Pre-Open Plans and Hypotheses

[joshdance 10]

… there’s no getting around “do the preparation”, etc .

 

Speaking of "doing the preparation," I was the most well prepared this past week I have ever been, and traded the worst. I am always prepared to a certain degree, but this idea of "I must have a hypothesis and a plan" before the open is, IMO, a bit of hogwash, though perhaps it works for some.

 

The basic problem is this: let's say the market is at 85. Well, I have identified two "areas of interest" at 90, and at 80. Having these areas on both sides of the market that I have marked as "significant" immediately screws up my bias. Seeing that shaded area above makes me think "short here" and the area below 'buy here".... so, I ignore what I would normally pay attention to, namely, directional bias and market sentiment, and I instead pay attention to that little line or shaded area, which the market has no knowledge of.

 

Having a list of hypotheses A through D (the "plan"), currently creates in me a state of rigidity that leaves me unable to react to the "E" case which I would normally respond to. In the above example, what if the market opens at 85, trades to 83, finds support there, and starts moving back up to 86? Well, it's above the open, and despite the fact that it looked like a possible good buy at 83, my predefined area was 80, so I didn't budge. From the standpoint of my preparation, it was "in the middle."

 

I just hear this over and over about preparation and a plan; yet, I'm simply questioning the wisdom of this. Sports teams, military institutions, businesses, and most everyone has a plan. Sure, I prepare for scheduled market-moving news such as econ reports, speeches, monetary policy, and earnings by being aware of them. I look at the overnight session, and the general market sentiment before the open, and based on this information, I look at where I may want to get long or short.

 

But in the world of trading which has an indeterminate nature (i.e., every day is a new market), is too much of a plan worse than too little?

[BlueHorseshoe 10]

I look at the overnight session, and the general market sentiment before the open, and based on this information, I look at where I may want to get long or short.

 

But in the world of trading which has an indeterminate nature (i.e., every day is a new market), is too much of a plan worse than too little?

 

Hi Josh,

 

I think that there is another overlapping issue here besides how 'good' the planning is, and it's the issue of how expectancy and opportunity interact.

 

To give an example, two simplified scenarios might be something like this (and in the example I'm substituting percentage win rate for expectancy):

 

1. You have near-perfect pre-market planning, and can identify the day's lows pre-market to within a few ticks; if price gets down to level X on any given day then that's a buy signal and you're right 90% of the time, for a $300 profit vs a $300 loss. Most days, however, price never quite makes it down as far as level X and you miss many opportunities. In a year you get 50 trading opportunities at level X and have 45 winning trades. Your net profit will be (45 x 300 = 13,500) - (5 x 300 = 1,500) = $12,000.

 

2. Your pre-market planning is a little more vague, and you know you can approximate the day's lows to within 12 ticks of a level Y pre-market; if price draws within 12 ticks of level Y then that's a buy signal and you're right 65% of the time, for a $300 profit vs a $300 loss. Most days price comes within twelve ticks of level Y and you have many trading opportunities. In a year you get 200 trading opportunities at level Y and therefore have 130 winning trades. Your net profit will be (130 x 300 = 39,000) - (70 x 300 = 21,000) = $18,000.

 

What you are hinting at in your post would seem to me to fit the second scenario more clearly, and this is obviously the more desirable of the two scenarios in terms of dollar profit. By having a less determinate pre-market plan (for example identifying a 'buy zone' rather than a specific 'buy price') your expectancy for each trade (or percentage win rate in my example) may well be reduced, but you'll have more opportunity to exercise this reduced edge, and therefore a greater net profit.

 

There are certain market scenarios that are almost certainly 'sure things', but they're very rare - way too rare to make a regular living from. Significantly less sure things tend to occur far more frequently . . .

 

Expectancy and opportunity tend to be inversely proportional, I think, and of course with increased opportunities comes increased slippage, commissions, and arguably exposure to risk. Nevertheless, there is often a slight disjuncture between the two, and I think that finding this will maximise the potential of your approach.

 

I hope that's of some help to you in thinking this through.

 

BlueHorseshoe

[gosu 10]

Everybody has a plan until they get punched in the face.

 

- Mike Tyson

[joshdance 10]

Thanks, very practical BH.. and gosu, you almost made me choke on my pizza, that was so funny.

[DbPhoenix 42]

This might be of interest to you:

Possibility Mapping

 

Traders often hear about the potential benefits of preparing actionable trade plans prior to the next trading day. The goal of such preparation is to make yourself immune to mental edge breakdown. One of the greatest threats to your mental edge is coming across something that's unexpected during the trading day. Seeing an unexpected price move (especially one you perceive to be a big move) is likely to stress and panic you and therefore cause your psychology to shift into an emotional, reactive state. An effective way to prevent this is to prepare with possibility mapping.

