Operation: SILVERPLATE by IKC (3 of 4)

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! :sweat_smile:

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! :smiley_cat:

May you break resistances and reach new highs!

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Another great post. Thankyou.

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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). :smiley_cat:

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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! :sweat_smile:
a5ygbb

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

istockphoto-683479596-612x612

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. :smiley_cat:

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

Cheers! :heart_eyes_cat:

May you break resistances and reach new highs!

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SILVERPLATE by IKC - Journal on Trader and Trading System Development

STANDARDIZATION
Cat with ruler

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!
image

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.

  1. 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!

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SILVERPLATE by IKC - Journal on Trader and Trading System Development

SYSTEMATIZATION
Previously
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.
Purrfect Cat
Us cats are PURRRFECT. :wink:

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. :smiley_cat:

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! :rofl:
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! :smiley_cat:

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.
Report Card

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

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? :smile_cat:

May you break resistances and reach new highs!