Operation: SILVERPLATE by IKC (3 of 4)

[Imperator_KittyCat]

SILVERPLATE by IKC - Journal on Trader and Trading System Development

CHECKLISTS

Did you know that statistically, there is a higher chance you would be involved in a vehicular accident than in a plane crash?

Have a look at this!

You’d sooner get shot at accidentally than die in a plane crash! That’s statistics for ya!

TRADING and FLYING PLANES

So what does make flying planes (relatively and statistically) safer than ground vehicles?
In the POV of a Pilot, this old chap once told me it was their system of checklists - I’m talking old school pen and paper on a clipboard, baby!

What is the impact of this checklist on a clipboard?
Oftentimes, through the daily grind day-in and day-out of the mundane routines of our lives, we tend to put certain details into the background.
We would often go “autopilot” on some of the things we think are too small or mundane to warrant our attention.
That’s what checklists are supposed to prevent and that’s what the pilots’ checklist system works to prevent.

The checklist brings into the pilot’s attention every small detail he NEEDS to check to ensure a safe and efficient flight.

The list is long and extensive when something so small or insignificant such as checking if a button was pressed or if a lever was pointing to a certain indicator. The attention to the small often neglected (but sometimes important) details is what brings a new level of thoroughness to the pilot - thanks to a simple checklist!

Now i wonder, if pilots kept a checklist to ensure all mission-critical components were at green light before a flight, CAN WE TRADERS KEEP OUR OWN VERSION OF A CHECKLIST?

I’d definitely keep a checklist if it meant avoiding a crash!

May you break resistances and reach new highs!

[Mondeoman]

@Imperator_KittyCat

CAN WE TRADERS KEEP OUR OWN VERSION OF A CHECKLIST?

Another great post. Thankyou.

[Imperator_KittyCat]

@Mondeoman

Another great post. Thankyou.

Thank you, oh pawesome hooman! It means a lot to hear what you say. I shall strive to keep sharing more stuff to help our fellow traders (and aspiring traders).

[Imperator_KittyCat]

SILVERPLATE by IKC - Journal on Trader and Trading System Development

FORMALIZATION

Now that we have discussed the idea of CHECKLISTS (See prior post) and how they help you keep track of mission-critical components, we now have a better appreciation of how they can help us with our trading.

Ever go to a grocery store with 10-15 things in mind to buy? The story starts with you wandering off into the soda section and then 15 minutes later, we got 20 things on our cart but only 5 of those were on our original list of things to buy!

That’s where the checklist comes in!

In trading, whatever our technique may be: Fundamental Analysis, Technical Analysis, Sentiment Analysis or a combination of any or all of those, a checklist will be of great help in our trading.

Think of it as a pre-planned and prepared grocery list that you bring with you before you work your way through the grocery.
If you listed Body wash and shampoo on your grocery list then you wouldn’t waste time going to the fish section or produce section!
Not only does it make your grocery trip more efficient, but it allows you to focus on the groceries you have on your list.

Instead of navigating around 10 or 20 lanes, you can focus on the 2 lanes that have what you need!
You can then focus on comparing the quality of Body Wash and Shampoo brands instead of being all over the place!

The idea is the same with CHECKLISTS IN TRADING.
Instead of being all over the place, trying to find a trade in 40 or 50 financial instruments, you get to focus only on the few financial instruments (say 4 or 5) that pass your checklist!
Treat your checklist as some kind of FILTER that sorts out the tradeable financial instruments in your reach.

From 40 to 50 financial instruments, your CHECKLIST will allow you to filter them by using what you set as DESIRABLE CHARACTERISTICS and reduce your targets from 40 to 50 to a smaller number say 4 or 5.

You can then spend more time, effort, and energy on the higher probability trades vs. being all around the place and possibly looking for (and forcing) trades where there is none to be made.

Kind of like being a SNIPER kind of trader, not a MACHINEGUNNER kind of trader

Now then, whatever our technique may be: Fundamental Analysis, Technical Analysis, Sentiment Analysis or a combination of any or all of those, we need to make a CHECKLIST of DESIRABLE CHARACTERISTICS which you will treat as if it was a set of CRITERIA OF EVALUATION and these will help us sort and filter the financial instruments we have within our reach.

What desirable characteristics should we put on our CHECKLISTS?

