Disclaimer: I HAVE NOT ARRIVED (but I'm getting closer! :) )
A few people have been asking about my trading strategy and while I've posted many charts in the past and talked about it here and there, I've never been extremely specific about how I approach the market. I am happy to share some insight but I am going to leave a few things left for the reader to figure out on their own for a few reasons:
1) My strategy is mine, it is still in development and it is designed to fit MY personality. One size does not fit all...
2) I've greatly benefited from taking the time to figure out a strategy for myself rather than simply take somebody else's. Doing the latter is "cutting a corner" and when someone does that, they lose out on the true benefit of doing the work themselves. In other words, take ideas and make them your own...
3) If I tell all, then I run the risk of losing my edge. Right? I know, I doubt that my four followers (thanks everyone!!) will really impact the market if you even like my strategy in the first place but still, it makes me feel special.
As the disclaimer notes, I really am nothing special although my mother would say otherwise. One day soon, I will be the King of Trading but until then, I'm just another guy trying to get it all sorted out.
So, without further ado...here are a few ideas to consider:
1) I like to trade reversion to the mean, which takes some "ganas" but once you get the hang of it, it is a beautiful thing.
2) Once I determine the trend, using simple moving averages and basic trend lines, I enter as price is pulling away from the trend, e.g. entering on the dips or the bounces.
3) To time my trades I rely heavily on RSI (I currently use a 2 period though I've used a 3 and 7 period with equal success, it all depends on how long you like to hold ultimately...). I also use the NYSE TICKS, which is an amazing tool if you know how to use it. Now is not the time to explain how to do that but in general, if the overall trend of price is increasing look to enter when RSI and TICKs are in an oversold zone. That zone on the TICKs is different every day so use brackets and a trend line to figure it out and be ready for the trend to change, just like price does during the day...
4) I don't use stops in the traditional sense. I know, 'GASP' but seriously, how many times have you traded in the right direction only to have the damn stop take you out early?! Early on I realized that my stops were killing me and I spent a lot of time trying to figure out how to place them...use a % of the ATR, trail it based on a previous high/low, base it on the risk/reward aspect of the trade. I say that's all garbage!! Why, because it's all made up. Price doesn't give a rats ass what your desired risk/reward ratio needs to be, etc. I say, think differently...
In essence, I base my exits on what the technical indicators are telling me. Think about it, this is how you are likely entering a trade in the first place...your indicator is telling you that now is a good time to enter the market. Why not wait until that same indicator or another one suggests that now is a good time to be getting out of the market, whether for gain or loss? That seems much more logical to me so that's how I manage my trades. Early on, I didn't do this very well and that's why many people saw me take big losses...that was simply me learning by trial and error. I still haven't figured out the perfect strategy but I can tell you this, basing your exits on a technical indicator(s) is MUCH BETTER than basing it on some subjective, made up, stop-loss area that really is nothing more than a dart blindly thrown at a board. Tell me I have no idea what I'm talking about if you dare but the reality is, this makes sense. I could go on but in short, that is my strategy for dealing with stops - I use an indicator instead of a "random" stop level. And just to make sure it is clear, I do know in advance when I will be getting out of a trade, I just don't necessarily know where...
5) I base all decisions on the close or open and I use limit orders. This keeps me from chasing the market, buying on emotion, getting bad fills, etc. It also confirms what I am seeing on the charts. For example, you may be looking for a new low to enter a short position (going along with the herd, eh? Have fun!) so as price makes a new low you enter but it wasn't on the close. So just after you enter, price bounces back up and ends up forming a hammer pattern and goes on to make a new high a while later. Shit! I bet you wouldn't have entered short on a hammer pattern but at the time you entered, it wasn't a hammer. Moral of the story: wait for the close or open. Of course, it is only relevant depending on the time period you are using but it's still a good strategy in my opinion, especially if you've timed it with an indicator. Waiting for the close/opn will also dramatically decrease the risk of over-trading. It requires patience and discipline...two very good things.
6) I primarily use two time periods: 3 minute and 15 minute. This simply works for me. I've found that by tracking too many time periods it over complicated things and made me second-guess too much. Avoid analysis paralysis, as they say. In reality, I could watch just a 3 minute chart and trade fine. I'm not suggesting that using multiple time frames is a bad idea, I'm simply suggesting to keep it simple.
The 15 minute chart is my big picture. I put the pivot points on that chart and I use it to help me signal or confirm trend changes or continuation, respectively. I simply reference it on occasion but I don't necessarily base any final decisions on it. I also avoid the shorter time frames although I do reference a 233 tick chart, which can be helpful in terms of providing a short-term heads up but again, I could survive without it. I decided to stay away from the shorter time frames for a few reasons, namely, a 3 minute chart fits my strategy perfectly and secondly, short time frames are often guilty of "whipsawing" you to death. The one minte chart is of the deveel in my opinion...
7) Use the pivots! Pivot points are very simple and extremely effective. Again, I keep them on my 15 minute chart and when I see price making an effort to get to a certain level, I wait anxiously for a pull back and then I hop on the wave and try to ride it as long as I can. Often times I end up getting off early because my indicators signal an exit but often it's just because price is consolidating a little before continuing on to the next pivot level. I should be adding to my position at that time but I currently struggle with that at the moment, plus I try to keep leverage in-check and would rather take contracts off, rather than put them on. At least until my account grows some more.
8) In the Market Wizards book, Schwagar mentions how one of the traits successful traders have is that they do not do the comfortable thing. This concept really resonates with me. Doing the comfortable thing in my opinion, is like entering long on new highs or as the market is climbing to new highs. Here you are simply joining the herd and the herd is usually wrong. The uncomfortable thing is entering long on a short-term low, e.g. a pull back and then staying with it long enough for price to come back and continue on its way. In short, this is what I'm doing and it's been working for me.
On a final note, I will also mention that I do have a very specific strategy and plan with exact entry and exit conditions that I follow. Having a plan is critical and if you don't have one, you are only setting yourself up to fail. Along these lines, I will also offer opinion that if you can't explain your strategy to a computer then you really don't have a strategy, at least a viable one. Furthermore, in this case you probably haven't back-tested it either or at least with any degree of reliability because how on earth do you go back in history to test a strategy you can't even explain?! I've seen example of people stating that their strategy requires (choose your indicator) to "bend a little" or for something to have an upward slope, etc...how do you explicitly define that to a computer? If you can't then I say it is nearly impossible to follow it yourself. Make it easy. Make it obvious and you'll do yourself a favor.
Anyway, I hope someone finds this interesting and maybe even a little helpful.
Go. Fight. Win.