A Structured Approach to Trading Mastery

Many traders start a trading venture and approach the markets in a very discretionary way with barely any rules – or no rules at all. They have a strong desire to apply their own ‘trading guts’ testing out if the success they have met in life can be transferred to trading as well. Typically, ‘beginners luck’ fuels a passion to become rich quickly, however, the human brain is wired to lose in the markets. All to often, new traders’ first trading accounts get destroyed (Van blew up two accounts after which he became very interested in the psychology of trading). Certainly, losing funds in a few months that were supposed to multiply several fold is a bit painful. More destructive than the financial loss, however, can be the annoying mind chatter about some kind of bad luck causing those losses or about ways to recover funds and multiply them again soon.

For a moment, let’s change to a different scene which fascinates many people around the globe: Formula 1 racing. What would you think of a person who believed they could successfully win an F1 race with little or no preparation and driving a car just based on ‘guts’? Would you think that person is a little crazy? It is obvious to everyone else that training, a lot of knowledge, and high level performance is required in such an environment. Trading is actually not much different – trading your guts does not promise much success.

Applying Deliberate Practice in Trading

As with any other complex activity, trading is a performance task that needs to be mastered. True intuitive-style trading can take many years to master, but learning a rule-based strategy is much easier and faster. Learning the rules of a strategy can follow a structured approach step-by-step.

Deliberate practice is a very effective and efficient approach in learning a complex performance task. It is a special type of purposeful and systematic learning experience. This learning method allows you to break down the overall process into individual parts, practice them with focused attention, gain competence one-by-one, and finally integrate the learnings into the overall process.

The Building Blocks of a Trading System

Whatever system you trade, be aware that it has individual building blocks. These represent important phases in the build-up and development of a trade. I trade rule-based discretionary systems – so they have rules and they also allow for some discretion. While the combination of rules for each part already contain important edges, applying some discretion provides one more edge – capturing the intuitive edge that trader’s experience can add.

Let’s take the example of the Turtle* system (one of my Futures systems) which uses a symmetrical, harmonic multi-bar pattern around a horizontal line for its setup. A Turtle trade can be divided into six distinctive building blocks:

1. Trading the Trend

This is the pre-requiste for this trend-following pattern. Very strong & ideally smooth trends are identified through a Top-Down Trend scanning process by analyzing multiple timeframes.

2. Setting the Stage

For a trend to remain robust it needs to “refresh“ (or take a break) to regain strength again. This “refresher“ happens during the consolidation phase of the Turtle pattern — a harmonic saucer-type of consolidation.

3. Wait for Battle

The trader should neither enter before nor during the battle, but wait patiently for the end of emotional battle. The Battle represents the Market Trap which I like to call in short the “Hook.” Once Countertrend Traders are trapped, a trade entry in the trend direction can be prepared.

4. Act on Trend Strength

The trader should not enter on the first jump in price, but wait for price to prove strength (2nd mouse). If prior resistance was broken first, then the trade has the best chances of success.

5. Play the Accelerator(s)

Another pre-requisite before entry is the existence of at least one stop-run level. This acts as an accelerator in trend direction providing good follow-through. Thus the trade has a high probability to become break-even early on.

6. Manage towards Target

With the determination of the target the Reward-to-Risk ratio can be calculated to fulfill a minimum of 2:1. After entry, the trade can then be managed through its individual phases: capital preservation, profit maximization and profit preservation.

* The Hook = Failed Test Bar, ie an excitable counter-trend bar testing important support
** HT EMA Support = Higher Timeframe EMA Support, eg dynamic support of 21EMA MF

You can see the Building Blocks for the Turtle system at work in the chart above – the Turtle pattern is Futures System 2 (as taught at the Van Tharp Institute).
Each one plays an important part and has its own edges. Once traders master each part of a system like this, they then need to integrate all of the parts into an overall trade process.

Mastery Through Trade Simulation

Learning to trade a system initially can be achieved best through deliberate practice using a trade simulator. The equivalent of years of trading experience can be gained in a month of focused practice. Actually, I recommend every student trade using simulation technology until they can execute each part of a trading system in an automatic, mistake-free way. Many trading platforms offer a simulator mode or the ability to “replay” historic price data in fast forward so you can watch chart patterns develop and execute your rules. In addition, several companies offer specific trading simulation products.

Whenever you want to learn a new trading system, I strongly believe that using a structured approach and simulation to learn the individual parts helps accelerate the learning. This is a much better way to be more successful early on in the markets rather than trying to trade on your guts.

Video Explanation

Please Video (7min) on Futures System 2 (Turtle setup) explaining the Building Blocks discussed in this article.
It is based on a real trade Gabriel took yesterday in the YM 1min Long that resulted into a great >8R trade.