There are many ways to skin a cat and what is a desirable characteristic of a financial instrument is up to the trader to decide.

The bottomline is that these characteristics have to be specific, well defined, and (based on research, testing, and experience) HIGH SUCCESS PROBABILITY.

Your checklist can be whatever you see fit as good filters for trades to take but they have to give you an idea on what instrument to invest / trade in and when you invest / trade. You will then treat this checklist as a YARDSTICK for evaluating financial instruments - a criteria for shortlisting the 40 to 50 instruments that are within your reach.

An example of a checklist would be:

“Go LONG if you see a:
1. Instrument has a trading volume for the past week at $ #######.##
2. A golden cross happens
3. RSI crosses the 30 line from below to above
4. Commitments of Traders Report show signs of institutional accumulation
5. Current Elliot Wave count is at Impulse Wave 3
6. The charts show a Harmonic Mongoose-Stomping-Snake formation
7. Tarot Card drawn is The Ten of Pentacles”

Well, you get the idea. The list is supposed to mirror what to you (and your trading system) is an IDEAL SCENARIO for you to take a trade on a given financial instrument. The checklist is now a criteria of evaluation for financial instruments you may want to trade.

So if a given financial instrument PASSES your criteria in your CHECKLIST, it is SHORTLISTED for further and deeper analysis later. If it FAILS your criteria, ABANDON the financial instrument for now and you won’t waste any more time on it trying to analyze every angle to find a trade there.

That is how a checklist works in trading.

So now, start identifying those CHARACTERISTICS you look for. Write them down! Make your CHECKLIST!

Cheers!

May you break resistances and reach new highs!

[Imperator_KittyCat]

SILVERPLATE by IKC - Journal on Trader and Trading System Development

STANDARDIZATION

Now that we have arrived at the FORMALIZATION of our checklist, we now come to the next phase: STANDARDIZATION.

We have so far identified traits we want to see before we consider a trading opportunity. Now, we must test the list if it is indeed a set of standards that will yield actual profitable results for us in a consistent manner.

So here’s why we need to TEST our standards (the checklist we just made)

1. Does our standard actually produce profits?
2. Does our standard have a winning advantage? Do we have more wins than losses? Is our Win Rate 51% or higher?
3. Does our standard produce consistent processes and consistent results? Is the result replicable on a long term basis?
4. Does our standard produce results even when scaled larger? Does our standard consider tranching / pyramiding in positioning?
5. Does our standard produce trades with a positive expectancy? Do we win more than when we lose?
   
   

These questions deserve straight and true answers during our process of system development. However, should we find our standard (checklist) lacking on any aspect, we have to adjust / tweak the system as needed.

More often than not, people tend to just jump to the next shiny stone instead of working on what they have. These people AVOID the MUCH NEEDED WORK because when you work on your system, you gain a better understanding on the markets and yourself when you ask WHY a system behaves that way.

People are too quick to ask WHAT and HOW MUCH when they should be asking WHY more often.

People are too quick to ask WHAT is the new system, the new indicator, the new magic solution that’s trending on X touted by some celebrity trader boy genius that will help them finally earn a bajillion bajonkers!

People are too quick to ask HOW MUCH does a proprietary system cost without even knowing its workings or getting an appreciation of its features. You’re asking how much is the subscription but you don’t even know why it works or how it works!

We learn more, not just of the markets but also of ourselves, WHEN WE ASK WHY.

So how do we go about it?
There’s a ton of websites and tools out there that you can use (but i wont name them. Aside from it being against rules, I want you to search em yourselves).

The process is usually this way:

1. You prepare your checklist and your source data. For the technical / charting aspects, it’s usually already there.
2. You pick your instrument whether it’s a currency, commodity, index, crypto, or any other instrument
3. Move back in time and start moving forward, looking out how your system reacts to changes in price action
4. As you move forward through the data, observe if your system is actually able to “catch” inflection points such as breakouts, reversals, retracements, or continuation patterns
5. Take note of times that your system works and provides clear actionable signals and times that your system doesn’t.
6. Take note of wins and losses vis-a-vis the level of similarity of the observed setup vs. your ideal setup. As much as possible, take only trades that mirror your IDEAL setup or those with minimal deviations.
   This is important because you need to develop a consistency with your system to make sure that you are following all your rules, regardless of win or lose.
   Distinction must be made between good or bad trades and winning or losing trades.

