Trading Business Documentation..

I hope you all nailing the markets as the price action has been awesome since the start of this August. I’m loving it.

I recently had a conversation with one of the readers and that took me back to a certain phase of my trading life where I was confident that I know stuff to pick good trades but was struggling to build confidence in what I know to extract money from real markets even when the paper trading proved to be profitable with hindsight charts. So I decided to write an article as this baby deserves some space in this series.

As an introduction to what I am going to write in this article, let me paste his query first.

“Hey, I’m trying to go through all YTC principles once again and really understand it and know what I’m looking for.

I’m reading your articles right now about acceptance and non-acceptance and it’s really cool but I have feeling that I don’t even understand basics or not using it..

I know the YTC definition of trend, that after 3 failed attempts to make a new SL/SH it turns into range. TVP is the SL/SH which leads to the highest SL/SH and after violating this point may be the trend over.
Am I right? After all of this, when I truly understand it and will be able to see it and mark on my charts, only then I can start to think about BOF, setups etc..

What do you think about it? I really love those articles about acceptance or impulsive moves etc. even though I don’t know how to use them properly. But do you have something like this for basic concepts or do you plan to make a few basics articles like step by step tutorial for dumbs?

Just to see what is your process – marking HTF S/R levels, identifying bias, looking for impulsive/corrective moves or whatever.

I have knowledge and information in my head over those 4 years of unsuccessful trading but I feel like I’m trading only intuitively without any system and plan. I’ve got my MM etc. but I just don’t feel like I know what and why I’m doing in markets.

Thank you very much, I really appreciate your work and I am amazed how you trade and understand what is going on in markets “

First let me answer few trading related queries in this excerpt.

1) What is a trend changing pivot?

A) In an uptrend, the swing low that leads to the breakout of the previous swing high and price gets accepted above that swing high is what I consider as a trend changing pivot. Vice versa for the downtrend. As an example, look at the post-market analysis chart I have shared on Thursday.

In the above image, F is not a trend violation pivot for me even though it has broken the swing high ‘E’. Because after the breakout, price is not accepted above it. So ‘F’ is just a normal demand level where I can look for a with trend trade. In this case, I consider ‘D’ as the TVP.

2) I really love those articles about acceptance or impulsive moves etc. even though I don’t know how to use them properly. But do you have something like this for basic concepts or do you plan to make a few basics articles like step by step tutorial for dumbs?

A) The concept of acceptance and rejection is pretty straight forward and what I have published is the basic concept itself. 😀 As of now, I don’t have any idea how I can granulate down further. The series I have started is the step to step guide itself.

3) Marking and validating HTF levels.

A) I received a lot of emails asking me to write about this topic. A simple and pretty straight forward one. I will write about it in the next article.

What interested me in his query is this sentence.

“I have knowledge and information in my head over those 4 years of unsuccessful trading but I feel like I’m trading only intuitively without any system and plan. I’ve got my MM etc. but I just don’t feel like I know what and why I’m doing in markets..”

I promised him that I will write an article answering all his queries as almost 95% of the traders feel this way and I exactly know what he is missing as I was there in his position long back. The answer is simple. He doesn’t have a detailed documented trading plan if I am not wrong. Four years is a very long time man and I’m just a year senior to you in this arena. 😀 How stupid am I to jump into post-market analysis before even talking about trading documentation. Without much adieu, let’s start it.

If you want me to suggest a template of the trade plan, I strongly recommend the book, Mastering the Trade by John F.Cater. I’m not a fan of the technical concepts in it, but the psychology section and the trade plan section is damn awesome.

I personally maintain the following documentations for my trading.

Trading Business Plan.
Trading Business Action Plan.
Trading Journal.
Trade log.
Post-market analysis Journal.
Trading Psychology Journal.
Market Structure Journal.
Motivational Journal.
1) Trading Business Plan:-

It’s a word document. I maintain hard copy and the soft copy of it.

This is not the one where you document your trading strategy. This document must have the following information.

Mission and Vision statements of your trading business.
Sources for improvement. Books, blogs and stuff.
Why are you trading this year?
Long term and Short term goals. Yearly, Half-yearly, Monthly and Weekly (Can contain a lot of personal information here)
Trading Computer setup.
Broker’s phone numbers and other emergency contact details.
Your trading and bank account details. (Documenting passwords is optional)
Pre-session rituals.. (Yeah… I call them rituals as I have to do them every single trading day before starting to look at charts)
Post-session rituals.
Recover and Recoup procedures to break the emotional patterns that setup during live.
Money Management
Profit Withdrawal Plan from the trading account.
Contingency management. In case of emergency situations.
Instruments you trade and why? Trading timings.
The platform you use and why? It’s cost.
Data feed you use and why? It’s cost.
Punishments when you violate your trading rules.
Miscellaneous information.
You can document whatever you feel important for your trading business other than what I have mentioned above. Let me be honest with you, it takes time, mental and physical effort to prepare this document. 😀

2) Trading Business Action Plan :-

This is the heart and liver of your trading business. Yes, it’s your documented trading strategy. A word document again. If you don’t have one, what the hell are you doing in real markets?

But the tricky question is, as a discretionary trader, what should I document?

