The Importance of a Framework
06/04/2015 6:00 am EST
Austin Passamonte, of Coiled Markets, outlines why having a framework—or a concrete strategy in place—is so vital to success in trading and why it’s important to treat every single trade, not as an island unto itself, but merely as one single feather on the entire bird.
Systems of Success
One of the very first things I was told about trading from my first futures broker was the fact that their only clients who ever succeed have some sort of defined system or guidelines to operate from. Now mind you this was back when electronic trading was limited to ES and NQ only, in a time when live brokers were more common than not.
From then to now I have met hundreds of traders who succumb to the human-logic mistake that they can logic, reason, or gut instinct their way through the trading process somehow. That it is actually possible to succeed by making each trade decision based on a random series of decision points and stimuli for entry.
Needless to say, all of them (and all others like them) have long since failed, are failing now, or will surely fail in time to come. Unless you, me, and anyone else has our own customized, personalized system for trades execution, there is zero hope for success. Less than zero, actually. The end result will be negative numbers.
Long-term trading success is not created from optimizing results from every single trade as an island unto itself. Success lies within the overall process of many similar trades and their blended outcome over time. Whether you hit or miss this trade or that trade here or there means absolutely nothing, less than nothing in the great scheme. Of course, that human-logic pitfall is a belief deeply entrenched in many. Traders naturally assume that the trade they are in right now is hands down more important than any other when, in fact, it’s merely one single feather on the entire bird.
If any of us succeed in this profession, it comes through the sole singular path of creating a systematic framework or approach to operate from that gives the cumulative results from many trades a decided edge. Weeks and months worth of trades over varied market conditions. Sadly, a couple of days—or even one week—cannot tell anyone much about any system, method, or approach. Nothing, in fact.
Therein lies one of many human nature rubs. Aspiring traders want to—and think they can—figure out something in short order when in fact, only the test of time offers any merit at all.
Away from the Range
I’m sure there are numerous, perhaps countless ways to base a trading system on. All of them must be based on key zones of resistance and support, aka supply and demand in modern vernacular. All of them rely on price action that occurs at limited areas on a chart…no system can tell what will happen in any symbol from every single price bar that prints. Some systems rely on price levels derived from past session(s) behavior that today’s current session does not even trade near. Which renders them completely worthless many days through time.
NEXT PAGE: The Basic Laws of Financial Market Price Movement|pagebreak|
Several years ago now, I set out to unlock whatever consistently recurring price action might exist based on each day’s open range value. First of all, if we use each day’s open range as a rough outline for selecting trades, how can there ever be a day that does not adhere to this filter? I thought that was an important criteria for daily trading.
From my initial backtest research then, and followed by years’ worth of statistical data since, it has been scientifically => mathematically proven to have objective, statistical bias in all markets/symbols through the test of time.
Any market/symbol with a pit-session of trading will adhere to the following statistics from its first five minutes of the open range…
- CM-RoadMap 233% value: 90% probable to touch intraday
- CM-RoadMap #1 value: 62% probable to touch intraday
- CM-RoadMap #2 value: 50% probable to touch intraday
- CM-RoadMap #3 value: highly probable to terminate daily trend moves
Every single trader without exception who applies this objective price measure to their own chart will see the exact-same information and results over time as everyone else. There is nothing at all subjective or hindsight related to this. The first five-minute price bar completes on everyone’s chart. Everyone applies the CM-RoadMap measurement to said bar. Everyone watches the exact-same price movement unfold in real time through the remainder of that session in exactly the same way.
A Series of Sequences
With these basic laws of financial market price movement known and understood, let’s review how I used that information last Friday…just an average, run-of-mill type session for the Russell 2000 futures. Keep in mind the same overall approach applies to everything else: crude oil (CL) futures, gold futures, soybean futures, natural gas futures, all listed currency futures, other stock index futures.
In other words, everything else at risk of being repetitive.
Past 9:05 AM ET, myself and everyone else on earth who follows the Russell intra-day all saw the same real-time information. Price zones of 1250 through 1248 were bearish overall. dialing down to our actual trade-signal chart (not shown), those of us who use the CM Patterns approach for trade identification saw the specific sell sequences inside those filtered zones.
From the open range down to the 1239 level where CM-RM 233% was for this day had a statistical 90% probability to be reached. How exactly that might unfold is always unknown.
Straight plunge without pause to there? Seen that happen last week.
Choppy, congestive decline to the magnet? Seen that happen last week.
Part way to it and then abrupt reversal in bias going the opposite direction? Seen that happen last week, too.
Knowing the statistical probabilities ahead of time tell us which way to play the cards. Working price action through the actual trade-execution charts (not 5min time frame) is how we actually bet, raise, ante, and fold each proverbial hand.
Ideally, I was trying to hold short position(s) from the 1250 region and/or 1248 region down towards the 1239 statistical probability for success. Had price action turned course and pushed up through the upper side of open range instead, I would have simply switched bias and worked the long sides accordingly.
NEXT PAGE: Navigating the Markets, in a Nutshell|pagebreak|
Using this smaller-chart setting at random for review, you can see where I worked the sell zones from 5min chart filter around specific pattern sequences (also not shown) reflected in the entry-exit results. What I’m gaming specifically is the price behavior of moving away from a signaled entry towards high-odds profit objectives below, without back-chop. The only defense we have against repeated, persistent sideways chop is limiting loss with small stops.
Most of the best performing trades take no heat at all from entry. They fill and go in favor almost immediately, if not immediately. Whether you opt to use a -5 tick stop, -8 tick stop, -10 tick stop is your own personal choice. The important thing is to realistically seek a profit target that is several times bigger than your loss.
If using a -10 tick initial stop, you should be able to realistically expect a +40, +50, +80, or +100 tick profit objective from there. Using the CM-RoadMap filter to identify trades most certainly does provide you with that type of potential reward. Some of the TF trades I turned last Friday went 10+ to 20 ticks in favor from entry, only to snapback and chop out the stops at par or partial gain.
You and I do realize, of course, that most traders fixate on the failed path of trying to wrest profits out of every possible trade. Those who follow that path to failure wind up eating like birds and discharging like elephants at each trading week’s end. Another example of human logic failure when applied to trading.
Ideally, my initial trade(s) from 1250s and 1249s would have held stops, price would have pushed (or plunged) methodically lower, and I would have enjoyed a +100 tick / +10 point gain without much effort. Unfortunately, that was not the case. Price action did not plunge straight down like it did on Tuesday to offer such results. Instead it wedged and chopped for some period of time until the statistical hand played itself out.
My job through that process was to enter, hold tight stops, and manage trades in a manner where overall draw did not get out of control. Through all of those early trades, the cumulative result wavered from -1pt to -2pts to -1pt before the inevitable expansion for +62 ticks / +6.2 index points captured and done.
In Until You Win
That in a nutshell is one effective way to navigate today’s modern markets rife with algo-driven explosions amidst endless hours of HFT chop. Price behavior today is nothing at all like it was years ago in the past. The daily path from high to low to high remains unchanged, but the manner in which it gets there bar by bar is totally different now from then.
When day trading, the game is all about trading directional bias (trend or reversal) as usual. Tight initial stops to contain loss. Managing your cumulative P&L to contain draws. Targeting realistic profits that are several times bigger than your average loss. Once that process has played out successfully, your work for that given day can be considered complete.
Knowing this, admitting this, and working around this reality is indeed the path to your long-term trading success.
By Austin Passamonte of Coiled Markets