We must aim for good trades, not just winning trades. Good trades are when we are consistent with the application of our rules and checklist, regardless of outcome.

7. Adjust as needed. If you see yourself making too many trades with traits of being a “GOOD” Trade but is still a “LOSING” trade, then maybe you need to go back and evaluate your system / checklist. Maybe it’s not a high probability setup as you previously thought?

Like gold that’s tested and refined by fire, it is a difficult (and painful) process to test your system but you gotta do what you gotta do.

The endgame is that we have a fully flushed out system and a well-defined trading process that consistently yields us high probability trades with a decent win rate and a high expectancy rate.

Happy hunting! Cheers!

May you break resistances and reach new highs!

[Imperator_KittyCat]

SILVERPLATE by IKC - Journal on Trader and Trading System Development

SYSTEMATIZATION

On our previous post, we talked about the process of STANDARDIZATION.
For those tuning in just now, it’s simply SETTING our ideal setup and TESTING its efficacy.

Once we have our STANDARDS set, it’s important to move to the next phase: SYSTEMATIZATION.
In layman’s terms, Systematization is simply organizing something in a system and a system is simply parts that act according to a set of rules to form a unified whole.

Why organize things into a system?

Because WE ARE THE WEAKEST POINT.
Yes, dear cats and hoomins, I have found the enemy and the enemy is US. You and I are the greatest threat to an otherwise perfect trading system.
Wait, that only applies to you hoomans 'coz you have weaknesses of FEAR and GREED.

Us cats are PURRRFECT.

It’s difficult to understand human psychology and to change and reshape human behavior to that which is ideal for a given endeavor such as trading.
Some psychology experts even point out that trading requires us to go against “normal” human psychology and to go against our fight or flight instincts but that’s for you to read up on.

However, I find it simpler and a whole lot easier to be rid of the entire human factor in the equation.
How do we do that? We let a cat trade, of course!
We do that by using a SYSTEM - simply put, we use a SET OF RULES.

BY USING A SET OF RULES, WE ELIMINATE HUMAN DISCRETION - thereby eliminating (or at least minimizing the threat of human errors; especially those influenced by emotions of fear and greed.

Our set of rules will simply tell us if a prospective trade is within our ideal standard (or close to it) and we then assign it a score based on its “closeness” to our standard.

Applying FORMALIZATION (previous post) and STANDARDIZATION (previous post), we then CREATE A SET OF RULES and TEST these rules based on our trading expectations and the end result would be a SYSTEM by which we evaluate the “tradeworthiness” of a given setup by giving it a score. We then have a quota for the score by which we decide if we take a trade or not! Say… we take a trade with a score of 80% and above only!

By doing this, having a set of rules organized into a TRADING CHECKLIST, we can then REMOVE THE DISCRETIONARY PORTION of trading.

ILLUSTRATIVE EXAMPLE:

For example, one of our rules in going long is that a certain moving average must be below the price and angled at 45 degrees going up to the right.
Say the perfect score for this particular rule (one of many rules) is 10 of 10 when the moving average is both below the price and is angled going up to the right at a 45-ish degree angle.

Once we see a setup where the price is indeed below the price and angled going up to the right at a 45-ish degree angle, we give it a 10 of 10 score.
Once we see a setup where the price is indeed below the price but is angled going up to the right at only a 20-ish degree angle, we give it a 6 of 10 score.
Once we see a setup where the price is below the price and angled at a -20-ish degree angle, we give it a 0 of 10 score.

That of course is just one aspect of your SYSTEM.
We then evaluate the setup based on the rules of the other components of the system and combine the score of each component of the system so we can arrive at the final score to determine if the prospective trade has a PASSING MARK and is then “tradeworthy” or worth considering opening a position in.

Okay, maybe grades a little higher than simply a passing mark will give us more confidence for taking this one!

A simple RULES-BASED approach works as a FILTER for weeding out low-quality trades and retaining high-quality trades for further evaluation on taking a trade.

From here on, the process is simply:

1. Looking at a prospective trade and noting its characteristics
2. Comparing those characteristics if they fall within the parameters of our standards (checklist)
3. Giving the prospective trade a score (based on how close they resemble our ideal standard on the checklist)
4. Taking or Missing a trade based on the accumulated score VS. a “passing mark”

The checklist, score system, and passing mark system will automatically decide for us if a trade is worth taking or not - No judgement or deliberation necessary; just cold hard numbers and facts!

