Trading Plan, first steps in creating an operational plan

The Way of Strategy

The Way of Strategy is a rugged path that perches between the most treacherous mountains and navigates the roughest seas, only a few traders are able to walk it steadily without abandoning it for reckless Aping, revenge trading and full margin leverage 125.

You will need to be a disciplined, rigorous and enthusiastic person ; as hungry for results as curious about what mistakes can teach you.

So let us introduce the faithful companions who will accompany you on this journey; without them you will lose your Way and the liquidation emails will never stop coming for you.

• Check List: Essentially the to-do-list for executing each trade, its creation goes through two stages: the first where you test a number of items for reliability and a second where you highlight only the most effective points and monitor them over time.
• Backtest: This represents the “wax on, wax off ” that every profitable trader constantly refines. It is a method of creating and monitoring the statistical EDGE of one’s strategy, that is, the advantage we feel we have against certain situations in the market. Through backtesting we can relive the movements that price has had in the past in order to be able to identify constants in behavior that we can statistically exploit to make profit. It allows us to identify the two key parameters that differentiate a profitable trader from one who provides liquidity to the market (RR and Winrate).
• Trading Journal: Twin brother of the Backtest, the trading journal represents the black box of our movements. Through how we structure this trading journal, it will be more or less easy to identify the weaknesses and strengths of our strategy. We will see in an article dedicated to the trading journal how to structure it optimally; today we will simply provide an introduction to its characteristic elements

Checklist Creation

The Checklist consists of those essential parameters and conditions for which a decision is made to enter or not to enter the market, they are also called confluences.

But not only that, other elements are also detailed within the checklist: related to the post-transaction and the characteristics of the transaction itself, such as predetermined RR and associated operational management.

Let’s go into more detail trying to understand how to create a two-step Operational Checklist:

• Step 1, depending on the type of trader you believe you are, identify a number of elements that, following theoretical studies, you believe to be respected within the target asset.

For example: periods of expected volatility on assets that have supply shocks, for trend-following swing traders compliance with structure, high risk-return price zones, and so on until you identify about a dozen

Once the points have been identified, a massive backtest needs to be performed to see which elements work best with which assets.

This is the most difficult part, it requires perseverance and critical thinking, a good statistic can usually be extrapolated from a series of 100 trades with attached operational data.

• Step 2, the result of summarizing the data obtained from Step 1. It will allow us to identify, again depending on the asset in question and our characteristics as traders, which are the most profitable points for our strategy, it means we are on the path, the hard part starts now, maintaining the Way.

The Checklist is an element that consists of well-defined points, which can be modified only against data collected through active monitoring.

The pillars of each Checklist in the trading plan

The three macro-categories that make up each operational list, within which each trader refines his or her confluences, are as follows:

• Entry: qualification of the entry zone, any clauses related to the market structure needed in the zone and essential elements without which the trade cannot be opened.
• Stop: predetermined level at which the trade is closed, accepting a loss. It will represent the value 1 in our risk return 1/R. It is usually placed at the point at which one’s analysis is invalidated, but against backtest data it could also be set at a maximum % drawdown.
• Target: predetermined level at which you close the trade by making a profit. It represents the multiplier of our margin, the R in our risk-return ratio 1/R. It is usually placed near a potential PRZ, but upon analysis of the data it could be set at a fixed ratio e.g. “the minimum target I aim to achieve is a 1/3 of RR”.

Trading Plan Backtest

Backtesting is the art of observing and acting, it is application of strategy in bursts.

Using software that allows us to perform replays at various time frames, we relive the phases of price movement, speeding up or slowing down the succession of candles.

With the help of such software, it is possible for us to go back in time to the dawn of the quotations of any asset.

What we are interested in is usually the last few months of the market, since changes in the movement logic are very frequent, so we tend to base our strategy on the 4/6 months prior to the start of the Backtest.

Of course this is a statement that is only partly true, or only for certain types of strategies, tending to be those that operate in the medium to short term and related to market manipulations or very specific patterns. On the other hand, those who operate as position traders or take advantage of cyclical market movements will have a longer Backtest horizon and will consider other factors.

Having clear what our operating time frame is and what elements make up our checklist, we will go on to apply our strategy, taking care to keep a detailed report of all those situations that trigger our positions.

It is time-consuming work, requiring a lot of effort and precision, to bring about reliable results, but it is definitely the step that allows you to know your strategy, to know how it works, when it works, and if it doesn’t work why and what mistakes to watch out for on the next trade.

