27/3 – Trading Strategy evolution: from ‘Levels’ to ‘K7’

Since the beginning of December I have been working on developing the Levels strategy.  Hmmm, 4 months is quite a stretch!

However, as I have mentioned, the last three and a half trading sessions have seen a change in tact.  I took 38 trades over 3.5 sessions.  Win Rate of 45%, RR of 1.3.  Net Profit was 1.1R.  Though those results include a meshed up Friday afternoon where I lost 2.2R via some emotional-induced trading.  In comparison I took 72 trades in just under two months with the Levels strategy and lost 7R.

Why “K7”?

I call this the K7 strategy because of in a game of blackjack, if you could choose your first card – then any ten-value card would give you an approximate 14% advantage.  Whereas a 7 gives you a slight disadvantage.  In the casino you cannot choose your first card – you need to bet first and then you will get dealt a card at random.  Using this as an analogy – in trading you only get into a trade when you firmly believe that the first card is a King.

K7 Image

But am I not jumping around from one idea to another?

To start,  one could argue that I am deviating from my plans to further develop and refine the Levels strategy (and heavily from my March Operational Plan).  But I guess in a way that is actually what I am doing i.e. developing and refining it – though maybe more significantly than anticipated.  I am not doing something completely new.  I am keeping the base, making some refinements and throwing out what I perceive as the bad aspects.

Keep what works/What stays the same:

  • FX-focused squawk
  • MT4-based platform strength/weakness platform for currencies
  • Risk Management & Position Sizing
  • Chart Setup – several EMA’s, no other indicators
  • Plotting key levels on the charts (primarily 1H timeframe)
  • Looking for technical patterns around key levels
  • Looking to 1H timeframe for the present trend/sentiment
  • Heavy focus on Cable and DAX
  • Use of strength/weakness matrix to identify momentum

What changes

  • MT4-based platform for measuring volatility across various asset classes (newly developed – thanks Mr. Wayne!)
  • Cease trading on Oil (because of proportionally high transaction costs)
  • Picked up heavy focus on EURUSD – because of currently high volatility and proportionally low transaction costs
  • Trades take place within the completed/completing/anticipated patterns – this is a bit tricky to explain
  • Entry tactics – getting in at cheaper levels – waiting for retracements rather than entering on the breakout levels
    • 1/2 on stop-entry, 1/2 on confirmation disappears
    • In a nutshell the entries are more aggressive, finer, and sometimes outright ballsy
    • Odds of success shift more into my favor because of the good entries
  • Willingness to look more widely in terms of instruments to trade – depending on short-term momentum, volatility and transaction costs  – e.g. USDJPY and FTSE trades
  • Re-introduction of pivot lines on charts for currency pairs being traded, as these tend to be very well respected
  • Simpler position management: mostly all-in/all-out with conservative stop tightening
  • Paying attention to 1M timeframe from time to time
  • Stops and targets become slightly tighter – e.g. mostly 20 pips on Cable and EURUSD, 20-30 points on DAX
    • Consequently transaction costs will on average be 5-6% of stop/target size
  • Aiming for at least 6 trades in every single trading session

What I have noticed in the last 3.5 sessions

  • Risk of going bonkers (wreckless trading) is higher due to more trades and more flexibility in entering trades
  • Profitability is better
  • Trade duration decreases
  • Documentation of individual trades becomes difficult – because there is more of them
  • Tiredness comes on more quickly because of increased concentration
  • I ‘feel’ better – less emotionally attached to trades – I am less concerned with the outcome of each trade – additionally less emotional capital is burned because the position management is simpler and the durations are shorter
  • It seems like I am better at this trading – meaning my analysis turns out to be correct more often
  • Feedback on what’s working and what’s not is much quicker with K7 because of the increased trading frequency
  • Overall I “felt” much better trading K7 than Levels – is it because of less structure and a bit more flexibility?

Additional thoughts

I got annoyed and frustrated with the “Levels” strategy in its current development state – why?

  • It wasn’t suitable for testing – or at least it took me forever to get a decent amount of testing done – will it be better with K7?  I will continue live trading all of next week, rather than testing – as long as I am profitable, I prefer to learn in the real trading environment, rather than in the testing environment
  • The position management was difficult – it is simplified with K7
  • The trading frequency was very low – given that I was sitting at my desk in front of the screens all day – it seemed like I was not leveraging my time effectively – with K7 I should get at least 30 trades a week
  • Often there would be good moves in my instruments that I simply would not catch with the strategy – K7 is more inflexible in terms of getting into trades, and it catches the moves more often
  • It seemed that often I was not getting in at good price levels – with K7 I do, even though invariably K7 will get me into some losing trades than I would have avoided with the Levels strategy

With the suggested changes, it really feels better when I trade it – it’s a lot closer in nature to the futures trading I have been doing for a colleague from time to time

Notes added on 31st March

Variables taken into account in making K7 trading decisions:

  • 1H Trend
  • EMA’s
  • Pivot Lines
  • Support/Resistance i.e. Key levels
  • Round numbers e.g. handles, 00’s and 000’s in the indices
  • Congruence across instruments
  • Strength/weakness from lower timeframes
  • Fundamentals
  • News schedule
  • Entry levels – looking for cheap entries i.e. retracements
  • Dixie
  • Price action on 5M & 15M

Being aware of the decision-influencing variables will help in designing testing – to be honest I can’t see how I could possibly create a solid testing environment that would allow me to incorporate the above variables.

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