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My Trading Plan


Here's a 'detailed' explanation of my trading plan. Please tell me what you guys think of it.

Foreword: The whole thing is based off of the theory that if something is profitable beyond a reasonable area of slippage and errors (such as computer problems) then it will likely be profitable for at least the near future. It's also based off the theory that the market will likely move at least 2 points in either direction from the open in any day before making any huge moves. (The exception to this is a trend day.)

Background: I back-tested this system starting January 1st 2010 and found that it is profitable by 72 points as of this writing.

How it works:

I look at the open price compared to the close of the previous day and decide whether to trade towards the close or away from it. I make this decision minutes before market opens at 9:30 and take a position at as close to open price as possible (usually slippage means one or two tick difference). I then set a 2 point target and 10 point stop and I don't do ANYTHING until either one is hit, at which point my day is done.

Please leave ANY questions of feedback. I've live traded this for almost all of May now and it has been profitable. I am looking for validation, especially from the people with years of experience because I don't know if I'm on the right track or not.
I'm not a system trader so I don't have much to add but I hate that specific stop loss because I use the 8 - 10 point range as a key fade point as I believe somebody likes to push it there...and then retrace a bit..with that said how about using some funtion of the average open to low or high depending on your planned direction of the trade?

Paul has done some work with the 5 day averages perhaps he can chime in.

What about using some price action exit when wrong?

I know today was a loser for you but suppose you tighten the stop after the market came back to the open or trailed it if it starts coming back etc...I'm not specifically sure here feng so just throwing out ideas ..

How about a Pivot number or something like that...obviously we all really want to see that stop smaller..or the winning number of points higher.......is the 10 point stop robust enough to handle all market phases and volatility?

How about a stop based on time ? was this mentioned already? How long does it take to have a loser...? Go back and look...If you fiqure out that most losesr come after 30 minutes then get out before then with less of a loss...

How fast do the winners come? Get back to us as that might be a good alternative

Glad you are following your plan and sharing it with us
I will test various stops over the weekend. I will post the results.
Honestly, I have bitten my lip concerning this topic, but I guess I'll chime in now.

feng, unless you have a true "edge" in choosing whether you are going Long or short at the open, the only thing you are doing is capturing noise, the reason it has a positive return is the size of your stop relative to average ranges of 5 minute bars and the infrequency of a one way trend at the open of trading.

As an exercise to illustrate the possibility that you are truly only capturing noise, take a random sample of your trades (or take all your trades), and using your estaboshed 2 pt Profit Target and 10 pt stop loss, calculate return based on taking exactly the opposite of what you did.

average range (H-L) of the entire RTH session (5minute bars) has been

2.70 (Fri 5-28)
2.29 Thurs
2.85 Wed
3.28 Tues
2.40 Mon

if you look at just the ranges of the first six 5-min bars of the RTH,

average range of 5min bars during 9:30 to 10:00am

3.58 (Fri 5-28)
3.29 (Thurs)
3.38 (Wed)
4.58 (Tues)
4.08 (Mon)

Compare these ranges with your stop and you can see that you are risking a directional move of 3 bars in order to pick up about 2/3 of an average 5 min range.

all you are really doing is allowing average price volatility to fill your profit target.

Can it work? sure, especially if you could:

1) figure when odds are greater for a directional RTH opening move.
2) figure the direction of an opening directional move.

If you take the time to calc performance taking exactly the opposite of the trades you took, I certainly would be interested to see the results. (And, if there is a signficant difference in your favor, then you just have to work on identifying (if you can) RTH opens that are directional.)
Thank you for your response Paul. I WANT to hear the criticisms as I'd rather not find out my errors the hard way.

My strategy has never been about predicting the market like some of you do here but to let the volalitity, or noise as you call it, fill my target...with my giant stop giving me a reasonably large chance.

I am working on ways to try to have a better opening bias as well as looking to adjust my stop so that I can further cut my risk but still maintain the strategy of playing the volatility.
Sorry another thing I needed to add was this...I wanted to have a system where even if I was wrong (e.g. my directional bias), I could still make a profit.
I just backtested May and the results are exactly the same when I went the opposite trade everyday. This is very interesting.
Results for using a 30 minute stop for the month of May netted 2.75 points more profit than using a 10 point stop. While it did reduce each loser significantly, it turned a +2 winner into a -8 loser and that was the one that made the major dent.

For the month of April, the 30 minute stop netted 3.5 points less profit than using the 10 point stop. However, volatility in April was far lower and so several times the first 30 minute bar didn't even move enough to fill the +2 target in time. More emphasis will be placed on the results for May.

Now I will attempt to use BruceM's idea of levels and O/N testing of those levels (as I understand them) and try to make better judgements on directional bias since all I need to do is get rid of 1 or 2 bad calls a month to be significantly more profitable.
feng456 I would suggest a 4 pt SL and a 4 pt. exit from the open. Its frankly 50% probability that we trade everyday so the approach has to be balanced.I am unable to understand your approach/ how you decide whether to go long or short at open. If you could spell it out in layman terms again it would be great. Also if you are really stuck with this idea put a sell and a buy 2 pts away from the open and exit at open like the pitbull statergy. Now without doing anything you are getting a SL of 6 pts from the open yet having a risk of 4 pts only. FWIW.....
Well I used to an adapted version of my gap fill strategy. Basically when there was small gap between the open and previous close, then I go in the direction of the fade. If the gap was too big, then I go opposite.

Right now though I am going to try to use BruceM's levels and try to make calls on the direction based on that and overnight movement. It's still in the works.
feng456 the gap is always filled but may take days sometime.
the specific criteria data ur looking..of course noone else here has done backtesting for it. something u need to spend time doing urself.

gaps are good though at fading. just gotta find something that works and be disciplined enough to follow it.