Overview
In the previous sections of our Playbook, we dive into the individual components of our trading system. The purpose of breaking down each component in isolation is to outline the characteristics of what matters to us in our decision making. As trader’s we are constantly observing, interpreting, and then acting on multiple data points that are in a constant state of change. We need to be clear on what it is we are looking for so that we do not hesitate when it is time to take action. Now that we have a catalog of all of the information that is significant to us, we have to figure out how put everything together.
Strategy Deep Dive
We believe that there are two categories of trading systems: Discretionary and Mechanical. Discretionary systems gives traders the freedom to decide what should be done in a particular situation. A mechanical system is more rigid in structure, with strict rules guiding our decisions. We consider discretionary trading to be more like an art whereas mechanical trading is more like a science.
There is a challenge in articulating the structure of our discretionary strategy. The freedom we give ourselves in our decision making process means we won’t always be consistent in how we react to certain conditions. Our discretion brings intangible variables into the equation. These intangible variables are our experience and intuition.
Our experience has helped us develop a high level expertise in our particular market of focus (for me it is NQ). The expertise was built by having an obsessive approach to developing and improving our skill set, never getting complacent and always being open to new concepts that can level up our game. Intuition is our subconscious pattern recognition that is slowly developed over the course of thousands of hours of screen time. When we put in the time, we gain the ability to take action based on what is happening in the market without doing any conscious reasoning.
We now have an understanding of the intangible variables that factor into our discretion, and the prior sections cover the other important components. So we are left with the challenge of putting it all together. How do we take everything we have discussed up to this point and make a trading strategy out of it? The answer is simple: we have to put in the work. Our system is not something that was put together after reading a textbook, watching an educational video, hiring a coach, or by reading about psychology. It is the amalgamation of all the most significant information we have taken in over our years studying and watching markets.
Preparation provides a consistent routine of how we get ready for each session.
Mindset puts us in the mental state we need to be in to execute with confidence and accept risk.
Price Action and Environment helps us manage expectations for our trades and give us clues about how to approach the session.
Rebid/Reoffer, Exhaustion and Absorption are actionable events that cause us to act.
Risk Management is the framework we use to manage our risk and scale our positions.
Our expertise and practical competence utilizing these components has increased slowly over time by putting them into practice; it is like building a muscle. It is important to emphasize how imperative putting concepts into practice is. Being a student of the market is the best place to start building a system. However, there comes a point where we will only continue to grow by putting real risk on to express our idea. Identifying trades is the easy part, putting our money on the line and managing the trade for real is a different beast. Everyone is Tiger Woods at the driving range.
Putting these components together into a comprehensive strategy is simply a function of putting them into practice, reviewing results, making adjustments, and repeating this process in perpetuity. We believe there is always another level to our game and we will work vigorously to take that next step. The journey of developing, improving, and practicing our strategy will continue for as long as we trade financial markets.
Discretionary Location
There are occurrences throughout the trading session that may present opportunity at an area that was not identified during preparation or with our other predefined areas of interest. We identify these trade locations as discretionary and utilize components of our playbook to guide these trades.
Trades at discretionary location will usually include one or more of the actionable events we have laid out in our playbook: Rebid/Reoffer, Exhaustion, Absorption or some other market nuance that offers a clear trade opportunity. The reason we call them discretionary is because they happen outside of our predefined areas of interest or areas found in our preparation. However. that does not reduce their validity. It is our awareness and observation of the market in real-time that clued us in to the trade and we should be leveraging that experience for these discretionary location trades.
Discretionary Location Example 1
We have opened with a grinding drive higher that results in a P shaped profile. Later in the session we see significant absorption at the high of day from sellers. This absorption based activity becomes significant as we observe large offers reloading and moving down as price falls. Then we notice an increase in the speed of which orders are hitting the market.
Typically slow and grinding days are not in our playbook but we have noticed a change in the personality of the market and it appears that sellers are getting extremely aggressive. After observing these sequence of events we think there is a possible liquidation, for entry we are looking for any re-offer locations and using our P.O.S.A. strategy for risk management.
Discretionary Location Example 2
We open the session and drive down. The order flow activity does not appear to be particularly aggressive, however price continues to rotate down nonetheless. As we watch this move happen, we begin to notice that the moves down are shortening in length. We also observe responsive bidding activity start to gradually increase in frequency. We have no level, MGI, or any particular reason to be interested in this area yet.
We suddenly get an extraordinary flush of selling that is immediately met with an aggressive bid. After the aggressive response occurs, we notice a material change in the personality of the order flow. Before, we had an equal distribution of orders hitting the bid and offer however the liquidity on the offer was consistently refreshed stepping price down. Now, we have no refreshing of the offer. The bid is the dominant side being refreshed and we see an increase in tempo of orders lifting the offer. We can view this change in activity as a potential exhaustion reversal at the lows, and can lean long against the area the activity changed for a move up so long as the bid refreshes.
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