Trading Rule #9 – Putting Together A Development Plan – Part 1

It’s our 9th post anniversary of trading rules. We are now going to start putting the pieces together so that after the next few posts, you can turn these lessons into action. 

You’ve no doubt heard that you need to have a trading plan. That’s something you need to work towards, my estimate is that by the time you have a plan down that’s built to survive multiple market cycles, you are about 75% of the way to success. But you can easily turn that into 10% by ignoring your plan when you sit down to trade.

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Most aspiring traders never get to that point because they’ve never seen a pattern repeat itself in the market, they are stuck for years on “looking for a pattern” or a “setup”.

There’s a few reasons for this:

• They don’t know what a repeatable pattern looks or ‘feels’ like.
• Markets consistently switch gears, which means patterns require flexibility.
• They don’t know what a trading rule looks like.
• They only look at 1 thing – charts.

Often the goal is a mechanical, repeatable setup that a chimp could execute. That would be lovely, but it’s unrealistic.

Going from zero to having a trading plan is a project, and part of that project is learning. Kinda like R&D really.

The way to have a successful trader development project is to have milestones, ‘wins’ and rewards along the way. It’s also a good way to run a business. Set yourself achievable goals and as you hit them, give yourself a reward.

The alternative is to sit at your screen “trying stuff”, clicking buy and sell and being consistently annoyed and disappointed. That is the norm. 

Let’s dispel a few development myths first:

• You need to put in 10,000 hours. At 260 working days at 8 hours per day, that’s just under 5 years full-time work. Professional trading would not exist if it took you 5 years to get profitable.
• Everything you need is on the internet, you don’t need to buy a course. This is correct to a point – but finding good information amongst the nonsense online is like trying to find a needle in a bullshit-stack.
• Just watch the screens for long enough and you’ll figure it out. All I can say to that – is I’m glad my dentist, doctor, plumber, electrician and especially my urologist didn’t take that approach.

Phase 1 – Choose a market & get to know it

You will be trading markets, not charts. Charts are a tool, the tape is a tool, the DOM is a tool – but what you are trading is an actual market. You could be trading stocks, agricultural products, index futures, interest rates, metals. CME has a list of markets here (https://www.cmegroup.com/markets.html).

Most traders (including me) gravitate towards S&P500 Futures – and in hindsight, that’s not what I should have done. If I could start over, I’d select a market I understood best. At the time, that would have been Crude oil. It’s easy to understand, it’s all over the news, we know when prices are going up and down at the gas pump. In contrast, I would not choose interest rate products because they are much harder to understand, it’s all to do with yield curves and central banks.

Let’s stick with oil as an example: 

• Oil has a mini and a micro market (micros are lower risk and ideal for beginners). 
• Oil has specialist sites that tell you what’s going on – https://oilprice.com/, https://worldoil.com/, https://www.eia.gov/ but is also well covered on Bloomberg, cnbc, investing.com, Wall Street Journal etc.
• Oil has regular scheduled events such as Oil Inventories on a Wednesday
• Oil has pundits you can follow – Amrita Sen, Ellen R Wald, Daniel Yergin

In other words – it’s pretty easy to get to know oil and read up on it every day. You don’t have to force knowledge into your head. Think of it like watching a Netflix series. In episode 1 you don’t know the characters or have a good feel for them, by mid-series, it’s all starting to make sense.

This isn’t hard, you don’t need to do anything with the information specifically at this point, you just need to get to know it. This is an ongoing task.

Sometimes news will be light, sometimes there will be big news and sometimes there will be an ongoing news ‘saga’ – like the recent Iran-Israel conflict where twists and turns sent prices up and down.

Phase 2 – Put a box around it

Decide how you will approach the market (day trading rule #4) – you need to LIMIT how much information you will use to trade and what sort of events you will trade. 

Technical: In absence of news, participants still sit at their desk and trade each day. There’s nothing wrong with using charts/volume profiles to determine where traders might be stuck or where momentum will occur or when a market has gone too far (mean reversion), relative to its peers (other energy products, for instance).

The downside of technical stuff is that most of it is bunk. We will look at volume profile trades and other technical ideas later in the series, but the most important thing is that you make sure the ‘technique’ or ‘event’ or ‘setup’ is valid by going back over time and looking at earlier occurrences. 

Fundamental/News based: This can mean having your finger over the button just before an economic release is out, but that’s a little ambitious for beginners. When major news occurs, institutions and ETFs often have to reposition. That’s something they like to do over time, unless there’s panic buying/selling. So often you don’t need to be there at the exact moment but have it set the tone for your day

For both ‘styles’ – Observation beats attempting to trade the event. Observation has no “fail”, you can determine the approach is invalid, but that won’t make you feel bad. But trading it and losing – is not in line with making this a positive experience with milestones and rewards. It’s going to really mess with your head.

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Sometimes it’s too volatile for you, and sometimes it isn’t. News is often as simple as OPEC announcing a change in production or US oil inventories going down. 

My take – markets are technical until news steps in. So the best thing to do is have a small selection of events (technical or fundamental or both) that are ‘sort of’ reliable. 

For example:  

• If production is cut, prices often rise.
• If US Rig count increases a lot, prices might fall.
• If we hit a level of support in absence of news, the market may react there.
• If we’ve been in a trading range, there might be a false breakout on the 3rd+ hit of an extreme.
• Returning to the top of a recent range might see sellers shy as they just stopped out.

These are simple, common patterns that we’ll show examples of as we go. There’s nuance and experience to put on top, so don’t run off and trade them just yet. Test. Test. Test.

The next step is figuring out how to take advantage of the moves that result from these events and ensuring that you are adjusting for volatility. Your ‘system’ will not be static, it will adjust as volatility does (as will your position size if you are smart).

We’ll cover those next steps in Trading rule 10 – confirmation. Then we’ll look at volatility adjustments in Trading Rule 11.

But for now, even if you’ve been staring at charts with no progress for a decade. Swap one of your Netflix shows for engaging with a market for half an hour at the start of the day, then take a look at what happened at the end of the day.

Week 1 goal: Pick your market. Read 3 articles a day. Jot down the high/low after the close. Reward: Your Favorite snack.

This is no harder than watching a Netflix series. Your brain will make the connections, as we covered in trading rule #6.

For those wanting more RIGHT NOW – remember from a memory perspective “drip feed sticks, overload slips”.

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