Having a set of trading rules and conditions that you look for when searching out trading opportunities is really one of the keys to success.
Without rules or demanding certain market conditions exist, you are most likely just guessing and that is no way to expect a long and successful trading career.
Mechanical System Trading Rules
With the mechanical systems, the trading rules and conditions are built into the system and once an opportunity sets up according to the system rules, all the relevant information (entry, stops, and targets) is printed on the chart.
For many people, this is probably a great route to go in their trading career.
Executed properly, you do have a slightly easier time bypassing many of the biases traders face during their trading career. The key to mechanical trading is sticking to the trade plan perfectly.
Discretionary is different but contrary to the name, there are still rules involved. Success in trading discretionary means not wishing and hoping the setup is a trade or seeing things that are not there. It involves conditions that must be present and close is close enough is often times an overriding rule.
Discretionary Rules In Action
I am currently short the USDCAD Forex pair and I think breaking down the trade will highlight discretion, simple concepts, and truths about the market that we often hear.
The USDCAD has been moving up for quite a while and this chart shows how the pauses in the uptrend resolved.
- “A” is a beautiful test of the lows of the range solidly rejected and price broke with momentum
- “B” has lower momentum into this range but strong break to the upside
A range formation takes place with a brief test to the upside that was rejected. The weekly chart superimposed at the bottom shows the break of the support zone.
Once the support zone broke with momentum, I was only alert for a pause and then another leg down. The key for this trade was: Momentum on the break
After the break I got the pause I was looking for. These was a bullish green candle that failed to take the currency pair much higher. Once the momentum showed up to the downside, I placed a sell stop order to get in when the market broke lower.
The downward triangle shows the trade trigger and the same day the trade started to take heat. The next day the trade was well under way.
Trading Rules Applied
I am well aware that the overall trend of this pair on my time frames is to the upside. That simply means that I will not let a rally go too far before exiting on the trade.
The reason for the counter-trend trade is simple: The price action and structure gave me a valid reason to take a short trade.
The trade dropped 175 pips from entry and is finding itself held up at the area marked “A” in the first chart.
There were conditions that I needed to take place for this particular trade:
- Steady directional trend
- There was a higher momentum thrust into “B” than previous moves
- Range formation
- Break of support zone
- Some type of flag formation
Some may classify those as “rules” but for me they were conditions of the market that had to take place in order to be interested in a trade to the downside.
The rules encompass the entry, protective stop, and management
For the entry, I needed a strong break of the pattern to the downside which occurred. This allowed me to stop my way into the trade which would mean price was heading in my direction at the time of entry.
The stop was placed above the range just outside the range of failure tests.
Management would be scale at 1R and watch for declining interest in the downward move. This can take many forms but the key is to ensure that neither fear nor greed have any place in the decision making process.
Trading Case Was Made
You can see that this was a well thought out swing trading opportunity which was only possible because conditions and trading rules worked hand in hand. Both must be present in order to set yourself up with viable trading opportunities and to put your money at risk.
I will also make a case to not take a trade but that will rely on the chart. I will use what I know about how price moves and what things can mean to not involve myself in a possible trade. Too many listen to the news, read the forums, or use methods that don’t take into account the actual mechanics behind the market. Every reason that you come up with to trade or not to trade must come from you.
Much like a lawyer in court, every piece of evidence is weighted and stacked upon previous declared evidence. They build their case to the best of their ability, rest their case, and then let the results play out as they will.
As traders, that is what we must do.
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