The Trading Playbook

Two rule-based plans for day trading and swing trading

Michael Gouvalaris

• Publisher: Harriman House
• Year: 2015
• ISBN:
  9780857194763
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Handel

Traders have a tendency to over-complicate. Many search for the latest new indicator that will give them an edge, or a new trading strategy to deliver bigger wins. The message of The Trading Playbook is to forget all of this and concentrate on three solid foundations to improve your trading performance: Simplicity - focus on price action alone.Probabilities - take trades where the odds are in your favour.Hard work and screen time - put in the effort to build up your trading experience.Hard work and screen time is down to you, but The Trading Playbook will guide you towards simplifying your trading and thinking in terms of probabilities.Michael Gouvalaris describes two straightforward trading plans that eschew complicated indicators and focus on probable outcomes. The first of these two plans - the day trading playbook - is based around ten different daily situations that can occur in the futures market. Between these ten daily setups, every single scenario is accounted for. You are shown how to determine what day type is in progress by studying that day's open and gap, and then high probability and low probability price action for each day type are given. Alongside the ten day types, the simple technical analysis tools of support and resistance and measuring market volatility are employed.The second trading plan - the swing trading playbook - describes effective ways to identify the trend, how to find ideal spots to enter trades in the direction of the trend, and also how to identify signals that warn of potential trend failure or reversals. You will learn simple and highly effective tools for spotting high probability entries and exits for trades. Again, basic technical analysis tools are employed, including measured moves, box theory and A-B-C waves.The key benefits of both playbooks are that they give you a well-defined plan to follow. This alleviates many of the big mistakes traders make, such as over-trading and cutting winners too early, or sitting in losing trades too long. If you are on the lookout for some trading ideas to simplify your analysis and refine your approach, The Playbook is for you.

Day Trading
Playbook

Introduction

Day trading is a process where you attempt to profit from the short-term fluctuations in prices within a given day, generally exiting all positions before the close of the day. Day traders have the odds stacked against them as they have to deal with the psychological issues that affect investors and swing traders – greed and fear – but to a much greater extent and more often.

I have geared the day trading playbook towards the futures market, specifically the ES, or E-mini S&P 500 futures contracts. This is the most popular futures market, with the highest volume and liquidity. The futures market tends to be where most serious traders reside as the tax efficiency, all day tradability and margin capabilities are more favourable.

However, even though I focus on the E-mini S&P 500, the principles presented can still be applied to other futures markets, like the euro and oil, and even stocks and ETFs. The regular trading hours may have to be adjusted accordingly for certain vehicles like the euro futures contract, and the expectations may have to be adjusted for highly volatile vehicles like oil futures or less liquid stocks, but the basic principles remain the same.

Since day traders have the odds stacked against them, it is imperative for anyone attempting to day trade to create a plan and stick with it. While it may be true that much of day trading is pure speculation – after all there are no certainties in financial markets – the first step is to break things down and think in terms of probabilities instead of certainties. The next step is to formulate a well-defined plan in terms of execution and expectations.

In the day trading playbook I have laid out a well-defined plan that is simple to learn and follow. I have created a few basic characteristics of the trading day and these form ten different day setups that cover every possible scenario you will encounter. These day scenarios outline what the trader’s expectations for the day should be and what trade setups to look for. Under my rules, trades are placed during the regular trading session hours only, but I do observe after-market indicators like the overnight high and overnight low.

Alongside my own rules, I describe how I use measures of volatility, support and resistance, and inside days to aid my analysis and trade placement.

I will present real examples for each of the ten days along with a bullet point list of guidelines to help you make successful trading decisions.

So let’s begin.

The structure of a market day

There are three elements that make up each day in the market:

1. Day type
2. Gap type
3. Open type

Based upon these three elements, there are ten different combinations that make up the trading playbook. The first element to look at is day type.

1. Day type

In order to define what day type we are seeing, we need to use the data from the pit session or regular trading hours (RTH) only. The reason for this is that the RTH session is generally when the most volume occurs.

As stated above, my trading principles can apply to any market with good trading volumes and liquidity. The market I focus on is the E-mini S&P 500 futures contracts (ES). So, in this case, the regular trading hours session would be from the 9:30am EST open to the 4:15pm EST close.

There are three day types:

Up day

A trading day that concludes with the closing price ending higher than where it opened at 9:30am EST. Figure 2 shows an example of an up day.

Figure 2: Up day

Down day

A trading day that concludes with the closing price ending lower than where it opened at 9:30am EST. Figure 3 shows an example of a down day.

Figure 3: Down day

Neutral day

A trading day that concludes with the closing price ending equal to where it opened at 9:30am EST. (This day type is rare – I will discuss how to deal with this scenario in further detail later in the book.) Figure 4 shows an example of a neutral day.

Figure 4: Neutral day

It’s important to note that we are not concerned whether the market closed positive or negative for the day. That is not what I am talking about when referring to up days or down days. We are only concerned with how the market closed in relation to its open.

For example, the market could gap up 1% on the previous day’s close, but close up only 0.5% on the previous day’s close. In this case, the market closed lower than where it opened the session. It resulted in a down day type, even though the market as a whole closed in positive territory. This is a subtle yet distinct aspect of my method.

Don’t worry, in the end I will put it all tog...