Sunday, March 10, 2019

Trading With a Flexible Bias

In the most recent post, I outlined some of the risks of becoming wedded to trading plans and thus trading with a bias that prevents us from adapting to how the market is actually trading.  By coincidence, Steve Spencer of SMB posted this excellent video that provides a practical example of how he traded his plan in the stock $NIO.  He entered the trading day with a view/bias, was stopped out of most of his position, but quickly identified criteria that would get him back in the trade.  Sure enough, after spiking higher and taking him out, $NIO went back into its range and gave Steve a profitable opportunity to act upon that original plan.

By being very aware of key price levels, Steve was able to determine whether the stock was ready to make the move he anticipated.  When $NIO moved to morning highs, Steve lost the trade, but not the idea behind the trade.  This allowed him to trade flexibly within his bias or plan.  The discipline was not stubborn adherence to the original idea, but knowing the price levels for acting upon the idea.

I notice many successful short-term traders making use of the idea of key price levels.  What they are doing is identifying prices at which other traders act in concert, highlighting levels from which we can potentially expect supply/demand imbalance.  There are many tools available for identifying such price levels, including:

Market Profile - Effective in identifying impulsive moves out of value areas, starting potential trends;

Market Delta - Effective in visualizing volume coming into a market, hitting bids or lifting offers, starting potential impulsive moves;

Bookmap - This is an order flow tool that I'm starting to explore.  It creates a chart of historical order flow, highlighting price levels where large traders lurk.

I also recommend following Steve Spencer.  Over the years, I've come to appreciate his effective trade planning.

As the quote from Eisenhower suggests, the important thing is not the plan, but the planning process.  None of us can predict price paths perfectly.  At any time we can get stopped out of a trade.  The skilled trader has criteria set out for determining when the idea is wrong--and for determining when the idea is still valid to re-enter the trade.  

Great trading is trading with flexible plans.

Further Reading: