"Meticulous Planning Will enable everything a man does to appear spontaneous."

Mark Caine

It's Your Money. Shouldn't It Be Your Plan?

Breaking the Trading Plan

The purpose a trading plan is not to shackle you down, force you to a rigid set of losing rules, or any other excuse traders make as to why they don’t have one.  The main purpose of a trading plan is to allow yourself all the flexibility needed in a time of fear by controlling it during a time of peace.  

Put another way, by designing your plan when the market is not open, or your positions aren’t effecting you, then you will not allow fear to take over when the market is open and those positions really are effecting you.  The most successful traders all have trading plans.  Whether completely written out or simply an internal process, success is not an accident for them.  Remember what Mark Caine said, “Meticulous Planning will enable everything a man does to appear spontaneous”.

Meticulous Planning Will Enable Everything A Man Does To Appear Spontaneous.

Let's Look at Today's Results & See This In Action

$294.25 made in under 12 minutes.  That’s more than the average american makes in 8 hours, this must have been a great day, right?

Absolutely not.  This is where traders confuse R’s with Profits.  

R=Risk Unit.  Whether a trader is trading $250 an R or $10 an R, either way, they should be risking 1 R when taking a trade.  The amount being risked is dependent on the skill of the trader, the amount of capital at work, etc.  

In R terms, if a trader risking $100 an R makes $200 then they made 2R’s on the day in profits.  If the next trader is risking $10 a trade but makes $40, then they made 4R’s on the day.  

In profit terms, the first trader obviously made more money, but in R terms, the second trader made more.  On a one trade basis, you could easily say the first trader is the better trader.  But over the long haul, this can change drastically.  This is important because lots of traders on social media will risk $1,000 and try to make $500 to $1,000 and look like a hero to the average joe.  

When in reality, that trader is doing little more than looking for a 1:1 payout and trying to use that result to promote themselves online, ultimatley for other intentions be that monetary or egotistical.  In either case, the traders that follow them on social media are focused on the dollar signs when the R Return Value is not worth it.  If they cannot copy that traders style to a T, then they will not have the finite success that the high dollar risk, low R return trader is getting.  This is exactly why so many traders get sucked into the cycle of following traders who win huge amounts of money but they can never copy the success.  

They are focused on the money and not on the true results.

Back to today’s results.  I typically risk $250 a trade intraday but with the high volatility lately pulled back slightly to risk around $220 per trade.  End Results in R’s Today: 1.3375 R’s or 1.34 for rounding purposes.

 My plan says 2:1 with a stop moved to break even at 1.5R’s.  Now let’s take a look at how this played out.

This is the CTP Calculator.  It tracks daily results for day trading and swing trading.  It also shows targets necessary depending on entries.  It’s available in our premium section if needed.  Today I traded 2 stocks, the SPY and IRBT.  SPY was a double test of the 1 minute based on the CTP Double Test which we actually teach and IRBT was a custom coded breakdown strategy.

If you’d like to get that double test teaching, you can sign up free here.  You can learn this exact same strategy we traded today by signing up to our CTP Group Email List.  

Let’s take a look at these setups here.

The first trade was a breakdown using a custom coded combination.  When they fire the signal together for the first time on the day, you want to pay attention.  You can’t see in hindsight what I saw on the break, which means I saw something that wasn’t really there.  IRBT was taken at $65.15 with a stop at $66.25.  The 2:1 Target was $62.95.  This trade was taken at 9:03 central time.  80 minutes later the current price is $61.00, this would be a 3.77R profit and I exited at break even.

My plan says once in, target is 2R with a stop moved to break even at 1.5R.  I can push past 2R if I lock in at least 1:1 when 2R is hit.  As in IRBT’s example, this would have been an excellent trailing option at the trade just hit 4:1.  Instead, it broke down and immediately popped back, and I exited break even. 

My plan said not too, and I can count the number of times one hand I’ve broken my plan this year, yet I did today. 

End Result: Break Even. 0R’s.

End Result of Plan: 2R+

The Second Trade was the SPY.  This was a double top retest CTP Style.  We teach this exact setup to new CTP Group members.  It takes 60 seconds or less if you’re interested.  I took SPY on the confirmation using my plan.  $267.69x$267.20.  2:1 Target was $266.22 with the option to trail for more.