 

Possibility mapping is a process which will mentally prepare you to expect the potentially unexpected, and therefore will allow you to numb, in advance, any potential emotional responses.

 

There are two major types of possibility mapping: Exact possibility mapping, which you would use if you tend to make your trade decisions the day before; and Price Pattern possibility mapping, which you would use if you tend to make your trade decisions while you watch price patterns forming.

 

With exact possibility mapping, you first identify a trade you might make. You would then write out all possible scenarios of price activity following your entry. Yes, there are more scenarios than you could possibly define. However, you'll be able to identify major groups of scenarios where each of the scenarios in a given group would ultimately result in the same signal. These groups are limited and can easily be defined. Then, in your objective state of mind, you decide how you would react in each case.

 

On the other hand, with pattern possibility mapping, you would define the several possible groups of general, overview patterns you might see and decide what actions you would take in each case. Over time, you'll find yourself mapping possibilities faster and more accurately. You can also prepare further by defining what you might think the chances are of each scenario actually occurring.

 

With such preparation, you've already "experienced" tomorrow's markets. Therefore, you virtually eliminate the chance of mental edge breakdown due to unexpected scenarios. Possibility mapping can also drastically improve the quality of your trade decisions and your recognition of certain patterns. In addition, reviewing and comparing your possibility mapping records with your trade diary will help you find key patterns in your trading, identify areas in which you might have a lack of preparation and ones in which you have strengths.

 

--Innerworth

[MightyMouse 12]

Josh,

 

My comments, relative to preparation, regard one's ability to deal with fear. Being prepared means knowing what to do with your trade when scenario A, B, or C occur, given the number of indicators you use to trade. In this context being prepared has to do with what you do next, and not what you do before you enter a trade.

 

Being prepared will help you with fear, but it isn't going to make the market go in the direction of your trade. We can never escape the fact that we are dealing with the unknown; however, we can know what to do when A, B, or C occurs.

 

 

MM

[Obsidian 10]

...But in the world of trading which has an indeterminate nature (i.e., every day is a new market), is too much of a plan worse than too little?

 

Being prepared, having extra plans increase our profit chance. During my first couple of years I remember I did stupid things due panic, fear or hope. waited too long to take profit or cut the loss. or I exited too early and missed nice opportunities...

Since then I spend some time on the charts during weekends to search and mark trend lines formations, s/r lines etc. I think about possible targets if things happen as I thought.

This is the easy part I think. What if I am wrong plan takes more time to think...

is every day a new market? I think the scenarios are the same, just different actors and scenes

[karoshiman 10]

 

...

 

1. You have near-perfect pre-market planning, and can identify the day's lows pre-market to within a few ticks; if price gets down to level X on any given day then that's a buy signal and you're right 90% of the time, for a $300 profit vs a $300 loss. Most days, however, price never quite makes it down as far as level X and you miss many opportunities. In a year you get 50 trading opportunities at level X and have 45 winning trades. Your net profit will be (45 x 300 = 13,500) - (5 x 300 = 1,500) = $12,000.

 

2. Your pre-market planning is a little more vague, and you know you can approximate the day's lows to within 12 ticks of a level Y pre-market; if price draws within 12 ticks of level Y then that's a buy signal and you're right 65% of the time, for a $300 profit vs a $300 loss. Most days price comes within twelve ticks of level Y and you have many trading opportunities. In a year you get 200 trading opportunities at level Y and therefore have 130 winning trades. Your net profit will be (130 x 300 = 39,000) - (70 x 300 = 21,000) = $18,000.

 

...

 

 

 

Good example BHS!

 

However, it would be more realistic, if in example 2 the profit would not be $300, as in example 1, but less as you give up on some of the movement (the 12 ticks). If you take $150 as the average profit (e.g. 12 ticks on the ES... but I don't know if you had ES in mind), then you would have a net loss of $ 1500 with example 2.

[karoshiman 10]

 

...but this idea of "I must have a hypothesis and a plan" before the open is, IMO, a bit of hogwash, though perhaps it works for some.

 

...

 

... so, I ignore what I would normally pay attention to, namely, directional bias and market sentiment, and I instead pay attention to that little line or shaded area, which the market has no knowledge of.

 

...

 

... creates in me a state of rigidity that leaves me unable to react to the "E" case which I would normally respond to.

 

...

 

In the above example, what if the market opens at 85, trades to 83, finds support there, and starts moving back up to 86? Well, it's above the open, and despite the fact that it looked like a possible good buy at 83, my predefined area was 80, so I didn't budge. From the standpoint of my preparation, it was "in the middle."

 

....

 

 

I just hear this over and over about preparation and a plan; yet, I'm simply questioning the wisdom of this.

 

...

 

But in the world of trading which has an indeterminate nature (i.e., every day is a new market), is too much of a plan worse than too little?

 

 

 

Hi Josh,

 

I think this has very much to do with the methodology one uses.

 

I know that you are not a beginner, but your descriptions sound to me that you have a little bit of a conflict of methodologies here.

 

You say it twice that you ignore what you "... would normally pay attention to..." or "... would normally respond to". That's an indication to me that your plan is not in sync with your "normal" or "natural" approach to trading. If you know that your normal approach is successful (long-term) than disregard your current way to make preparations for the day but instead look for other ways to plan ahead (if it is possible at all). Or ask yourself the questions what your results would look like long-term if you would not plan ahead like you do now.

 

Of course, one has to be careful not to fall into the trap of hoping to capture every market move every day. I think no methodology is able to do that consistently.

 

Your approach to trading is very discretionary which makes things a little bit more complicated.

 

My own approach is semi-discretionary. That means that I am looking for certain "set-ups" (sorry, for the use of the word... I know that you don't like it, but I don't have a better word for it). If they don't appear, I do not trade... it's very simple. Well, sometimes it's not simple because I "feel" sometimes that price is moving in a certain direction without one of my setups occurring and I don't want to miss a move. However, overall taking a trade here hurts my bottom line... if not immediatey, then over a course of several weeks as I dilute my methodology and "move" slowly into random trading ... so, it's best for me to wait for my setups and execute them. It is far less exciting than taking trades based on "feel" but it is profitable...

 

Maybe your "set-up" IS to wait for price to come to these areas of interest. And if price does not come there, well... then you don't have a trade. That's part of this business... you have to sit on your hands in these situations (if you know that this approach is successful long-term)!

 

It sounds to me that your current approach to trading is shaken. This can be a good situation as you have the opportunity to develop your approach to the better. But it is also a very dangerous situation as it can lead to big losses. Or both... I've experienced both in the last 3 weeks, but moved back to my old "set-up approach", but with improvements which I did discover in these difficult 3 weeks.

 

Coming back to your original questions regarding planning, my set-ups - if they occur - lead to only one expected outcome. So, if I see my set-up I expect only one scenario to happen. If my trade fails, this gives me important information about what the market "wants to do", i.e. another scenario develops. And as there are not many other basic scenarios (trend long, trend short, consolidation) I am able to understand the markets intention and can react accordingly, i.e. profit from this new scenario and make up for my losses. Of course, this requires "online analysis", but I am able to do that. It is difficult to try to prepare for every single scenario of the market ahead of the day, as you rightly mention the indeterminate nature of the markets. But if your approach is to wait for certain set-ups, this makes things a lot easier as you have a clear point of reference from which you can operate.

 

Hope this gave some food for thoughts!

 

Regards,

karo

[BlueHorseshoe 10]

Good example BHS!

 

However, it would be more realistic, if in example 2 the profit would not be $300, as in example 1, but less as you give up on some of the movement (the 12 ticks). If you take $150 as the average profit (e.g. 12 ticks on the ES... but I don't know if you had ES in mind), then you would have a net loss of $ 1500 with example 2.

 

Hi Karoshiman,

 

You're absolutely right, and the situation obviously gets a whole lot more complicated in a whole load of other ways besides. For example, you mightn't give up the whole twelve ticks every time depending on where in the 'buy zone' you enter (I wasn't assuming mechanical entry at precisely 12 ticks above the level Y, as this just becomes another 'buy level' rather than a less determinate 'buy zone'). Your profit objective of $300 from level X might leave a lot on the table - maybe even 12 ticks per trade - so then a profit target of $300 in the second scenario would be feasible (though why not then trade with level X and a $450 profit target?).

 

The other thing to consider is that Joshdance is bound to be more sophisticated in his entries and exits than entering purely because the market falls to some specific level or zone.

 

So yes, my example was grossly over-simplified (as these things always are), but the main point I was hoping to make was that less determinate planning can feasibly lead to more frequent opportunities for profit.

