Testing Our Draft Trading Plan: First 20 Trades of 2023
Oliver Velez discusses the importance of a trading plan for a successful trader and its essential components in his YouTube presentations, "The 7 Parts of a Master Trading Plan - (Profitable After 20 Trades)" and the "Trading Strategies: The Eight-Step Formula for Winning Trades." Here are the key takeaways:
8 Parts Of a Trading Plan
Please note that our understanding of all the components of the trading plan is not perfect. But we are going to test the plan to the best of our understanding. The components of our 8-Part Trading Plan adopted are the following:
The Mechanics
1. Identify
2. Location
3. State
4. Entry Method
5. Initial Stop Method
The Mastery
6. Add Method
7. Profit Method
8. Stop Adjustment Method
Oliver Velez is a renowned trader, entrepreneur, author, and international speaker on trading psychology and strategies. He is the founder of ifundtraders.com, as well as the founder and creator of Pristine.com. In his YouTube presentations, Velez emphasizes the significance of a trading plan for traders' success and discusses the essential components of a master trading plan.
Embarking on the Journey to Profit: The First 20 Trades
Marginal Stock Trader has decided to resume our online stock trading activities after a hiatus of over 158 months since February 24, 2010. Our primary focus remains on three core areas: Online Trading, BPI Trade, and the Philippine Stock Exchange (PSE). We shall be using BPI Trade as our online broker to buy and sell shares of blue-chip companies listed in the PSE. Our goal is to trade with just enough board lots to be just over the net amount of Php 8,000 per trade.
Adhering to the Trading Plan
The trading plan's objective is to help traders become their best selves. By strictly adhering to the plan, traders undergo a transformative experience akin to being devoted followers, resulting in heightened discipline, awareness, ability, capability, and wisdom. These positive changes emerge gradually as a result of faithfully following the plan.
Developing Trading Discipline
The need for a trading plan is essential because, at the start of a trading journey, the trader is not who they need to be to succeed. Trading discipline is not innate, and it needs to be developed over time. A trader needs to go through a transformation and become more disciplined, aware, and wise. To aid in this process, a well-constructed trading plan becomes a temporary replacement for the trader. However, as the trader undergoes this transformation, the plan eventually becomes unnecessary because the trader becomes the plan.
Creating Habits for Success
Repeatedly applying a method consistently, even if it feels unnatural initially, can be advantageous as it can develop into a habit. Once the habit is formed, it gets ingrained in our subconscious mind and becomes a part of our daily routine. Over time, it becomes second nature and becomes an integral part of our way of life.
Details of Our Trading Plan
Although our understanding of all the components of the trading plan may not be perfect, we are going to test the plan to the best of our understanding. You would be helping to improve our blog if you would report to us any errors found on this post concerning the quoted references. We will be adopting the 8-Part Trading Plan, with the following essential components:
Part 1. Identify Playable Event (7 to 8 key playable events)
In terms of technical analysis using candlestick charts, there are 14 bars available, but we shall focus only on the ones most significant to our purposes:
These are our notes from The Most Powerful #Trading Tactic Of All Time presentation by Oliver Velez:
- Bull 180 (+180) Green Elephant Bars. This event is what we are looking for.
- Bull 180 (+180) near or on the 20-MA, and above both the 20-MA and the 200-MA. Use Php 25,000 or 50% of the Php 50,000 account.
- Bull 180 away from the 20-MA and below both the 20-MA and the 200-MA. If you are away under the 20-MA, get near before taking profits. If you are near above the 20-MA, try to get away above before taking profits. The stock can't get away and they can't stay away from the 20-MA. They always have to snap back to 20-MA.
- Add another Php 25,000 if another playable Bull (+180) shows up along the way going up.
- Bull 180 (+180) with 80% entry.
- Too much of 180 is also not good.
- Bear 180 (-180) Red Elephant Bars. For now, Marginal Stock Trader uses these events only for guidance, not buying signals.
- Bear 180 (-180) near or on the 20-MA, and below both 20-MA and 200-MA.
Part 2. Location of Playable Events (7 locations)
The 7 specific locations based on the concept of Fabulous 4:
- Location 3 is farthest above the Fabulous 4 (+) and to bet long for more gains on the stock here is a losing strategy now and then.