When SPY got down to the previous pivot low and held, I was already out IRBT break even after watching it go 1.8:1 without me.  I had broken my plan once already which frustrated me.  I was now looking at a trade up 1.3 and thinking how pissed I’d be if this one takes a loss after IRBT fiasco.  I overrode my plan a second time and jumped.  This is the power of journaling, you must recreate as best you can your reason so you won’t make the mistake again. 

Within 4 minutes 2R was hit, and as of this writing, the price has reached $263.68 which would have been 7R+.

I’m not saying you get the bottom on these moves, I’m just showing max potential.

Actual Results: 1.34R

Potential Results: 2R+

The Plan Wins Out

Combined potential results are 4R+.  Combined actual results are 1.34R.  At $220 a trade that means my plan made $880 (less commissions) and I made $294.25 including commissions.  Remember at the start where I said I made more money in 12 minutes than most make in a day yet I screwed up, now do you see why?

This is why we have trading plans.  The absolute flawless simply never break their plans once they are built.  I consider myself a few steps under that but try extremely hard not to break my plan.  The few times I do break it however, the end result typically compounds itself in the wrong way.  This is why the trading plan is so important.

It’s built when the market isn’t moving.  It’s built when your mind is clear.  It’s built in a time of peace so that when the time of risk comes, when that potential time of fear comes, you have something stronger to help you overcome it.  

And yes, there will be times when you think the plan wasn’t built for this, I need to override it.  Considering the market is moving on average 200+ points this week, you could absolutely make this case.

Yet even with higher volatility than normal, the plan has still beat me by over 1.5x today.  Imagine what could happen in a week if this was a regular occurrence!

This is why when the plan is built, you have to follow it as best as you can.  And on those days you break your plan, you need to consider shutting down.  Something inside you is so off today.  Accept it, Improve it, and try again tomorrow.  The market is ready and waiting.  

Going forward, I will remember this day like many of the others when I violated my plan.  I understand nothing works every time, but being consistent with a proven setup gets me so much further than intuition based on tick fever.  My plan is designed to help me succeed, and help me overcome myself.  I’m still human and I will still make mistakes.  But if I remember mistakes are what successful people call experience, then I won’t be so hard on myself.  I will use this experience next time to try a little harder to stick to my plan.  One trade at a time. 

The plan is built when the mind is clear so when risk comes, it can be overcome.

Market Selloffs

Whenever the days turn red, traders begin to think the worst.  Instead of joining the crowd, let’s instill some common sense and rules so that next time your stock takes a hit you’ll have a better understanding of knowing what’s really going on.

First and foremost, we need to establish some definitions.  The market uses closing prices for these numbers, which means the daily close.  This is important as using the highest high or lowest low may get you there quicker, but it doesn’t mean the market agrees.

Pullbacks: Any retracement in the market or equity which is less than 10%.  This can happen any time for any reason.  Typically, if it’s less than 3%, it shouldn’t even be on your radar.  Knowing when to ignore the noise is an excellent thing to do.

Correction: Any retracement in the market or equity which is greater than or equal to 10%.  These are steeper corrections that  on average happen about once per year in the general market.  If you’re trading a high beta stock (highly volatile) this may be happening weekly.  As a rule of thumb, expect this in the market on average once a year.  

Note: In 2017 the S&P 500 never experienced a correction.  Average means just that.  The past is there to base assumptions on but never there to concrete the results.

Opposite Trend: Any retracement in the market or equity which is greater than 20%.  Typically, there is also a time rule on here of at least 2 months.  This keeps gaps based on news/earnings that may correct themselves over the short term from being classified back and forth.  There should be little whip saw in terms here from a bullish to a bearish trend.

Let's Look at the Past to Learn for the Future

This is a Weekly Chart of the SPY from ’08 to ’12.  If you are constantly trading by your own rules, then this may be of no value to you.  However, if you prefer to go a more mainstream route when considering trend definitions, then study this chart.  Take it all in.  Whether you traded during this time or only learned about it afterward, the definitions of trends can help you go along way.

The Red Box is when the bullish trend turns bearish. 

Remember, it takes a 20% retracement from the highest or lowest close to change the direction of the trend.

