[kimchi]

Many traders don’t have a plan. A plan should be a set of rules to guide each trade. Writing down what you intend to do and how you will react to each situation. A plan helps to remove pesky emotions from trades and helps you become somewhat detached from the market on an emotional level. A plan should remove panic and indecision since we have predetermined responses which have been tested, are logical, understandable concepts, and are known to work.

I suggest we try and trade a simple concept. I don’t have the knowledge or expertise to start looking for arbs or deep statistical relationships to exploit. Simple concepts work well and tend to be more robust. I’ve spent years trying to re-invent the wheel doing this in the past I am currently studying some well-known statistically relevant relationships in various markets. There are lots of apparently good relationships, but it’s difficult to formulate a tradable plan around them, and I suspect I’m still busy trying to re-invent the wheel here…..

The first simple concept I think is whether we are going to buy high or buy low (and sell high or sell low). My first system buys high and sells higher (I can’t short this one for tax reasons) – which is opposite to what people intuitively try to do. This is essentially a trend-following system which follows the strongest uptrends in 25 stock markets/sectors, 10 bond markets and 1 moneymarket. It holds a maximum of 5 positions at any one time and makes approximately 2 round-trip trades per year, and holds positions for usually a few months or years.

Another system I use is a mixture between swing and trend trading. I look for value in 7 long-term stock index uptrends (and v-v) and hold the position for as long as I can until the trend reverses. This holds positions for weeks or months. It has worked wonders on Asian markets but bombed in US markets.

Both the above are relatively difficult to trade psychologically because of the poor win-rate (~30% for #1) and heavy drawdowns accompanied by many consecutive losses, (12 in a row stings) and watching and waiting as yet another tidy winner turns around into a loser.

I propose we develop a shorter-term modification of the latter system. Look for value in uptrends and sell rallies in downtrends – nothing new here. The main difference (aside from the timeframe) from system #2 will be profit targets. I’ve never liked profit targets as it is often the profit from one wild runaway trade that makes up for all the little losers and accounts for more than your year’s profit. Limiting profits by using a target may or may not make sense. It will, however increase the systems win-rate at the expense of perhaps reduced expectancy (possibly negative), and despite the reduction in profit expectancy, may make the system easier to follow and thus more likely to be stuck to during nasty drawdowns.

It will involve selling longs in a runaway uptrend, but avoid holding positions during failed breakouts which gap back or holding on to winners as they retrace back to somewhere near our initial stop – you can’t have it all.

I’ll dig out some charts to better illustrate this concept – but it’s really simple. Then we can try and look for an edge together, or at least a way to trade the concept.

It’s difficult to define or quantify an edge without proper testing and much experience. If the concept makes logical sense then we can move onto the next step.

Obviously, I hope others can make suggestions/flameless criticisms along the way and maybe propose superior ideas before I start digging too much into anything.