Isn’t that a great way to take out fear and greed from the equation?
Isn’t that a great way to trade?

May you break resistances and reach new highs!

[Imperator_KittyCat]

SILVERPLATE by IKC - Journal on Trader and Trading System Development

SPECIALIZATION

Trigger warning: The following statements are my opinions on facts and experiences I have come across on my trading journey. Let’s agree to disagree. I think my way works, I think your way works too… for you - not me! Peace out! Ciao!

There are (according to experts) three pillars of Trade Analysis: (1) Fundamental Analysis (2) Technical Analysis and (3) Sentiment Analysis

In a perfect world, the ideal trader is capable of all three methods albeit he may favor one over the other.

I choose to specialize in Pure Technical Analysis: Not because it is easy, but because it is simple. All I’ll need to analyze are the price charts and I’ll have to make a decision to buy or sell as needed and act on price movements themselves.

What about the other aspects?

For me to successfully pull of Fundamental and Sentiment analysis, I have to extract (1) Economic Reports and Figures (2) COT Reports and be on watch for (3) Economic Releases. Then, I’ll have to read and analyze those reports to form a coherent picture of where the market may be headed (Bias).
Then, I’ll still use Technical analysis to make my entries and exits efficient. All this I have to do in a timeframe that allows me to act while the information has yet to impact the markets!

So, that’s a lot of expertise and effort within a stringent deadline to act! Talk about a full-time job!

This holistic approach can be rewarding at times but the sheer randomness of the markets and the amount of effort needed (in my own personal opinion) takes away most of the advantage in win rate that you may have.

If simple knowledge of economic data and the ability to understand economic releases were the basis of successful trading, then by all means, news anchors, news writers, and analysts should be the best traders out there - but they’re not!

This might be a hot (and controversial take) but what we all fail to consider is the sheer RANDOMNESS of the markets and at this point, most of the advantages of the holistic approach tends to dissipate with the sheer effort to carry it out. In my own personal point of view, that makes the holistic approach not that worth it.

But should you, reader find worth in the effort in terms of a heightened win rate, then by all means, go! It’s just not for me.

What about the benefits the other aspects provide?

As a Pure Technical Trader, we trade on the presumptions of a Perfect Competition market:

1. Large number of Buyers and Sellers
2. Buyers and Sellers have PERFECT information
3. Products are homogeneous
4. Free entry and exit

The most important presumption that applies to Pure Technical Trading is that the Buyers and Sellers have PERFECT information.

With perfect information, it can be gleaned that ANY ECONOMIC EVENT is automatically IMPUTED into the price of a given commodity.

With perfect information, we are assuming that any economic releases, any major economic impact news is imputed onto the price of a given commodity.

With perfect information, we are assuming that flows and institutional moves are known and is imputed onto the price of a given commodity.

Pure Technical Trading implies that PRICE is our one and only leading indicator and that’s where we’ll put our efforts and focus.

For those reasons, I chose to specialize in pure technical trading. I know it’s not for everyone but as my old gramps used to say: Different folks, different strokes!

Find your specialization(s) and good luck out there, cats and hoomans!

May you break resistances and reach new highs!

[Imperator_KittyCat]

SILVERPLATE by IKC - Journal on Trader and Trading System Development

INSTITUTIONALIZATION

In this Kittycat’s post of STANDARDIZATION, I have talked on the idea of having a checklist of ideal characteristics you want to see on a prospective trade.
In this Kittycat’s post of SYSTEMATIZATION, I have talked on the idea of applying a rules-based approach and giving a trade score based on a setup’s resemblance to what is seen as the “ideal” setup.

Now, allow me to take it a step further with INSTITUTIONALIZATION.

Dear hoomins, behold! I made a list of my “ideal” characteristics and assigned points to each of them depending on how important they are in the overall picture of what my system considers as the “ideal” setup. There were 22 points as the “perfect” score or the “ideal” setup.

I then determined which of those characteristics which characteristics I needed to be on a given trade at the MINIMUM and thus determined what was a “passing” score. There were 18 points that a trade setup needed to gain in order to qualify as a “passing” score but I took 1 more point as a leeway for imperfection, thus setting my “passing” score for trade setups evaluated at 17 points.