The blue boxes are all considered corrections.  These are all areas that retraced greater than 10% but did not reach a 20% move.  

Notice the first correction technically happens before the bearish trend officially begins.  Had you tweaked the numbers to highest high/lowest low you would have reached 20% and immediately gone into a correction.  Had you instead used the highest close argument you would have stayed away from looking short until the red box closes and would have immediately produced a winning short.

However, this may have kept you looking long on the pullbacks which should have produced a decent winner on the shorter time frames when the market retraces early on, but this should show you why first and foremost you must decide if you are going to use highest close or highest high.  Everything changes based on how you determine the starting point and this must be decided before not during the process.  If unsure, remember the majority uses highest close.  This is just one more part however that comes down to you trading what works for you.

The green box is when the bearish trend turns bullish.  At this point, price has retraced 20% from it’s lowest close and the market goes long for the next 8 years.  Notice the two corrections that happen in 2010 and 2011.  This should show you that corrections can happen quickly after a market trend changes and they happen on average once per year.

Now that you’ve seen this in action, let’s look to the present.

The SPY must reach $257.92 to enter a correction.  This means even as nasty as this roughly 5% pullback is, it’s still just a pullback.  The fact that this did not happen in 2017 should not scare you because it’s finally happening in 2018.  It’s just part of trading and should be expected, not feared.

 

The SPY must reach $229.27 to turn to a bearish trend.  Remember, if price closes below $229.27 on a daily time frame, the market will officially be bearish, but this doesn’t mean you should expect it.  

In the current state, the market is in an aggressive pullback.  While it may be tempting to throw up a #BTFD and get in there, stop, and think.  Ask yourself is this part of my plan?  If this a % based buy or simply looks enticing because at one point it was $285?

The key to trading this properly is knowing what your plan says, and sticking to it.  

If you have a plan, and know how you’re going to trade this type of pullback, then the last thing to do is recognize that you have to ignore the noise.  

On Social Media, there will be plenty of bears saying this is it.  This time it’s it.  This time everyone’s going broke.  While it very well may be, it seems strange to bet against the US, but maybe that’s just me.

Next time, instead of paying attention to that noise, trust your plan.  Trust the knowledge you’ve gained knowing the current numbers the market must hit to truly change course.  Understand that if new highs come, these numbers again change.  Always based simply on the 10% and 20% rules. And finally, as always, only trade what works for you by trading your plan.

If you are unsure of what to do with this new information, head over to our strategies section and learn the price channel breakout.  It’s  must easier to buy the dip when it’s making a new high on a smaller timeframe.  If you liked what you learned today, make sure you join the CTP Group to get more information just like this every few weeks. And last but not least, Trade Your Plan.  It’s the best edge you’ll ever have.

Profits

Trading has end goals that are different for everyone.  Some look at it as a way to keep score, others as a way to prove ego, and others still as a means to an end.

Regardless of the goal, everyone has a goal to make profits.  The thing about a goal like that however, is because it’s so open ended, most people never get the big profits they really wanted in the first place.

It’s easy to say I bought FB at $20.  It’s a lot harder to say I’m still in FB from $20 when it’s now over $170.

How do you handle the swings that come with holding a trade for bigger profits?  Whether it’s taking a trade from 1:1 to 2:1 or taking a trade from a double to a triple, to make real profits, you have to be willing to give it back without willing to go underwater on a massive winner.

The key to making larger profits is you must learn how to only trade house money.

It’s easy to say I’m in at $20 and my stops at $25 so since the stock is currently at $30 I’m home free.

However, if tomorrow the stock comes out with news that sends your stock gapping 50% premarket (EFX anyone?) and you aren’t covered then that stop does you no good.

A stop market order only means that you will be taken out at the market price if your number is reached.  A stop market order does not guarantee you will be taken out where you want.

 

A stop market order does not guarantee you will be taken out where you want.

So back to our example.  If you are in a stock at $20 and it’s up to $30 you’re up around 33% at the minimum.  

If you’re stop is moved to $25 you’ve locked in a $5 gain and are up at least 20%; excellent job.

However, if the next day something happens that causes the stock to gap around and take a 50% bath, what will your stop end up doing?

Your stop market will simply trigger at market price once $25 or lower is reached.  That means if the market opens at $15, you’re out at $15.  