So let me answer that question first. Discretionary trading doesn’t mean that you just look at charts, interpret the market information the way you want it, and then take decisions you feel right at a given time. You must have a framework (or a model) to interpret the information and then to make an informed trading decision. That’s the only way you can eliminate chaotic decisions which are the root causes for overtrading, revenge trading etc. Whether that decision is related to entries, trade management or exits. I repeat, you must have a documented model. Otherwise, you cannot survive for the long run no matter how good your profits are in a given week or in a given month.

I am a discretionary trader and almost 80% of my trade plan is rule-based. The way I draw the supply/demand levels (HTF/range boundaries/Entry levels and Exit levels), the way I characterize the swings(impulsive/corrective ), the way I define the trend structure (trend or a range) at any given time, the way I define the bias at any given time, the way I name something as acceptance or rejection after breaking a level and the way I manage trades till it reaches the target is totally rule-based. I never ever mess with those rules. Oops. That’s a very strong and solid statement. 😀 Let me put it this way. I try not to mess with those rules 😉 and I pay the price 9 out of 10 times when I use the sentences like, “this time it will work even though it’s not something that’s documented in my trade plan.” while trading. They are not rigid rules at the same time they are not very loose. I can bend them but I don’t want to break them.

Entries and exits are the only areas in my trading that involve a decent amount of discretion. Because timing the trades at lower risk at an entry-level needs a good read of price action at the time of taking the trade. Making maximum out of the trade that you’ve taken needs a good read of price action once the entry is done or when the market is interacting with the exit level. That’s why there is nothing like perfection in entries, trade management and exits.

Anyways, this is all about my trading. If you have a different a different approach, make sure your trading plan covers the following sections in detail.

How do you differentiate a range from a trend?
Yes. Start with this question. The reason why a lot of traders suck in real markets (in terms of stats) is that they don’t know how to differentiate a range and a trend. The game is totally different in those two environments. In trends, you go with the trend fading pullbacks until it reaches a strong level that can reverse the price. Till then markets cause a lot of psychological and financial damage to those who try to fade the trend. In ranges, you fade the moves at the boundaries or take a trade in the direction of the breakout depending on acceptance or non-acceptance after the breakout of the boundary. The market makes you bleed slowly if you try to trade pullback type entries in ranges and there is no doubt about it. I can say it as I learned it the hard way.
How do you define a trend? When will you say that the market is in a range?
Whether you use a mechanical strategy or a discretionary strategy, it all starts with defining the trend. EMAs, trendlines, channels, stochastics, or just impulsive/corrective swings (like me) etc. etc… Whatever you use in your trading, make sure you document the process of defining the trend using the tools you use.
How do you form a bias at any given time?
Bias and trend are totally different. Sometimes they intersect. Make sure your document covers this. Conditions to take a CT trade, conditions to take a with trend trade etc.
What are the stay-away conditions for you?
Yep. Staying flat is an essential part of the business and your trade plan must cover this.
Make sure you cover all these four sections (we can call them as chapters rather than sections) in detail and add whatever extra you feel important to your trading business action plan.
When you have a detailed trading action plan and you decide to stick with it, you eliminate a lot of chaotic decisions under the pressure of market information. That’s how the consistency starts.

3) Trading Journal :-

This is where you keep the trades you have taken in a given session with notes explaining the reasons behind every single setup you have attempted. I keep soft copies and I use PicPick for taking screenshots and making notes. I recommend using a blog as it will be easy for you to go through historical sessions. You can also label the posts if you find something interesting in a session or a mistake that you repeat so often. As we don’t have to pay anything for CMS services like Blogspot, WordPress etc. to create a blog, it will not add anything to your business costs.

4) Trade Log :-

I use a Trading Journal Spreadsheet to log my trade entries, exits and other parameters. You can keep track of your stats in this document. I have already talked about this in the previous article.

5) Post market analysis Journal :-

Here you save the post-market analysis charts. You can use a separate blog for this too.

6) Trading Psychology Journal :-

A normal notebook will do for this. Here I record how I felt after taking every single trade in that session, what are the reasons that deviated me from the ideal performance of the post-market analysis chart and made me trade the way I did in the trade journal chart. Simply, it’s about your psychological edge. Along with the technical edge, you gotta track and improve the psychological edge with time too.

7) Market Structure Journal :-

Here you record the lesson or some interesting price action (if any) in that session. You can maintain a separate blog for this too.

8) Motivational Journal :-

Another notebook. I started maintaining it since I read about it in YTC. Thanks to Lance. 🙂 In a business like trading where the overall stats are totally against the success of average and below-average performers, we get crushed down by the market a lot especially during the learning curve and it is well known to do that. During those times, you need something to motivate yourself to keep you moving for the next day and that’s where it helps.

You can document stuff like, why I love trading, what are the worst things that can happen if I fail in this business, what are the best things that can happen if I succeed in this business, some affirmative phrases and whatever the that can motivate you to trade the next day leaving the garbage from the last session.

That’s it. These are the 8 business documents that I use every single day I trade.

Remember all these documents are for your personal use as it involves a lot of emotional stuff like setting goals, motivation things and all, and it makes sense to keep them for yourself.

Ufff… I know it’s a big boring theoretical article. But the documentation is something that’s very important in a performance-based profession where there is a lot of room for chaos.

You might ask,

Do I need all these things to trade as I am picking good trades often just by my gut and the knowledge in my head?

How about me asking a counter-question if the above question struck your mind.

In a profession where the odds of success are totally not in favour or you, how serious are you about what you are doing?