I started trading in 2011 and am still in the business. This journal opens a new chapter in my trading operations.
I plan to flawlessly execute a trend following system, on an end-of-day basis, to become consistently profitable now with this method.
This journal is to record my progress, motivate me to execute the plan by making it a public commitment, and to learn from others.
I also hope people will find this journal helpful.
The system I am going to trade is Chanel breakout, as defined in a book "How to Make a Living Trading Foreign Exchange" by Courtney Smith.
Another book that contributed to my decision to do trend following and inspired this approach is "Diary of a Professional Commodity Trader" by Peter Brandt.
And lastly, one more inspiration book was "The Little Book of Trading: Trend Following" by Michel Covel. (note these are NOT affiliate links, I provide them just for your convenience)
The system, in a nutshell... Channel Breakout: it is to place a buy stop above the last 55-days high. Stop loss at the last bar. Exit if the price does not close above the channel for the first two days (this is called a rejection rule, and is in place if the channel line was flat or declinig for at least 5 days, it applies right after the trade was opened, and also while managing the trade as an exit signal), exit if ADX turns down from 40, and trail the stop to last 20 days low. Reverse the rules for short. I will also use a multi-unit tactic and exit half of the trade, for profit at around 1R, i.e. a distance of the initial stop. ADX shows a strength of a trend. If it is above 35-40, it means trend is very strong, if it then turns down, it indicates a trend may soon reverse or at least correct. Buying the break of 55 high ensures we will participate in a big trend, if there is a big trend. Last bar stop and a rejection rule make our losses small. Trailing the stop lets the profits run and not exit on a noise, while exiting on ADX turn down often let's us exit close to the top. Lastly, there is an ADX filter: the buy stop order should be in place only if the ADX is raising, i.e. the trend is gaining strength. Buy stop order needs to look at Ask price, sell top at Bid, of course. And I will add 3 pips for majors and 5 pips for crosses to avoid some false breaks. See below how I am going to try to profit from some false breaks.
I will also trade a "ride the rejection rule" setup, from the Courtney book. If the price fails to close above the breakout channel level for the first two days, I will exit at market on close and reverse the position, and close it on the following day, hopefully at profit, while the stop loss on this setup is above last bar high. I will provide a more detailed system description later.
Position size. As this is a learning phase I will use minimal trade size. 0.02 lots per trade. Not 0.01 as I want to be able to close half of the position.
Markets. I will look at roughly 20 forex pairs. I will be careful not to load many correlated positions, but I will take some correlated trades and the overall risk will be small due to small position size.
News and fundamentals. I will completely ignore.
Weekends. I will ignore and keep my positions opened. I may consider a breakout somewhat more likely to follow through if it happens on Friday.
System qualification. I believe that any trading system, before it is traded live with a serious size, should be qualified first. This journal is a step in the process to qualify a trend following channel breakout system for me.
How I view a system qualification process. A few steps which I described on my blog some time ago. In short, I believe this is a good path to profitably trading a system:
1. Understand the system well. Why it offers an edge and can be trusted. How it works. What's the setup and rationale and psychology behind it.
2. Backtest the system on historical charts, i.e. find past occurences of the setup, seeing the history and future, and imagine how I would have traded it. Record the results of last year or more of trading on a couple of pairs. Move on only if profitable on this hypothetical result.
3. Backtest the system on historical charts but looking at them bar-by-bar. Imagine trading it "live" without seeing the future, pressing F12 in MT4 to show next bar, with no cheating, record the resuls of imaginary entries and exits. Move on if profitable.
4. Demo trade it, at least 20 trades and 3 months. Move on if profitable.
5. Trade it live using a micro account. Move on if profitable.
6. Slowly increase the position size. If profitable.
So, with the Channel Breakout and Ride the Rejection Rule systems that I am going to trade here, I completed steps 1 to 3 above. I am skipping a step 4 of demo trade becasue I know the platform, I am an experienced trader, I know how to control the risk, and I want a real experience, real execution, real emotions to manage. So I go to step 5, live micro, with this journal. I will trade 0.02 lots per trade, so a risk will be roughly up to $20 per trade (if I have a 100 pips loss, of $30 in an unlikely event of a 150 pips loss, which is where my emergency stop will be, even if last bar stop would be wider). So the financial risk of this exercise is small and fully acceptable for me. If I should have 20 losses in a row, it will cost me $200. Unfortunate, but acceptable.
My task is to execute the system flawlessly. To learn. I will consider it a sucess if I am able to execute the system with high quality and if I learn from this exercise how to become a better trader. This should let me become consistently profitable over time.
I will also look at classical chart patterns such as triangle, rectangle, etc. like in Peter Brandt's book, and I will consider channel breakous more important and likely to trigger a sustained trend if they are initiated from a chart pattern such as rectangle, triangle, head & shoulders, etc.
I will trade end-of-day only. CET timezone. I will not look at the charts or touch my orders during the day. I have a full time corporate job which I do not intend to quit and want to focus on. It is something I like doing and it pays my bills, unlike trading so far ;-)
More to come in my next posts. This is the plan: I plan to post my trades and some orders here, I plan to do a weekly or monthly review with my fx book performance chart, I will trade only this system in the live account. I plan to be flawlessly executing this system for at least the next 3 months, September, October, November. On December 1st, 2014 I plan to review the progress, apply learnings and decide what's next, i.e. continue or drop or tweak the system with the same or increased trade size, all depending on results.
I am happy to hear any comments, questions or insights or ideas. Thanks and please wish me discipline and persistance in trading the plan. Thanks.