This doesn’t happen very often under normal circumstances, but if you’re in profits and holding a stock through earnings, FDA news, or just unlucky, you better believe it can happen.

Stop Markets are helpful, and they are used by us regularly especially starting out.  The potential for these types of black swan events are rare and if you truly understand trading it’s simply exchanging risk for potential reward.  Which is why a trader clicking a mouse for 30 minutes can make more than most who work 40 hours when it’s done right.  

That being said however, once the trade gets enough into profit to start using house money, there are alternatives that work even better than stop markets.  Enter Box Trades.

Once the trade gets enough profit to use house money; there are alternatives better than stop markets.

Box Trades using Options

A box trade requires 3 parts.

  1. Equity Shares
  2. Call Options
  3. Put Options

While it can be done from the start, it is recommended to not pursue until the trade is in enough profit to cover the cost.  Doing this beforehand will eat away at profits and is only recommended under extreme circumstances.

However, lets go back to our example above.  (Note: The video below shows a live example if you’d prefer video over reading).  In the above example, the stock was purchased for $20 and was currently at $30.

If the same goal of $25 stop was desired, instead of using a stop market which has risks, the trader could look to purchase $25 puts roughly 1-3 months out on a long term setup or 2-4 weeks out on a short term setup.

Whatever the cost of the put, the trader would sell calls on the other end to offset the balance.

Tip: Never sell naked calls/puts. Only sell 1 contract for every 100 shares you own and round down.

 

Let’s say the $34 calls cost the same as the $25 puts.  Noticing the calls are more expensive than the puts from the get go may be an excellent indicator where markets believe this stock to be heading.

In this example let’s assume the trader has 300 shares purchased at $20.

They want their stop to be at $25 to lock in profit now that the trade has reached $30.

By selling $34 calls and using the profits to buy $25 puts they have created a risk free box.

If the trade gets above $34 before expiration, the shares are taken away for a $14 profit or 70% Return.  

If, however, the trade has a black swan event where the stock gaps against, the stop market order would result in a net loss regardless of where the stock was the day before.

The puts however would profit anything under $25 theoretically locking in profits at a $25 level or $5 per trade.

The difference between a covered call and a box trade is a covered call is used for slow stocks looking to collect extra premium, the box trade is used for aggressive stocks where you are looking for insurance.

The downside to this is that if the stock gets past $34 you’re out the shares and no longer have a position.  If, however, you are doing this short term and the options expire worthless you can look to put it back on every few weeks or months and simply hold until taken out from the calls.

This is only one example of how to protect profits, but hopefully it can help shed some light on ways to protect profits other than simply adjusting a stop and hoping the news doesn’t hurt you.

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Max Losses & How to Handle Them with an Edge

First we took the Loss.

We took a Max Loss on 8-8-17.  If you don’t know how to handle a loss, you can look to hold on longer than you should and make it even worse.  There’s a reason you plan for max losses, so that when they occur, you can take it like a pro.

Next, we stuck with the Plan.

That allowed us to take the trades the day presented instead of being distracted by yesterday’s losses.  Once all of our trades were live, we walked away.  We went to the gym, we studied other charts.  There’s no advantage to sitting at the desk and staring, your results are the same, your mental psyche is drained if you sit and stare.  There’s a better way.

Finally, We made it all back and then some.

This is how you trade like a pro.  Focus on the setups, focus on the system.  The results WILL take care of themselves over the long haul.

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Why You Must Focus on Rs and Not the Dollar Amount

If you’ve ever YouTube’d Day Trading one of the first things you see are videos of things like watch me make $5,000 in one hour or learn how I make $200 a day trading or any other nonsense that is only there to sell you.

The truth is, without knowing how much they were risking to make that, you don’t have all the facts and cannot POSSIBLY consider their strategy legitimate for anything more than selling purposes.

When looking at any trade result, any strategy, or any plan, the secret to success is all in the R.

R or Risk Factor is how much you’re willing to risk per trade.  Typically, the logic goes that you should not risk more than 2% or less per trade.  Many times you’ll hear this in swing trading but not as often in day trading as even that amount can be substantial.

Regardless of what the amount is, the key is understanding why it matters.