 

Thanks,

 

BlueHorseshoe

[roztom 10]

Josh: I can't begin to tell you how many times my confident hypothesis is thrown out the window by the times we through globex to RTH open... However, the areas of interest I have are still valid if the underlying cash instrument has not been trading (ES).

 

One of the things that I do is have several hypothesis...but the opening type and where it opens in relation to the previous range is key.

 

Since I know that I don't know I accept that any trade I take is 50/50. I may have a statistical edge but the next trade is 50/50.. a coin-toss.

 

Having a plan let's me focus on execution. If the market does not hit my target areas I can still trade based on interday price developement but I have to stay conscious that my areas might still be tested at some point. How the market plays out is somewhat random but my trade and trade management is mechanical..

 

No right or wrong on this. It is one of those items that needs to align with the trader - like a pilot's flight plan. They don't make it up as they go..they just execute the plan..

[karoshiman 10]

 

...

 

So yes, my example was grossly over-simplified (as these things always are), but the main point I was hoping to make was that less determinate planning can feasibly lead to more frequent opportunities for profit.

 

 

 

Mine was over-simplified too

 

Just wanted to point out that you have often a trade-off. So, your way of looking at expectancy is the right way to look at it as you have to consider all variables.

[TheNegotiator 13]

Speaking of "doing the preparation," I was the most well prepared this past week I have ever been, and traded the worst. I am always prepared to a certain degree, but this idea of "I must have a hypothesis and a plan" before the open is, IMO, a bit of hogwash, though perhaps it works for some.

 

The basic problem is this: let's say the market is at 85. Well, I have identified two "areas of interest" at 90, and at 80. Having these areas on both sides of the market that I have marked as "significant" immediately screws up my bias. Seeing that shaded area above makes me think "short here" and the area below 'buy here".... so, I ignore what I would normally pay attention to, namely, directional bias and market sentiment, and I instead pay attention to that little line or shaded area, which the market has no knowledge of.

 

Having a list of hypotheses A through D (the "plan"), currently creates in me a state of rigidity that leaves me unable to react to the "E" case which I would normally respond to. In the above example, what if the market opens at 85, trades to 83, finds support there, and starts moving back up to 86? Well, it's above the open, and despite the fact that it looked like a possible good buy at 83, my predefined area was 80, so I didn't budge. From the standpoint of my preparation, it was "in the middle."

 

I just hear this over and over about preparation and a plan; yet, I'm simply questioning the wisdom of this. Sports teams, military institutions, businesses, and most everyone has a plan. Sure, I prepare for scheduled market-moving news such as econ reports, speeches, monetary policy, and earnings by being aware of them. I look at the overnight session, and the general market sentiment before the open, and based on this information, I look at where I may want to get long or short.

 

But in the world of trading which has an indeterminate nature (i.e., every day is a new market), is too much of a plan worse than too little?

 

Josh, I'd like to make a few points for you to consider.

 

1)Preparation is to find potential market "pivots" in a non-classical trading way. If you try to do this in the midst of trading, your emotions will bias your objectivity and you'll end up tying yourself in knots.

 

2)What you see and context of how the day develops matters. Taking trades blindly at these market pivots will not be likely to lead you to trading excellence, just as only trading at these points will also not likely lead to success in the near-term- unless you have a gargantuan account or you are prepared to look at multiple markets every single day.

 

3)If you want to plan to take account of entries other than at these points, then you also have to plan for what to do if the market doesn't get there in your timeframe. See what the market does in terms of trading activity, then watch for price behaviour. Work out what would provide you with an acceptable entry location in these circumstances.

 

4)The best way I have heard to describe the two types of entries which you describe is this. Number 1 entry which you plan for is based on INFORMATION RISK. Number two entry which you are saying in this case you didn't take because the market didn't get to your pre-defined price, is based on PRICE RISK. Ideally, the best trade locations give opportunity to take IR and often provide great trades. When the market subsequently shows it has reacted, traders who want to take the trade but only if they get "confirmation", back the trade up. However, like in the scenario you presented about the trade that never got to the price you wanted, at this point you may have had an opportunity to take a PR trade. What I mean is you are risking that you are not in the ideal location because of what the market is showing you about its intentions by how it trades. You have been given information that the market is possibly starting to balance or even reverse but your entry price isn't ideal. The way to deal with this is position sizing. If the potential positive side of the trade is still worth taking, then you can normalize you risk by taking a smaller position.

 

5)You might plan to trade PR type trades differently. You may choose to take a much shorter term view and look for just a couple of points or so.

 

6)Nothing always works. Don't give up on a method or approach just because it doesn't work on any given day. If it creates problems consistently, maybe adjust it. If like was suggested in another post, there is conflict in your method then address that conflict.