If most traders lose their capital in the short to medium term, it is probably because they do not know their strategy thoroughly; the Backtest never ends.

"Creation and subsequent monitoring"

Trading Journal: what is it?

The most important documentation you will be able to draw up in your trading activities is definitely the monitoring of your trades.

By transcribing and jotting down every step you take in the world of trading you will have every victory and every mistake at hand, you will be able to take note of improvements and what still penalizes your results.

Each Trade is composed of several characteristic elements, which alone serve little purpose, but compared with a high number of trades, conducted on the same asset, can highlight constants useful for optimizing our strategy.

We understood, therefore, that in addition to constancy in the drafting of our Trading Journal, we will need a graphical schematization of each trade, which will ultimately allow us to have well highlighted what are the recurring parameters in our operations.

Trading Journal: what elements make it up?

The compilation of the trading journal will help us every step of the way:

• It will help us in optimizing our strategy in backtesting;
• Once we find the completed checklist, it will help in noticing changes in our market advantage;
• When it seems to us that our strategy is no longer working properly, it is thanks to the trading journal that we will be able to find the solution to become profitable again.

Let us see then, what elements should make up each trading journal:

1. Date: The placement of a trade over time provides chronological order to the journal and allows us to divide the trading year according to our needs, revision or rebalancing.
2. Trading session and time: This element may seem futile in a 24/7 open market, but let’s remember that we are still the little brothers of the regulated markets. The big money often comes from there and respects session times (London, NY, Sydney and Tokyo), so it will not be difficult to notice, in conjunction with openings, increases in volatility.
3. Asset: Each asset on which we conduct trades should have its own trade list, as each has its own characteristics that make it unique, and to which our strategy should be adapted.
4. Directionality: The easy summary of preferred directionality can be useful in identifying emotional bias, it also depends very much on the type of strategy, if one is looking for market lows to execute bullish swings, it is clear that the directionality will often be Long, vice versa if we are looking for bearish reversals; in a balanced strategy, however, on the big numbers the ratio of long to short should be balanced.
5. Entry/Exit Price: Important in order to get an after-view of the various levels at which the asset was traded.
6. Link trade TW: Essential to get an immediate view of the conditions under which the trade was made.
7. Planned RR: we said that this value should be predetermined, if the actual RRs match the planned ones it means that the strategy is being followed, while if the actuals are less or more than the planned ones, perhaps from the emotional point of view (fear and greed) some improvement could be applied
8. Planned operational management: the management of the trade from the standpoint of following up once you enter the market is what often makes strategies profitable.
9. Checklist points: which ones? how many? this is a crucial element in the backtest phase and allows us to have data on the effectiveness of our checklist
10. Trade outcome: how did the trade actually go? did it follow our analysis? did it go to a stop? what % did it come in from the take profit before reversing and coming back at me? These, and many others, are all questions that are usually asked by the trader who always wants to take his strategy to the next step, and which often make him profitable regardless of variations in market logic
11. Notes with cues for improvement: in this section should be included both operational indications related to certain aspects that can be improved, derived from mistakes or assumptions that need to be tested, but it is also useful to have track of one’s emotional conditions related to the trade: having an a posteriori view of the emotional conditions in which one trades allows a great qualitative leap from the point of view of emotional management.

Conclusions

You will have realized that there is no conclusion to any of this, despite the title of the paragraph, the methodologies by which a trader trades in the market are of two types: either statistically proven or randomly arranged; it is easy to see who is moving toward an ever-increasing understanding of their strategy and who is dangling in the fog clinging to whatever is clickbait enough to convince them.

Those who walk the Strategy Path are easily recognized, they talk about Backtest, Risk and Return, WinRate of a strategy tested and retested, implemented and modified, and if even now they are not a profitable trader be sure that with perseverance and continuity sooner or later they will be.

As for the last tips related to today’s speeches, the best platform to run Backtest definitely remains TradingView, whose basic program unfortunately does not allow the execution of Replay at Time Frames lower than Daily, while with this discount Trading View you will be able to access the paid programs saving $30.

On the other hand, as far as Trading Journal is concerned, there are several software dedicated to the orderly layout of data: from Trading View notes for concentration on a single platform, to Excel, Paper Tables, Notion and so on.

Depending on everyone’s preference and convenience, choose the program that best suits your needs.