If a “guru” risks $1,000 and makes $1,000 and posts a video of it online, it’s impressive to an extent but it’s no different than someone risking $10 to make $10.  They just had a larger account to begin with.

However, if the same guru posts a video that shows $1,039 day come see how at my site” then you’ve been hooked into believing you can start making $1,000 days yourself if you just follow along.

The truth is your dollar amount return is completely dependent on your account size.  If you are only supposed to risk 2% per trade then to risk $1,000 you must be trading a $50,000 account.

This isn’t that large a number in the grand scheme of things, but when you’re struggling to come up with the $500 to pay this “guru” to show you how to make $1,000 a day, be very aware of how much it costs to copy him in all aspects; not just the profit part.

Another important reason of R value is for data comparison and trade management.  At the end of the day if you pull in $300 it is a nice day.  If you have a monetary daily goal as your main focus point (not recommended) and you reach it; then you exit all and call it.) 

But if you want to double that monetary goal, what do you have to do?  Hold twice as long?  Risk twice as much?  By tracking Rs instead of $ amounts, you can quickly see which management style produces the best Rs over the long haul and then simply make the Rs match the goals instead of trying to make the money match the goals.

If you want to make $5,000 a month, you can risk $1,000 a trade and hit it with 5 trades or you can risk $500 a trade and make it with 10R.  They do the same thing but they handle themselves entirely different.

One final point; ever wonder why casinos make you trade in your cash for chips?  Because you can handle yourself better with chips.  If you are carrying around 20s and 100s and playing with them, the money is too real, you’ll play differently.  Trading should be the same, by focusing on Rs and not the $s, you can trade the right way and hit targets whether you’re trading $25 an R this month or $200 an R next month.

Let the Rs show success; stop chasing the $$$.

If you need more help with this, we offer plenty of free training through our blog and email group or we offer a premium service with custom built management and tracking if need be.

Why Your Plan Needs a Stop

There are alot of traders who don’t use stops in their plan.  They do this for reasons like “The Algos are out to get me” or I lose too much with a stop” which is really just an excuse for the traders limitations.

When you give excuses for your limitations; you get to keep them.

This can be seen at the highest level all the way to the brand new trader.  Those that don’t plan for stops will be taken out of the game.  Look at Jesse Livermore.  Arguably the most famous trader in history, the book “Reminiscence of a Stock Operator” is a classic and one of the first books traders read when they get into this game.

Yet what the book doesn’t mention is after he made close to a billion dollars in one day by today’s standards, he could not be satisfied with small profits going forward.  He kept risking more and more without any stop, and within 5 years of having a billion dollar day he lost everything for the 3rd time in his life and could not handle it.  He took his own life in a bathroom.

For a more modern take, consider some of today’s hedge funds.  Assets so large they have no stops in place to wind down positions.  Look at the final exit price of VRX for a certain well known manager compared to his entry price and you’ll see just how important the stop truly is.

Who doesn’t use a stop successfully?  Warren Buffett.

Who does use a stop?  O’Neil and traders/investors like them.  It simply comes down to this.  

If you are buying something you plan on giving to your kids for the dividends, then wait for a market extreme mispricing and buy all you can without a stop.  When buffett goes in, he rarely catches the bottom.  Look at how long his bank plays took to get extremely profitable in 08-09 era.  If you’re doing this type of strategy, divide your amount into 3-12 lots and buy it monthly or quarterly and never look back.

If you aren’t investing to give to your kids or retirement, strongly consider stops.  Whether they are % based like an arbitrary 7% or ATR based off the pivot high/low, it doesn’t matter.  You need to have a stop.  

Stop making excuses and start tracking the data.  You’ll see there’s a few times you’re being stop hunted but are you basing the stop off the proper level?  Because a true breakout does not pull back 7%.  A true pullback continuation holds near that pivot low.  

First, analyze your losses and see how close your stop was to the actual level.  We have ways of tracking all of that data in the premium services section if you need help.

If you already know your numbers, then you know the truth.  90% of the stop hunts are coming from the fact you’re trying to get as large as possible with as tight a possible stop as you can get when the proper stop would still have you in the trade.

Longevity; Not Prosperity.  Focusing on the first will give you the second.  Focusing on the second will take the first away.