August 15, 2018 TSXtrad3r

Developing YOUR Trading System!

Hello traders, I hope your month is going well so far! August has been an interesting month in the market, particularly in the small cap space as there has definitely been a drop off in long side momentum, and a few less short plays per week which is typical in mid/late August, however, by simply following our systematic process and trade triggers, we are still sitting at a healthy 80% win rate for the month!

The key to this has been PATIENCE. In late July I was getting 3-5 valid trade setup triggers per day so we were seeing more trades, but even in the slowest weeks of the summer months, there’s still good money to be made, but you may have to wait a bit longer for those setups to arrive. As Tom Petty used to sing, “The wait is the hardest part”.

Believe me, I know what FOMO (fear of missing out) and boredom trading is all about. I think we’ve all had our battles with those issues, which is why I developed a simple system to combat that… (insert drum roll)

A TRADING SYSTEM! Yes, a system. What is a trading system? It means that we only enter a trade when ALL of the criteria we use to define a valid trade is met.

We have a simple 4 point system of criteria that we need to enter a trade, and if all the criteria is met (volume parameters, chart setup, and a few other simple indicators that we use) then we can trigger our trade with CONFIDENCE knowing that we have a statistical edge in these trades and they will work out with one of 3 possible outcomes:

1. Small Win – The trigger point offers 1 or 2 profit targets but lacks follow through, stop the rest near break-even for a small win.

PRPO One Target Trade

 

2. Big Win – The trigger point offers 1 or 2 profit targets, move stop to break-even, and ride the trend with zero risk to final targets.

Big win example on MARA – 10 cent per share risk trade, all targets reached.

 

3. Small Loss – The trigger point fails and no profit targets were reached. You take your planned stop which is a controlled loss.

SNES long signal failed

Planned / Controlled Loss Example

 

Remember: Taking a stop is NOT a bad thing! With EVERY trading system, no matter how good, there will be a sample of losing trades.

For example, if your trading system offers an 80% win rate, then 20/100 trades WILL BE LOSSES! The sooner you realize this, and plan for your losses (controlled amounts, planned stops, and always HONORING the stop), the better your performance will be, period. 

Notice how there is no 4th outcome “Big Losses”. Why is that?

Well, because we don’t take discretionary trades. We don’t guess tops or bottoms, we don’t chase stocks or alerts, and every trade that we take is timed by our system to offer the lowest risk entry with the highest probability of return.

So ultimately, as long as we follow our system, those are the only 3 outcomes that are possible, which really helps with our students confidence and allows them to find comfort in our system (especially while watching me trade it live during the day and walking thru the trades step-by-step).

How to Develop YOUR Trading System

OK, so you know what a trading system is, and you are sick and tired of guessing where stocks are going, taking boredom trades, trying to top tick or bottom tick stocks, and you want to start making better trading decisions and having more direction and less emotions in your trading. Good! Lets get started…

The First Step is Journaling Your Trades

Every professional trader I know keeps a trading journal. If you’ve been “winging” it all this time and you are ready to step up to the next level, then you are willing to take the 1-2 minutes it takes to screen shot your chart after a trade and save it so you can analyze your trades after the fact.

If you want to use the same trading journal as me, please see our blog post on journaling!

Take a screen shot (like the ones above) of EVERY trade that you take. These screen shots are going to give you visual representation of the trades you took with the entry points, stop loss, and exits.

Be sure to include notes in your journal so you know where the stop loss was VS the entry point, and what the setup was that you were playing.

 

Fast forward a few weeks, you’ve taken 50 trades and now you have some data to work with. Go through the journal entries and categorize each trade by the setup. For example, “Long flag break pattern” or “Short Setup” – Keep all of those trades together, both wins and losses; now here’s where the fun begins. 

First look at all the chart screen shots of the trades that are winning, and focus on those. Ask yourself these questions:

Which setup was it that yielded the best results?

What time of day was it when you took the trade?

Was the stock doing above average volume? Was the stock up on the day or down on the day?

Was the stock over or under key support/resistance areas?

Was the stock in an uptrend or downtrend?

So on and so forth.. I look at EVERYTHING. 

Now look at the losing trades:

Were they boredom trades?

Was there a valid “setup”?

Were you going long into a down-trending stock?

Were you chasing an overextended up-trending stock?

Were you buying into resistance? 