- Location 2 above the Fabulous 4 (+ +) is not close nor too far to the Fabulous 4 and is the second-best location to bet on the stocks going up most of the time.
- Location 1 immediately above the Fabulous 4 (+ + +) is the very best location to buy.
- Fabulous 4 Trap Zone is the location where we do nothing. This zone consists of 4 key items of support/resistance:
- 200-Period Moving Average
- 20-Period MovingAverage
- Prior Day's Closing Price
- Prior Day's Late Day Price Activity
- Location 1 immediately below the Fabulous 4 (- - -) is the most desirable location to bet on a downward movement. We don't think about betting on an upward movement from just under the Fabulous 4. Since we don't think short, this is just a guide to us of an impending downward movement.
- Location 2 below the Fabulous 4 (- -) is not close nor too far to the Fabulous 4 and is the second-best location to bet on the stocks going down most of the time. But every now and then if something really powerful happens in this location, we can also bet on the upside.
- Location 3 farthest below the Fabulous 4 (-) we can bet up most of the time from this location.
Part 3. State of the Overall Environment (2 states)
Confirm the state of the market using the 20-MA and 200-MA:
- Tight and Narrow State with the 20-MA either on top or below the 200-MA. Best opportunities come from the narrow state.
- Wide State with the 20-MA either on top or below the 200-MA. This is where you become a contrarian trader.
Part 4. Entry Methods (2 items)
Shorting is definitely not on our list. Now that it is out of the way, let us talk about how we are going to enter the market. We have two ways:
- 1. Anticipation Entry (AE)
- 2. Confirmation Entry (CE)
- Position: Stop trading against position.
- Color: Stop trading against the dominant color.
- Stop trading against the 20-MA (simple)
- Steps for buying the Elephant Bar:
- Buy the stock Power Bar.
- Buy the stock above the 20-MA (simple) and 200-MA (simple)
- Buy the stock that has a rising 20-MA.
- Buy the stock near the 20-MA.
- Buy at the major bottom strategy, according to our notes from CANDLESTICK PATTERNS STRATEGY Can Help You GRAB The LOW ! and Spot The Bottom In ANY MARKET (3 Signs The Market Has Reached Lowest Point)
- No Follow-Through 1
- No Follow-Through 2
5. Initial Stop Method (3 items)
- Limit loss to 1 bar or risk only 1 bar
- Keep watch of the maximum loss per trade.
6. Add Method (2 items)
Successful traders always add to their winning positions.
7. Profit Method (3 main rules of 5 rules)
Oliver Velez listed 5 Rules on how to take profits from the point of view of day trading, in his YouTube presentation How To Take Profits Like A Professional Trader, which considers "The Ultimate Art":
- Rule #1: 30 to 50 Cent Rule: Partial profit-taking rights available.
- Rule #2: 3-Push Profit Rule: Take all, take part, or take no profit at this point.
- Rule #3: The Igniting Bar Profit Rule
- Rule #4: The New High-Profit Rule
- Rule #5: The 50% Break Rule
8. Trade Management (8 items)
More trading strategies for testing
Testing our study notes on not trusting the green in bear markets
- We want to put our study notes to the test based on the advice from When Not To Trust Bull Moves - Technical Analysis Thursdays with Oliver Velez.
- The best course of action is to wait for green bars to eliminate red bars, indicating a potential bullish trend.
- The game is potentially over when one green bar takes out two red bars simultaneously, indicating the bull market is gaining power.
- It's important to keep in mind that the odds are that 72% of all new highs will eventually fail, underscoring the need to be cautious and deliberate when making investment decisions.
Assessing the probabilities
Our study notes from the YouTube presentation Pullback Percentages - Technical Analysis Thursdays with Oliver Velez:
If a stock undergoes a significant downward drop
If the stock undergoes a significant drop from the 100% mark to the 0% mark:
- It has roughly a 1 out of 10 chance of the stock coming all the way back up to the 100% mark coming from the 0% mark.
- It has roughly a 2 out of 10 chance of getting to the 66% mark or two-thirds up from the 0% mark.
- It has roughly a 6 out of 10 chance of getting to the 50% mark or halfway up from the 0% mark.
- It has roughly an 8 to 9 out of 10 getting to the 33% mark or a third up from the 0% mark, thus continuing its decline to a new low.
