Trader Skillset's ultimate check list tells you what to look for in a trading system

Ultimate Edge Checklist for Traders

Do your New Year’s resolutions include making more money? Possibly by improving your trading performance, or, perhaps, to transition your career towards trading?
Good idea. The best advice we can give you to achieve those goals is to discover an “edge” in seven key areas. You might find these edges in a book, membership service, seminar or training course, but you need to have something defined in each. In a nutshell, you should be looking for an edge, or advantage, in the following areas, otherwise the system you follow is, quite frankly, inadequate:

a chart showing a correction up during a downtrend: there is always a better chance of a new low
The phenomenon of market inertia: “an object in motion, stays in motion” at least more than 50% of the time. Technical trading relies upon this very basic edge.
  • Trend Direction – Markets obey the law of inertia. In other words, they trend. So, as traders we need to get a clear definition of the prevailing trend – which can be up, down and sideways. For example, when a market forms a bear trend there is a better chance that the price is going to move down x points than to move up the same distance at any randomly given time. It happens because we have more, and longer, impulse waves down a bear trend. (i.e. in any ongoing trend, corrections tend to finish quickly and shallow, and continue their prior trend.)
  • Coordinating Time Frames – You must recognize, and deal with, the different layers of the trend. It sounds simple to follow a single time frame, but coordinating that with one larger is worth the effort (i.e. having the same trend on a 5-minute and 15-minute). Considering multiple time frames might improve your analysis, and trading, at least 5% in terms of hit rate. When a larger time frame trader joins your side, the wind of the trade is at your back.
  • Perfect Your Timing – Timing means balancing risk, reward and probability. It is the art of making sure that the market trend is already on the move with good enough probability, but not delaying the entry until it becomes too obvious as that might demand too high of a risk (unnecessary large distance to your stop loss level and taking an already crowded trade.). I see so many trading methods just looking at the trend, and while that’s important, it’s not enough. Trend is only historical background i.e. should be considered as an idea, or a source of bias. Going long in a bull trend has an instant edge, but you can do much more than that. Your system has to be able to mark a certain price level as the condition for entry in an objective way. In other words, pick an actual signal that confirms your bias prior to entering a trade.
  • Risk Control – We put a special emphasis on the initial stop level and type. The market’s position within the dominant cycle should rule your choice of either a “scalp type” or “structural type” swing stop. Also, the further away your stop is, the larger the risk you take and the worse the risk/reward ratio. The closer your initial stop the more likely the market will find it. Another area to find balance, eh? Does the pundit you follow plan thoroughly the amount of risk he takes? If not, that’s a cardinal sin because no one has a control over the market, but every trader has control over the risk she takes.
  • Lose Less When You’re Wrong – A trailing stop strategy will shave off the actual capital at risk. If you timed your entry well usually the market moves some in the direction of your trade. When and under what circumstances do you first move your stop loss order in the direction of your trade eliminating the amount of risk you initially took? When you trail the stop well, it cuts back your losses on average losing positions without diminishing your reward side and your probability of success. Imagine that only 3 out of 10 losses are closed at the initial stop loss level, another 3 had been trailed to ½ distance toward your entry level, and 4 got hit at breakeven. That would mean that your actual average loss (risk side) has been just about 50-55% of what you initially planned.
  • Scoring Home Runs (Win More When You’re Right!) – We set our price target as an “educated guess,” primarily for calculation purposes as we elaborated here in the “Point of Profit Reference.” Ideally, we take trades with profit targets equal to or up to 2.5 times the risk we take. Sometimes the market picks up and reaches our profit target showing more strength than we initially expected. It is important to stay with these positions and ride the apparently larger time frame blast or unexpected wave extension. At times we can achieve as much as 6 to 8 times our risk by following the market with a properly set profit taking trailing stop tactic. Although the number of “home runs” can represent less than 5-10% of our trades, they might be the source of 40-80% of a day trader’s profit at the end of the month. Home runs would be non-existent without a sound profit trailing routine.
  • Dynamic Position Sizing – It is often referred to as the most important aspect of money management. The maximum risk a trader can take is based on the amount of capital, the payoff ratio, hit rate and the quite subjective “core risk-taking ability.” In short typically, we only max out our risk allowance during a winning streak, and hold back a bit on days when performing below average or taking a counter-trend trade. We always control the amount of risk by increasing or lowering the position size.

Do you have all these seven trading edges built-in to your trading plan? If not, you definitely leave money on the table. Now, each of these seven areas needs much more than a paragraph, so if there’s not enough in here for you to develop a specific process, don’t worry. We’ll be back with further clarification on all of these in 2015.

Start you research to improve the missing aspect(s) next year. Get more of a mathematical edge; go for quality, risk less to save on losers, maximize your reward on winners and do so more often than ever. Rock it in 2015!

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About Laszlo Nagyferenczi

Laszlo Nagyferenczi is a day trader, analyst and instructor as well as the creator of the proprietary Context-Momentum-Signal concept. He has authored over 200 blog articles about his unique approach to trading and the Elliott Wave Theory. His clients appreciate his ability to go from the theoretical to the practical i.e. all the way to the actual trade set ups. Originally hailing from Hungary, Laszlo is fluent in English and Hungarian with a long list of education credentials including BA in Economics, Certified Elliott Wave Analyst (CEWA), Certified Adult Educator for T-Groups, Professional Co-Active Coach (PCC) at CTI. The real education, though, has been the trial by fire in the markets, with real capital at risk.

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