I plan to flawlessly execute a trend following system, on an end-of-day basis, to become consistently profitable now with this method.
This journal is to record my progress, motivate me to execute the plan by making it a public commitment, and to learn from others.
I also hope people will find this journal helpful.
The system I am going to trade is Chanel breakout, as defined in a book "How to Make a Living Trading Foreign Exchange" by Courtney Smith.
Another book that contributed to my decision to do trend following and inspired this approach is "Diary of a Professional Commodity Trader" by Peter Brandt.
And lastly, one more inspiration book was "The Little Book of Trading: Trend Following" by Michel Covel. (note these are NOT affiliate links, I provide them just for your convenience)
The system, in a nutshell... Channel Breakout: it is to place a buy stop above the last 55-days high. Stop loss at the last bar. Exit if the price does not close above the channel for the first two days (this is called a rejection rule, and is in place if the channel line was flat or declinig for at least 5 days, it applies right after the trade was opened, and also while managing the trade as an exit signal), exit if ADX turns down from 40, and trail the stop to last 20 days low. Reverse the rules for short. I will also use a multi-unit tactic and exit half of the trade, for profit at around 1R, i.e. a distance of the initial stop. ADX shows a strength of a trend. If it is above 35-40, it means trend is very strong, if it then turns down, it indicates a trend may soon reverse or at least correct. Buying the break of 55 high ensures we will participate in a big trend, if there is a big trend. Last bar stop and a rejection rule make our losses small. Trailing the stop lets the profits run and not exit on a noise, while exiting on ADX turn down often let's us exit close to the top. Lastly, there is an ADX filter: the buy stop order should be in place only if the ADX is raising, i.e. the trend is gaining strength. Buy stop order needs to look at Ask price, sell top at Bid, of course. And I will add 3 pips for majors and 5 pips for crosses to avoid some false breaks. See below how I am going to try to profit from some false breaks.
I will also trade a "ride the rejection rule" setup, from the Courtney book. If the price fails to close above the breakout channel level for the first two days, I will exit at market on close and reverse the position, and close it on the following day, hopefully at profit, while the stop loss on this setup is above last bar high. I will provide a more detailed system description later.
Position size. As this is a learning phase I will use minimal trade size. 0.02 lots per trade. Not 0.01 as I want to be able to close half of the position.
Markets. I will look at roughly 20 forex pairs. I will be careful not to load many correlated positions, but I will take some correlated trades and the overall risk will be small due to small position size.
News and fundamentals. I will completely ignore.
Weekends. I will ignore and keep my positions opened. I may consider a breakout somewhat more likely to follow through if it happens on Friday.
System qualification. I believe that any trading system, before it is traded live with a serious size, should be qualified first. This journal is a step in the process to qualify a trend following channel breakout system for me.
How I view a system qualification process. A few steps which I described on my blog some time ago. In short, I believe this is a good path to profitably trading a system:
1. Understand the system well. Why it offers an edge and can be trusted. How it works. What's the setup and rationale and psychology behind it.
2. Backtest the system on historical charts, i.e. find past occurences of the setup, seeing the history and future, and imagine how I would have traded it. Record the results of last year or more of trading on a couple of pairs. Move on only if profitable on this hypothetical result.
3. Backtest the system on historical charts but looking at them bar-by-bar. Imagine trading it "live" without seeing the future, pressing F12 in MT4 to show next bar, with no cheating, record the resuls of imaginary entries and exits. Move on if profitable.
4. Demo trade it, at least 20 trades and 3 months. Move on if profitable.
5. Trade it live using a micro account. Move on if profitable.
6. Slowly increase the position size. If profitable.
So, with the Channel Breakout and Ride the Rejection Rule systems that I am going to trade here, I completed steps 1 to 3 above. I am skipping a step 4 of demo trade becasue I know the platform, I am an experienced trader, I know how to control the risk, and I want a real experience, real execution, real emotions to manage. So I go to step 5, live micro, with this journal. I will trade 0.02 lots per trade, so a risk will be roughly up to $20 per trade (if I have a 100 pips loss, of $30 in an unlikely event of a 150 pips loss, which is where my emergency stop will be, even if last bar stop would be wider). So the financial risk of this exercise is small and fully acceptable for me. If I should have 20 losses in a row, it will cost me $200. Unfortunate, but acceptable.
My task is to execute the system flawlessly. To learn. I will consider it a sucess if I am able to execute the system with high quality and if I learn from this exercise how to become a better trader. This should let me become consistently profitable over time.
I will also look at classical chart patterns such as triangle, rectangle, etc. like in Peter Brandt's book, and I will consider channel breakous more important and likely to trigger a sustained trend if they are initiated from a chart pattern such as rectangle, triangle, head & shoulders, etc.
I will trade end-of-day only. CET timezone. I will not look at the charts or touch my orders during the day. I have a full time corporate job which I do not intend to quit and want to focus on. It is something I like doing and it pays my bills, unlike trading so far ;-)
More to come in my next posts. This is the plan: I plan to post my trades and some orders here, I plan to do a weekly or monthly review with my fx book performance chart, I will trade only this system in the live account. I plan to be flawlessly executing this system for at least the next 3 months, September, October, November. On December 1st, 2014 I plan to review the progress, apply learnings and decide what's next, i.e. continue or drop or tweak the system with the same or increased trade size, all depending on results.
I am happy to hear any comments, questions or insights or ideas. Thanks and please wish me discipline and persistance in trading the plan. Thanks.
Michal9