By the way, this is how I evaluated my system’s effectivity manually (for those old-fashioned folks out there, this is da wae)

I manually evaluated the characteristics of a given setup in question as compared to my yardstick of what I considered as the “ideal” setup and gave it points for criteria it met and took points for criteria it failed. I then had an evaluation of whether or not the system will let me trade the setup or not and then I evaluated if such a trade resulted in gains or losses.

However, for the more tech savvy folks out there, fear not. This cat is also well versed in the wonders of Excel and Sheets!

This is how I did my evaluation of my Trading System using more modern tools:
I designed a worksheet that lets me pick the status of a given trade setup vis-a-vis my checklist of ideal characteristics.

Everytime I picked from the dropdown menu the applicable characteristics of a given trade setup, the system would automatically evaluate the setup and assign points to it based on previously established metrics.

I use my “Traffic Light” theme of Green for good (desirable characteristics), Yellow for neutral, Red for bad (undesirable characteristics) and I assign points to those characteristics based on the metrics I devised from their resemblance to what is an “ideal” setup.

Not only does the system give points to “desirable” characteristics, but it also takes away points for “undesirable” characteristics or when the setup fails to meet expected characteristics.

The end result of the system’s evaluation is a NUMERICAL SCORE RATING and a DESCRIPTIVE RATING describing the SUCCESS or FAILURE of a setup based on how it performed against criteria, in accordance with my bias.

With a numerical and descriptive rating, we can then gauge the risk profile and probability of success of any given setup. We now have a SOLID BASIS for MAKING TRADING DECISIONS.

In addition to the decision to take a trade or not and its risk profile, our system also gives us a CONFIDENCE LEVEL assessment with which we can also define HOW WE PLACE OUR STOPS.

This is how the Imperator KittyCat trades: Formalized, Standardized, Systematized, Specialized, and Institutionalized.

Without the weakness of a trading system: A (pitiful) hooman trader, the system works without the weaknesses of impulse, fear, and greed.

P.S. CATS > Hoomans

Cheers!

May you break resistances and reach new highs!

[Imperator_KittyCat]

SILVERPLATE by IKC - Journal on Trader and Trading System Development

THE POWER OF 0.01

Starting / restarting your trading journey can be intimidating. It is SIMPLE, but NOT EASY. There’s a distinction between those two and it’s something a lot of us take to heart. Knowing full well that it’s difficult sometimes can put you in a rut of inaction or send your account spiraling down with losses.

One of the big reasons why trading is difficult is that proper position sizing is something a lot of traders neglect and it can come bite them in the back soon! Ouch!

You could have a great edge (positive win rate) and your setups could have a positive expectancy (favorable RRR) but if your position sizing is messed up, the entire system could crumble like a Jenga stack!

During the phase of our practice / training, it is important for us to train our minds and our emotions to properly bear the “weight” of our allocations.

The “weight” of a $200 Value-at-risk (VAR) on a $10,000 total account balance is not the same as the “weight” of a $1,000 VAR on a $10,000 total account balance.

There is a significant difference on the impact of the two scenarios on both the MENTAL and the EMOTIONAL aspect of trading and that may significantly help or hinder your judgement as a trader.

What to do about this, then?

We make our practice INTENTIONAL.

During the practice / training phase, we need to have a PHASED and GRADUATED rate of increasing the mental and emotional load of trading allocations.

Start practicing your trading with a 0.01 lot size - the least and easiest mental and emotional load to bear while you’re still working out on starting or resuming trading.

When you begin your practice with 0.01, you practice trading with virtually no mental or emotional stress - enabling you to be at your peak performance and truly fully implement your trading system and routines.

Then, you get used to the minimal mental and emotional load of a 0.01 allocation. Say this happens after a week?

Now, you gradually raise the allocation size say for example from 0.01 to 0.02

Once you get used to that mental and emotional load, you once more raise the allocation by a little bit!

This process is repeated over and over: Raising the allocation size, getting used to the allocation size, and we rinse and repeat from then on.

This process gradually tests your capacity to handle the mental and emotional load of taking on risks that grow larger over time. This tests your tolerance and your ability to stick to a plan without compromising your mental state (by panicking) and your emotional state (by fear or greed).

