Qualify a trading setup

How to qualify a trading setup? 

Here is what I recommend that you do if you are serious about trading a given setup: whether it is a pinbar, or a 1-2-3 pattern, or any other price action or other trade opening setup for that matter.

This is a critical step, a milestone, in the discovery process of your own trading system, a system that is right for you, that you will be able to trade effortlessly once you are ready. The setup is a key building block of the trading system.

It takes a lot of work, you may need to to practice like Patton's soldiers, but here is a specific action plan I followed, and I will follow for new setups I am learning to trade:

Trade opening filters

Trade opening filters

To have a complete trading system you need trade open criteria, entry method, initial stop loss placement, trade management plan, positing sizing method. For a complete trading plan, you need to add list of markets, broker, computer, trading hours, mental preparation, emergency plan, etc.

This article talks about one component of the trading system, i.e. filters you can use to decide if to open a trade.

Filters

Filters are criteria that needs to be met for you to open a trade. This is a list of things that, if not met, you do not open a trade. A good filter will eliminate losing trades. It will also occasionally eliminate a wining trade; that's trading. 

Confluence factors for trade opening

Confluence factors for trade opening

A complete trading system building blocks include open criteria, entry method, stop loss, closing method, position size algo, etc. But there is more.

This article talks about one more component of the trading system, i.e. confluence.

Trade opening setups

Trade opening setups

To have a complete trading system you need trade open criteria, entry method, initial stop loss placement, trade management plan, positing sizing method. For a complete trading plan, you need to add list of markets, broker, computer, trading hours, mental preparation, emergency plan, etc.

This article talks about one component of the trading system, i.e. possible setups you can use as a trigger to open a trade and place your entry order (order type will depend on entry method).

What would General Patton say about trading

General Patton speech to his soldiers during the World War II... here is what I imagine he would say to his Traders :-) 

Credit. This is where I took the idea from, the fxmonster.pl blogger who posted a speech of Patton to traders, in Polish. Here I found the English original. Version below, I created based on fxmonster's idea and the original.

Read on if you are OK with some profanity, as in the original version...

Effortless trading

Imagine Your trading is effortless

By effortless I do not mean "with no effort". This is not possible.

Imagine your trading feels effortless. You like doing it, you feel no stress, no pressure, no worries.

Imagine that

• you know your trading method very well (this gives you confidence and removes guessing or futile attempts of predicting the market) 
• you know exactly if there is a trade setup or not (you know exactly if your edge is present, it prevents over-trading) 
• you have the discipline, to trade only if your setup is present and only if you feel ready (think mindset, your state) 
• you have patience, you understand that the market is not going away, that there will be trading opportunities in the future, and that you cannot rush to become profitable (so you do not trade if there is no setup and you take time to forward test your method on demo) 
• you look at the chart for 10 seconds and you know if the setup is present 
• it takes a minute or so to decide if you should trade this setup, e.g. based on confluence; and where to place the initial stop loss order and how to manage the trade (e.g. how to move the stop or place a take profit order) 
• there is no stress
• you do not care about the next trade outcome; this is because 
• your position size is right, so that a single loss, or even a series of losses is totally acceptable to you (as long as it is not much longer than the longest in backtest) 
• you trust your method, that it gives you an edge, and
• you trust yourself, in your ability to follow your plan, so you know that, on a large sample of trades, you will make money (so you do not worry if you are going to be profitable for the year, you know you will if you follow your plan) 
• trading takes as much or as little time as you want
• you feel comfortable and relaxed at all times
• and if not, you have techniques at hand to improve your state of mind

Building blocks of the trading system

Trading System building blocks - for a complete trading plan

I said on this blog that to be consistently profitable,  you need to have your own trading system.
What makes me think so? Top trading books and insights from experienced traders.

How to create or discover the trading system that is right for you?

Let's have a look at the building blocks of the trading system, i.e. its elements, so that you are clear on what you need to decide on and write down as you create your own trading system. [ You may have a look at my trading system ]

Building blocks of the trading system

Without getting into discussion on what element is the most important, e.g. trade opening criteria, or the way to close the trade, or position sizing method or psychology, let me just say that ALL the things mentioned below are CRITICAL. Really.