If a stock undergoes a robust upward move
If the stock experiences a power move upward from the 0% mark to the 100% mark:
- It has roughly a 1 in every 10 chances of the stock getting all the way down to the 0% mark.
- It has roughly 2 times out of every 10 chances of getting back to the 66% mark or two-thirds down the 100% mark.
- It has roughly a 6 out of 10 chance of getting back to the 50% mark or halfway down the 100% mark.
- It has roughly an 8 to 9 out of 10 chance of getting back to the 33% mark or a third down the 100% mark, then continuing its upside move to a new high.
We hope we don't get all mixed up in the percentages and the odds. Moreover, this is day trading advice but we are applying this tactic to swing trading. Finally, we used the daily closing prices for our chart and simple moving average.
Keeping our trading plan simple: the summary points
More study notes from the YouTube presentation When Not To Trust Bull Moves - Technical Analysis Thursdays with Oliver Velez:
Three movements of the market:
- Up
- Down
- Sideways sometimes
Two colors for the most part:
- Green
- Red
Two dominant moving averages (simple moving averages or SMA):
- 20-SMA
- 200-SMA
Two states of the market:
- Narrow
- Wide
Two actions of the market:
- Buy
- Sell
Two results of trading:
- Gain
- Loss
Two types of market players:
- Depositors/Withdrawals
- Losers/Gainers
Bringing It All Together: Synthesizing Our Study Notes
Here is our evaluation of the SM Investment Corporation (SM) stock as of April 13, 2023, as we put our learning notes from the past two weeks to the test. Let's see how our knowledge translates to the real world.
- Analysis 1: This significant downside move named A has reached past the 66% mark away from its high position (A, 0% mark) and has 2 times in 10 chances of a pullback. Thus, our analysis is that this upside move named B is not real. The attempt from here to get to a new high will likely fail or is going to fail most of the time because the odds are very low. Most likely it will bounce and make a new low (yellow line) or move sideways in the meantime.
- Analysis 2: In contrast, the powerful upside move named B has reached up to the 66% mark on its rebound from the new low (B, 0% mark), with only 2 times in 10 chances. More likely, this will bounce a little bit more and proceed to decline to a new low or move sideways in the meantime.
- Analysis 3: When trading in a bear market, it's advisable not to rely on green bars. However, if a single green bar surpasses the value of two red bars simultaneously, it indicates a shift in market sentiment, and the bears lose their grip. This signals the beginning of a bull run. We can observe this phenomenon on two occasions - March 17 and April 5 (indicated by arrows) - where two green "elephant" bars have eliminated the value of at least two red bars. This implies that the market is likely to continue its upward trend (represented by the purple line).
- Analysis 4: In terms of identification, we have a Bull 180 (+180) sitting on the 20-MA (simple moving average) last April 5. This may possibly indicate a continued upswing movement.
- Analysis 5: In terms of location, the stock is most likely to be found in the optimal buying location, which is right above the Fabulous 4 or Location (+++), and the 20-day moving average (20-MA) that is also on an upward trend. This represents the best opportunity to purchase the stock.
- Analysis 6: In terms of state, the 20-MA is on top of the 200-MA and is in the tightening and narrowing state. Best opportunities come from the narrow state.
- Conclusion: After analyzing the six analyses, we have observed a fairly balanced prediction of either a continued downward trend or a robust rebound leading to a new high. However, based on various indicators, we are more inclined to believe that the 20-day moving average (20-SMA) will act as the new support level at Php892.50, at least for this week. Hence, we believe we have found an entry point around that level. Even if our prediction turns out to be incorrect, we have 19 more opportunities to test our trading plan and make necessary adjustments for optimal results. We consider any loss incurred during this testing phase as a small price to pay for the valuable knowledge, insights, and experience gained.
- Benchmarking: Despite using only technical analysis through candlestick charts and simple moving averages, we can refer to the BPI Trade Traders' Takedown report of April 12, 2023, for comparison purposes. The report recommends a BUY rating and sets the target price (PT) for SM at Php1,120, representing a potential upside of around 25%. This target price is determined through a sum-of-the-parts (SOTP) analysis that assumes a 10% discount to the net asset value (NAV) of Php1,246 per share. As of April 12 and April 13, SM's latest closing prices are Php899 and Php884, respectively.
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