You do not need to be a genius to have a great system. You certainly don’t need to be pinned to an eight monitor super computer to see what you should be trading. The gift of a clear and complete model for your trading is that you no longer become a moving piece of the market. You are fixed. In place. This gives you a great advantage as you simply look for trades to come to you. Here’s how you set up your own model if you are like me… a non-quant.
The Goal
The goal of a model is to contextualize price for you in a way that allows you to both manage risk and exploit opportunity. To do this it must take in some basic factors. While those factors are reasonably fixed, the way you read them is fully dependent on your primary edge, read and what you find compelling in markets.
Each one of the following should be simple, clear and easy to read. They each exist in one of two states. Clear and unclear. You simply need to see how each node triggers a clear or unclear reading and move down the chain. With a simple system, this can be very quick and easy to do.
Some Assumptions
I trade intraday futures and some stocks. I trade a small timeframe. Five minute and lower. I do not trade options. While this information can be applied to swings, options and futures, you may find that some data adjustments are needed to fit your specific needs.
Trend v Range
On a larger timeframe, are we in range or trend?
This can be daily, hourly or whatever timeframe meets your needs. You don’t need more than this and this data point should inform your execution questions which are simply, fade or follow. I simply use daily bars and previous day high and low to get a sense of trend v range.
Structure
This is a fairly common term in today’s more advanced circles and it should be. Let’s define not what it is but what it is for.
Structure should give you a sense of how much your market typically moves (atr) and based on these distances, where interactions may change. You should always know how much your product can move and realistically, where it may begin to transition. It’s simple a projection tool for trend v range.
Momentum
Momentum is just a technical term for the markets emotional intensity. I use two items to understand this. Item one is simply the previous day’s close v current day’s open. Buyer/Seller strength is clearly measured by gaps and if they fill v if they do not. More than that, it tells us of the “mood” of the market for that day.
My second item I use here is simply an opening range. I use a modified fifteen minute opening range. When I say modified it’s simply because I do not care about the high/low as much as the open/close. I always ask the same two questions about it.
- Are the open/close values near the high/low values?
- What is the distance between the open/close values?
This simply shows me how the RTH gap might be relating to the RTH trading session. A good model will give you these three dimensional concepts as you move towards execution. For an intraday trader, RTH momentum for the current session is critical.
Again, the aim of this node is to give us a sense of trend v range on an intraday chart. It’s functioning as a projection for participant behavior.
Positions
Never forget this. A market is just positions. As we now narrow into execution, we need a way of taking advantage of other people’s positions to give us access to bigger ideas. For this, I use a combination of price action, technical analysis and some order flow. This is truly the “whites of the eyes” element of trading. In the previous nodes, you are getting estimations, generalizations and such. In this node, we need to be truly specific.
There continues to be no need to complicate this. Range v trend is still primary. You should be able to simply see where people are positioned and when they are wrong.
Summary
In a constant pursuit of range v trend, we simply need a few tools that tell us the mood of each timeframe as we move towards taking advantage of other people’s positions. This can be done with price alone. I however use a few additional tools laid over price that act as shorthand for these concepts and give me a quick sense of things without overthinking.
The reality is, you will be wrong. This is the advantage a non-quant has over a quant.
When you keep trading “loose” and release the need for perfect results, you open up an advantage not many have. You are now operating with a high level of executional edge without the mental block of “being right”. With these in mind, you can both develop a model that works and trade it without massive pressure and self criticism.
A key belief that I have as trader is this:
It’s not the model or strategy that makes money. It’s the trader who trades it. You must take a model and make it profitable. This is done only through consistent observation of the model through a feedback loop.