Ask yourself all of those questions (and more) and particularly focus on studying the LOSING trades so you know where you are going wrong. Chances are, there are some correlations in the losing trades that you may be repeatedly taking that are EASY TO AVOID as long as you KNOW you are taking them!

Remember, you cant fix what you don’t know, and you can’t improve what you don’t measure. 

For example, trying to short into momentum. This is a losers game, and can result in massive losses. We have a system for shorting that offers a very low risk entry point and a planned stop, that gives an 80% chance of success, and if it stops me out, the loss is relatively small vs the reward that this setup typically offers.

How do I know this? Because I’ve taken the trade 1000s of times and tracked the results in my journal!

The problem with NOT journaling is that you don’t take accountability for your actions. If you look at that trading journal EVERY day and look through your past trades, you will see the correlations on the winners (and especially the losers), and it will help instill good habits into your trading, and naturally, you will focus harder on avoiding the trades that your journal has proven DON’T work for you, and then you can hone in on perfecting the trades and setups that DO work for you! 

So, lets take a look at some trades from today. We had 2 valid setup triggers. The first was a short on $STAF which resulted in a win of 40 cents per share, and the second was a long on $PTIE which offered just under 80 cents of upside from our trigger point to get long with a stop just 10 cents away from the entry.

Both trades reached all 4 of our profit targets, and both trades offer a VERY low risk entry point vs the stop.

Lets take a look at PTIE. Here are the chat logs and chart:

 

So, as you can see we had a clearly defined entry point (which was explained ahead of time on the screen share with live audio and posted in the chat room) and an exact stop loss point 10 cents below the entry. This setup is what we call a “trigger” point which is where all of our criteria lined up to enter the trade with confidence, knowing only 1 of the 3 possible outcomes we discussed above could happen, with a strong favor in the win category.

In fact, this trade setup tends to have a 75%+ win rate, so we play it often. We explain in detail the exact criteria that needs to be met in our video lesson library which outlines our entire trading system with hundreds of examples of live trades in our daily webinar for our traders to watch and learn from. These are all instantly accessible with a mere 1 month access to our trading group.

Anyway, the entry triggered at $1.58 and the risk was just 10 cents per share. To put this into perspective, if you bought a measly 1000 shares of this stock risking just $100 on the trade, you could have sold near the peak of this move for over a $700 profit!

Now, realistically, you are not going to hold for that entire move, we take profits along the way, move our stops up to guarantee a win, and trail 1/3 or 1/4 of our position until we get a “sell signal” … but you get the idea!

 

 

As you can see, there was an exact point defined where we would sell the stock at $1.89 if the move did not continue higher, so we can lock in profits and get out before the herd starts to sell. In this case, the stop didn’t trigger, so our final targets over $2.00 per share were hit for a very nice win.

Now, this is a great example, but of course, not all trades are this easy. There are times where we will only get a profit target or two and then have to take a breakeven on the rest of our shares for a small win, and of course there are times where our stop is reached for a small loss, but no matter what the trade, we know exactly the entry point, risk level, targets, and based on our system we have a 75%+ expectancy of the trade working in our favor (as long as all 4 points of criteria are met).

The point is, when you have criteria and patterns that are repeatable and “systematic”, it takes the guess work and emotion out of trading completely, and allows you to simply follow a process that you do over and over again each day.

If you don’t currently have a trading system or strategy, you need to develop one! Track the results religiously so you can tweak and refine your strategy until its perfect.

Make one that works for you as an individual. It may takes years of back-testing and hard work, but its worth it when you have something that works for you. It took me nearly 12 years to develop and perfect mine, but an even easier way to go is to simply learn an trading system from someone with years of experience, and then tweak it to your liking / style.

I want to personally thank each and every one of you for being a reader of our blog and subscriber of our YouTube channel. Please note that in a short period of time we will be increasing our rate for new signups to $99 per month in order to keep our trading group small and professional, so it remains a perfect learning environment for our clients; so if you are serious about learning a systematic approach to the market in a very professional environment, now is your chance to lock it in at just $79 and get access to all of our materials, all-day live stream, 24/7 chat room, DAILY training webinars, 400+ video lessons/webinars/trade recaps and much, much more!

Hope to see you guys on the LiveStream soon, I’m looking forward to helping you and many others reach your trading goals!

P.S. – Grab our FREE Day Trading Video Lesson below!