Soon enough, maybe you’ll be trading 1 Lot allocations!

Note however that there are hard limits on how far you can raise your allocation.

Consider the intentional gradual raising of allocations as your “soft” limits and they fall below and within what we set as “hard” limits.

What we can consider as “hard” limits are the total exposure rate we pre-define as a figure between 1% to 5% of total portfolio depending on your risk appetite.
Experts vary on advice as to what the “hard” limits are but essentially, the figure computed as X% multiplied by total portfolio value is the maximum exposure you can have at any given time for the risk level of your open positions to be considered as “acceptable”)

Have fun practicing and slowly moving towards your maximum ideal allocations.

Don’t forget to start with 0.01.

Cheerio!

May you break resistances and reach new highs!

[mrhenry8th]

So would you say you need to have successful trades first to be able to get your checklist together? You need something to start from, like a reference point of success.

And all I have to say is wow wow wow on this post. I’m reading it again. There’s a lot happening but I think it’s pure gold.

I have a question related to this.

@Imperator_KittyCat

For me to successfully pull of Fundamental and Sentiment analysis, I have to extract (1) Economic Reports and Figures (2) COT Reports and be on watch for (3) Economic Releases. Then, I’ll have to read and analyze those reports to form a coherent picture of where the market may be headed (Bias).
Then, I’ll still use Technical analysis to make my entries and exits efficient. All this I have to do in a timeframe that allows me to act while the information has yet to impact the markets!

If you do/did this, its this like a weekly analysis. Maybe on a Sunday for the upcoming week. And how does the bias change within the week. Is there like a daily review?

[mrhenry8th]

@Imperator_KittyCat

Start practicing your trading with a 0.01 lot size - the least and easiest mental and emotional load to bear while you’re still working out on starting or resuming trading.

I got sucked in by winning trades and immediately thought I can do this everything single time and with bigger size. Boy that was a wrong assumption.

[Imperator_KittyCat]

@mrhenry8th

So would you say you need to have successful trades first to be able to get your checklist together?

Good day, pawesome hooman! I would say “yes and no”. For us to see how truly effective a trading system or setup really is, we would need to see how it actually performs in the markets.
Let me put things this way:

1. We need a large sample size of trades in order for us to gauge the win rate of a given trading system or setup.

2. We need wins and losses that actually reflect adherence to the system / setup. It’s unfair to evaluate the win rate of a system based on trades that did not actually comply with its rules.

3. The sample size of trades DON’T necessarily have to be REAL. They can be simulated in paper trades or backtesting software. If you don’t have that, good ole pen and paper or microsoft excel is good enough!
   The sample size of trades can be from backtests or from forward tests whether real money is staked or using demo / simulation.

However, for this cat, i suggest starting with demo / paper trades then with backtests and then move to forward testing with real money. I call it the “0.01” phase where you take actual trades with the least amount of money at risk possible to see for yourself how your system works without putting your account in danger. The 0.01 phase is as real as it gets! It factors in the emotions you wouldn’t have if it were demo or simulated.

@mrhenry8th

If you do/did this, its this like a weekly analysis. Maybe on a Sunday for the upcoming week. And how does the bias change within the week. Is there like a daily review?

We used to do this before. Sunday night at around 7 PM we’d review as a group (via zoom or skype) and we’d drill down on upcoming economic events and how they’d impact the week ahead. We had a guy in charge of Commitment Of Traders reports. We had a guy in charge of stalking the Fed officials. We had a guy in charge of stalking the ECB, etc.

It works best as a team so the time and effort needed is distributed. We’d of course get in touch midweek if something “big” or perspective altering came our way. We adjusted as needed if major changes happened in policy and impactful global events happened so we had a group chat for that just in case.

Here’s a useful site for that:

TRADING ECONOMICS | 20 million INDICATORS FROM 196 COUNTRIES

We don’t do that anymore but if you will do that, i wish you well!

Good luck out there!

May you break resistances and reach new highs!

[Imperator_KittyCat]

Trust me, we’ve all been there. I try to see it as “tuition fees” on my learning journey in the School of the Financial Markets. Soon i’ll share my position sizing strategy but i do hope you find yours too and that it goes well.

Cheerio!

May you break resistances and reach new highs!