 

7)Preparation and planning are vitally important imho. But your methodology must properly incorpate how you use your plan. If it doesn't, you'll miss decent trades and you'll take trades where you shouldn't.

[joshdance 10]

I agree with most of this N. It's just that people prepare in different ways. You have your hypotheses that you post in advance. For some people, that's simply too much. I appreciate that your way works well for you, but for some people like me, too much detail and too much planning can draw a curtain over other possibilities, and that makes it difficult to adapt. I'm not advocating blind trading or recklessness. I'm simply acknowledging that there is more than one approach, and "homework" the night before is often invalid by morning, and "homework" at 8:15 can be rendered null by 9:30.

 

On PR vs. IR, yes I'm familiar with the concept and the primary proponent of this idea. It is logical and makes sense.

[TheNegotiator 13]

No worries. If you have something which you feel works or you can make work, stick with it and develop it.

[johnw 10]

JD,

 

We know that Price is an absolute simply because it is correct 100% of the time.

 

Therefore we trade Price and Price alone.

 

Then there is you ... JD the Trader ... the man who is going to turn Price into Profit.

 

Therefore you need a methodology to achieve this worthy goal ... Price into Profit.

Once you have defined yourself and your methodology, the amount of pre-planning should drop into place and that is what you will do each and every trading day.

 

My suggestion is to keep planning to a minimum, since the more you think you know then the more you will screw up.

 

Price has a plan and the plan is to go where it wants to go ... it is never wrong.

FWIW I think that if you are required to spend more than a couple of minutes pre-planing the day then you are over complicating the task at hand and you are bound to fail.

 

My Broker always says "it doesn't matter what you do just so long as you are making money" .... I never forget it.

 

And so I think that planning should be a sub function of your methodology to turn Price into Profit

goodluck

[edakad 10]

Hi, josh

 

I do preparation and have a hypothesis before market open. However at open I have a different set of rules to validate or negate the hypothesis. So I think it should be considered as background information only.

[madmedmat 10]

Everybody has a plan until they get punched in the face.

 

- Mike Tyson

 

maybe the plan should include thoughts about the possibility having someone punch them in the face?

[nirofree 10]

Hi,

I think that what one defines as "preparations" is the corner stone of this discussion.

I for once, always prepare myself before the open, and my preparations does not include anything special but the market bias, basic ranges of the commodities I intend to trade, and obvious support/resistance levels.

But as the day evolves and I am on the hunt for a good trade, I will change my plan and views if the market will dictate it, and will not be bound to a rigid pre-planning that might go against me.

 

What I am trying to say is, that pre-planning are important, and defiantly give the trader some focus before the day begins, but I think that when the action begins, it will take more than pre-planning to succeed.

 

Cheers,

 

Niro

[ashake2003 10]

Pre market planning. How come JP Morgan lost so much? Lack of pre market planning?

[karoshiman 10]

Hi,

I think that what one defines as "preparations" is the corner stone of this discussion.

I for once, always prepare myself before the open, and my preparations does not include anything special but the market bias, basic ranges of the commodities I intend to trade, and obvious support/resistance levels.

But as the day evolves and I am on the hunt for a good trade, I will change my plan and views if the market will dictate it, and will not be bound to a rigid pre-planning that might go against me.

 

What I am trying to say is, that pre-planning are important, and defiantly give the trader some focus before the day begins, but I think that when the action begins, it will take more than pre-planning to succeed.

 

Cheers,

 

Niro

 

 

Good point!

 

Preparations are also helpful to get a "feel" for the market before starting the actual trading. So, it's not only about sticking to a pre-defined plan but also preparing your mind to get in tune with the markets.

[joshdance 10]

my preparations does not include anything special but the market bias, basic ranges of the commodities I intend to trade, and obvious support/resistance levels.

 

But as the day evolves and I am on the hunt for a good trade, I will change my plan and views if the market will dictate it, and will not be bound to a rigid pre-planning that might go against me.

 

What I am trying to say is, that pre-planning are important, and defiantly give the trader some focus before the day begins, but I think that when the action begins, it will take more than pre-planning to succeed.

 

Couldn't have said it better myself nirofree; this is basically how I approach it as well and what works best for me.

[joshdance 10]

Pre market planning. How come JP Morgan lost so much? Lack of pre market planning?

 

:rofl: ... checkmate!

[Obsidian 10]

Pre market planning. How come JP Morgan lost so much? Lack of pre market planning?

 

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