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Hi guys - as part of my ongoing quest to fill my trading knowledge gaps, one of the things on my to do list is the process of categorising my past and future trades into Setups.
The main reason to do so is to start measuring more objectively which specific setups work best and which don't, as opposed to currently having just a long bunch of trades some of which are winners and some are losers.
I was inspired to follow this approach by one of the excellent @DionysusToast's videos he has on his website (the specific video is called "Introducing Order Flow to Your Trading" in case you ask)
I have a feeling that I am probably going to open a can of worm but here goes:
Q1 I have identified the following setups. Do you think they are reasonable categorisations?
TREND FOLLOWING - enter at either measured pullbacks or where a liquidity vacuum ends
BREAKOUT - enter after price has broken out of a range
PRE-BREAKOUT - enter before price has broken out of a range but there's indication it will break
SCALP - (in this case defined as aiming to take 3-5 tick profits)
FADE / REVERSAL - the permafader - 'hero' trade type
Q2 I accept that going backwards and trying to fit the above setups into all my past trades can be challenging, as sometimes why I took a trade wouldn't have been this clear - Because of this consideration do you reckon it's better if I forget applying the above to past trades and do it only from now on?
Note: even if people agree that the above setups are pretty much okay, that does not necessarily mean I am going to take all of them in the future.
I also accept that a) there may be 'variations on a theme' regarding the above setups b) multiple setup opportunities may develop during one session c) some setups may be more suited to one market than another
With the above I merely want to attempt to identify a fairly rough number of setups and ensure I have not missed anything obvious.
I would look not just for how well they work but:
- under which conditions they work well
- what supporting information makes them work better
From that perspective, I'd look at 2 specific, opposing types of trade:
Pre-Breakout
Trend Following
The reason for that:
Pre-Breakout requires overall rangebound behavior in the short term. It's also a tricky bugger of a trade. It's a trade that needs good timing and one you need to get out of quickly if you are wrong. But you do get indications that the range will break which is the "supporting information".
The Trend following trade obviously requires different conditions and also it's a trade that can be left time to work out. So the supporting information comes over time and is very different.
So there you'd have 2 very, very different trades from both when they work and how to spot them
Other people might have other factors for you to consider too - this is just my 2c.
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Thanks Pete - not sure whether when you created Jigsaw Trading you named it after the fact that trading is a bit like a puzzle, and each time you add a piece the overall picture becomes a little clearer. At least to me it feels that way. So, thanks for adding another piece
I have done exactly what you described a while back when I log my trades in Excel. I was doing this because I'm still a relatively new trader and I want to build a systematic process of identifying/testing new setups I see.
For the trade log for each individual trade, I added almost exactly same setups categories as your list. on top of that I identify the entry price reasoning e.g. MA, Bollinger VWAP etc, and exit reasoning eg technical levels, price flows or change inter market correlations . Next I added a category for how I size the trade, all in all out, scale in scale out or all in scale out. I also have a yes/no column for whether I stuck to my plan or not. I Finally i put in the MFE and MAE along with realized profit for the trade.
At the end of the month, I will make a pivot chart out of all the data I collected and evaluate how each set up perform given I stuck to my plan for those setups.
Sometimes these categories are not comprehensive enough to complete define my trade ideas/setups. One of the reason is that I found it too difficult to document the context for each market at the moment of the trade. I could only try my best to fit the ideas into the categories.
I believe it is really helpful. But for me personally, this exercise helped me to better understand trading perspectives rather than what each setups are doing. Interestingly I found this helped me to stick to my plan as I wanted a YES tick for not stick to the plan column in order to get good "data" for the log.
Thank you teee - sounds like our trading logs are similar
If, when you say "Sometimes these categories are not comprehensive enough", you're referring to the setups above, I would agree, as I bet there can be several variations on a theme, but I was trying to ensure with the above that I collect feedback from fellow traders on what they are doing, and I am keen especially to understand I am not missing anything obvious.
I also agree that the exercise can be beneficial to collateral skills such as discipline.
By the way, not sure why I can't give you a 'thanks' in these questions thread.
Hmm...well at a very 'meta' level, it appears all of the trade categories you have created are 'directional' strategies in nature. So you may want to consider other strategy types all together, e.g. spreads, delta neutral volatility strategies, carry trades, etc.
But from a purely directional stand point, I think the labels seems sufficient after you add DionysusToast's "pre-breakout" classification.
Thanks MacroNinja - yes, the setup I mentioned are directional.
The other types you cite sound probably too 'advanced' for me at this stage - while it's true they may probably be missing from the list, it does sound they are outside the scope of my exercise.
I think the intent is to focus on the basics and get the basics right first.
I certainly think fitting trades into setup categories is useful.
I have decided to look back on the days that would have been the most profitable/amenable to my style and put them on a calendar and then go and review them for pre-trade conditions looking for distinguishing factors that would alert me to the setup.
So I would like to trade short days that open near/at the HOD and fall for a good range e.g. 20pts, getting in at the HOD and exiting near the LOD.
(In this market I don't want to trade long for fear of a flash cash and my stops not working).
Whether you go back or just forward would depend upon your time and goals. If you have categories do you have a way of knowing (a journal with thought before the entry of what you were thinking it was e.g breakout?). Are you doing this to see how often they worked out?