The Three Trading Plans and Rules Every Trader Must Have – Part 2

The Three Trading Plans + Rules Every Trader Must Have

(Rules of Engagement)

In this article, I will be talking about two things:

• Know Your Entry Pattern
• Know When to Stay Out of The Market

Rules of Engagement

Every trading system has certain rules as regards how they enter and exit and also what to look for that won’t make you enter or even stay in a trade.

These are very important things that every trading system must possess.

1. A proper and explicit entry
2. A proper and explicit exit
3. When you should not stay in a trade or when to leave a trade
4. When to not even enter a trade at all

These 4 aspects of a trading system will be discussed under the umbrella of two important principles which are:

• Know your entry pattern
• Know when to stay out of the market

Know your entry pattern

Every system, no matter what is used for analysis, has a pattern or more they look out for in confirmation of an entry, a lot of things may fall into place but if this pattern does not present itself, it will be advisable to not enter a market, why, because this entry pattern itself does two works

1. Confirms the trade
2. Optimizes risks and maximizes reward

Confirms the trade

When it comes to the properties of the entry pattern, it is important to note that when it surfaces it is an added confluence to the setup and makes you just more confident in the bias. Examples of some entry patterns are:

Example 1:

Bias: Bullish

Daily TF: Up-trend

4hr TF: Uptrend

15mins (Entry TF): must be in an obvious uptrend before entry on a retracement

Now in a case like this, if the 15-minute TF which is the entry time frame isn’t in an obvious up-trend then it won’t be a confirmation yet and you need the 15 minutes to be in an up-trend, not only that

In the 15 minutes, the entry has to be on a retracement and not the impulsive leg, or else you are not sticking to your rule of engagement.

Example 2:

Bias: Bearish

Entry pattern: Head and Shoulders on the 5 minutes TF

In this case, even if the market keeps going down on the 5-minute time frame, so long as you’ve not seen your entry pattern you shouldn’t enter the trade.

Optimizes risks and maximizes reward

Every entry pattern should be equipped with the ability to refine risk down to the possible unit to maximize reward unless that entry pattern is not detailed enough.

Most times, the timeframe in which you get a bias is not where you enter from, so it is required that you refine down to lower time frames to be able to minimize risk and this in turn maximizes reward cause with an optimized risk level a trader can leverage up and make up a lot of reward for the target.

Example:

A trader is looking to buy and if he can refine his risk to no more than 30 pips, he will be able to use higher leverage.

Daily TF: He spots a bullish bias

Then scales down till he finds the pattern he trades then he measures the risk level, and he would get just about 25pips.

This is a good risk level at which he can put the amount of leverage he wants

Now the point of this illustration is that, if he tried to enter on the daily TF, he would be breaking an “entry rule” which is to know your pattern, so also will he not know the risk he is to use and because he knows his entry pattern, that is why he scaled down time frames till he found it.

Know when to stay out of the market

Just like knowing when and how to identify entry important as required by your system, your strategy for engaging the market should also guide you and warn you when not to enter the market.

Seems counterintuitive because this sub-topic is talking about “Rules of Engagement” and you might be like, why will you be talking about “knowing when not to enter the market” in a “Rules of Engagement” discussion? There are times when the market is unpredictable and super erratic, if your system can’t tell you when those times are prevalent then it is not complete as far as rules of engagement are concerned.

Every Veteran knows their system to the point that the moment it starts acting out, they identify it and adjust appropriately.

They have their A+ Setups which have a higher strike rate than any other setup they might have and when these A+ Setups cause a loss, they suspect that market conditions might not be in favor of their system and they stay out.

Times when the market condition might not favor your system

Choppy Market Conditions These are times when the market is just sweeping short-term highs and lows swing points and isn’t moving towards any direction whether up or down, the market is in a tight consolidation with no breakout in view. Veteran Traders have come to identify this particular behavior and know their systems would not trade in this sort of environment successfully.

Times to expect choppy markets:

1. Pre-News releases: before news releases like CPI, NFP, FOMC the market can be very choppy all up to that point so experienced traders do not trade till after the release of the news.
2. After a particular market has moved quite exponentially past its average daily range on the previous day: Times like it can take some moment for the market to recover from such exponential moves and it will take an experienced trader to understand why the market is choppy after such a day.
3. Bank holidays: during bank holidays especially when it is the bank of the currency you trade expect choppy behavior in the market as the banks who set the price and are the main factors driving the demand and supply are not presently in the market and, expect choppy price action.

These are just a few times when veteran traders expect a choppy price action and it is not exhaustive to this list as there are a lot of other factors that can cause choppy price actions.

That concludes the Rules of Engagement section, trading is not supposed to be hard, you just need rules that guide you when emotions try to over-cloud logicality.

Next week we enter the third and final installment, till then, BE SAFE!