Uncertainty and Trading Success: The Discretionary Ruled-Based Plan

So, you read ‘Uncertainty and Trading Success”; you took the Neo-Ip Test and found you are best suited as a Discretionary Rule-Based Trader. How to proceed with creating your Method?

The best first step is to find a market theory that suits. For example:

1. Dow Theory. There is a great piece by the Forex Training Group, “Basic Tenets of Dow Theory“. If I’m trading stocks or stock indices, the Dow Theory is where I’d start. The article is excellent! It even offers a summary pdf of its main points.
2. Wycoff Theory. The best exponent I know is Wyckoff SMI. James O’Brien has done a great job teaching Wyckoff.

There are others, Gann, Elliott, Tubbs etc. In short, you have a wealth of material to choose from.

When you have a theory you like, you are ready to construct your plan.

First: Identify your trader’s timeframe: a key element and not one that’s as easy as it sounds. Most use general words like: Long-term, medium term, short-term, swing etc. The problem is general terms don’t help with the construction. You need a description that is relatively objective.

For example, I use a Barros Swing to define my timeframe, the 18-day swing. Barrios Swing allows me to do quite a few things:

• To distinguish different magnitude trends.
• It provides an objective measure of overbought or oversold, etc.

The chart below shows the following:

• Green line: approximation for the 12-month swing, yearly trend.
• Black line: approximation for the 13-week swing, quarterly trend.
• Red Line: 18-day swing, monthly trend.
• Blue Line: 5-day swing, weekly trend.

At a glance, we can see the that the key question is whether the yearly trend is overbought: using stats we can assess if the current swing line is below normal, normal or greater than normal. The greater the swing line is above normal, the greater the probability it will turn down. A 12-month down swing line will change the trend of all the lower timeframes.

The brings me to the second series of questions.

Second, what is the trader’s timeframe trend? Is this trend likely to continue or change? The answers tell us if should take a long or short.

More tomorrow.