Resting Paper – A “wall” of resting paper builds up within the R-AD metric confirming an area of “resistance” which confirms the validity of the R LEVEL itself.  A re-test of the high area does not generate any intensity signaling a divergence in interest and confirming the SELL R FADE.
  • SELL UP REVERSAL – The “wall” of resting paper above the MKT gives a “more likely to occur” expectation to a negative turn and a resumption of the BEAR TREND. The macro context of the market state and structure provides trade vision that a REVERSAL from the UP would not only confirm the SELL R FADE strategy but would also generate a new sell opportunity with the potential to be the start of the next extension lower.
    • Order Book Events
      • Liquidity Shift – This event provides a “tell” that a new trend is developing by shifting liquidity down. In a prelude to a REVERSAL opportunity after a rejection from the R LEVEL a negative liquidity shift offers a chance to anticipate a failure from the UP-AD and get into a trade early with the order book shift.
      • Intensity of Trade – A failure from the UP-AD metric signals a SELL UP REVERSAL strategy which when supported by intensity of trade confirms the event and is similar to validating a BREAKOUT.
      • Resting Paper – It is interesting to note that prior to the UP-AD failure, resting paper below the market began to “move out of the way”, which was another “tell” confirming the negative sentiment shift and underlying dominance of the BEAR TREND condition.
Summary

Observing price action within market structure in the context of the market state and underlying PlayBook strategy themes provides a macro foundation for TradeTactics which can be optimized by incorporating market metric thresholds and order book events. This combination of macro structure and micro structure offers the best results in creating more effective execution of TradeTactics.

MarketMetrics – APMD (Average PriceMap Distance)

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Average Price Map Distance (APMD)

APMD (Average Price Map Distance) = the price segment distance the MKT is trading in for the defined trade period.

IF we know the price segment distance the MKT is trading in, THEN we can forecast or anticipate price movement.

Markets are in a constant state of expansion and contraction. The ebb and flow of the expansion and contraction can be measured as a function of the APMD. Typically a MKT moves in ½, x1 and x2 APMD segment impulses. This is “typically”, or rather, what is more likely to occur, as x3 and x5 segment moves do happen during event conditions. As a general rule x1 APMD is a good measure for a “decision point”, when a MKT reaches the point of dynamic equilibrium and “decides” to either continue expanding or start contracting. The PriceMap Framework defines this market structure and the APMD represents the distance between these points to dynamic equilibrium.

In the example below the CRUDE OIL contract demonstrates this well over the 3 sessions.

marketmetric-apmd-1

 

Normalizing Exit Targets

Understanding the relationship between the PriceMap Framework and the APMD provides a metric to normalize exit targets for a TradeStrategy.

As a general rule the APMD should be used as the the minimum expected profit potential for a TradeStrategy executed at one of the PriceMap Action Qualifiers. R LEVEL strategies can go for more and be positioned for a x3 APMD move. A trade from the CriticalRange extremes has a minimum x1 APMD target but should go for x2 APMD and a DIR (Directional) trade x1 APMD. Any Validation level entry should base risk on a ½ APMD reward.

APMD Practical Application

Observing price action and the position of the LTP (Last Traded Price) within the PriceMap Framework provides awareness to the value of an opportunity. Trading tactics can be normalized by focusing signal acceptance at market structure points using the APMD as a measure of profit potential to define exit targets.

Identifying the relationship of LTP and the R LEVEL provides additional insight to the current expectation or “behavior” of price action. Momentum moving in the direction of the Sentiment Bias is more likely to follow through in the direction of that bias. The farther away from sentiment the LTP is, the farther away it is from the real “energy” or “liquidity”. Markets that expand >x2 APMD away from the R LEVEL may start to look “extended” and are more vulnerable to a “contraction” Even if that contraction is only ½ APMD. Keeping TradeStrategy signal acceptance in alignment with the Sentiment Bias is prudent, as is making position size or risk adjustments in accordance to the APMD distance between the R LEVEL and LTP.

Awareness is further enhanced by the significance the level has to the STRUCTURE of the STATE as well as the price segment distance the MKT has already achieved to get to the LTP level.

Example

In the example below, the MKT is in a BULL TREND state with sentiment positive, below the market equal to the DP (Downside Pivot). The UP represents the high point for any “contraction” of the positive trend and a valid SELL FADE opportunity. Prior to the UP being tested it was after a x1 APMD move from the DIR (Directional). This FACT combined with the R LEVEL being  x2 APMDs away from the UP, identifies lower positive energy at the top of the CriticalRange. The result of these  FACTS produce a x1 APMD “correction” back to the DIR where prices stabilize and produce a rally that is in alignment with Sentiment Bias for the trade period.

marketmetric-apmd-6

 

PlayBook Strategy Themes

MARKET STATE AWARENESS is improved by monitoring PRICE ACTION within MARKET STRUCTURE in the context of the MARKET STATE.

Specific strategy themes are inherent in the state structure dynamic and each theme has a profit expectation that is based on the APMD.

marketmetric-apmd-9

The image below identifies the Optimal and Hedge strategy themes for a BULL TREND MARKET STATE with the R=DP, that played out during the session along with expansion “E” and contraction “C” signals that produced ½ and x1 APMD segment moves.

marketmetric-apmd-10

The APMD MarketMetric provides reward expectations to normalize a TradeStrategy by identifying the price segment moves the market is trading in.  Many times it is not IF the market is going to make a x1 APMD move it is just a matter of how it is going to do it. Observing price action within market structure in the context of the market state provides awareness to opportunities. The APMD defines what those opportunities are worth so proper size and risk management can be applied.

 

Applications JSDesktop and Sierra Chart Price Map Chart Overlay