# Trading Strategy A strategy has the following elements: 1. An edge in the market --> Signal generating Process (SGP) 2. A plan to execute the edge --> Risk management & Account parameters 3. Ability to follow the plan --> Discipline & Mindset 4. Ability to avoid self-sabotage --> This is an ever present risk in every endavor, and something one needs to be cognizant of while making important decisions --- ## A. Signal Generating Process ### Indicators 1. **Supply and Demand zones** - Amount of time spent in the zone previously - lesser the time spent, higher probability of same reaction - Speed of approach this time - faster the approach, higher the probability of a reversal from the zone 2. **Dual Time Frame Momentum** - Momentum indicators represent momentum trends - Rule 1: Trade in the direction of large time frame momentum - Rule 2: A trade execution may be made following a smaller time frame momentum reversal in the direction of the larger time frame momentum trend 3. **Pattern Recognition** - 3 wave or 5 wave movements - [Elliot Wave Theory](https://www.investopedia.com/terms/e/elliottwavetheory.asp#toc-what-is-the-elliott-wave-theory) - Normal reaction vs. reversal - Categorizing the current trend and expected movements 4. **Trend** - Daily and Weekly market trend lines - Two highs/lows are needed to establish a trend 5. **Enviornment** - VIX - high/low advancing/declining - Economic Calendar - Earnings Calendar - Enviornment can predict rise in volatility/ breaking price levels (catalysts) 6. **Sensible Zones** - Price before the previous big event heading into the next - The low/high of the year or current trend - The VWAP YTD, since the last big movement - Big options strikes 7. **Candlestick patterns** - Bullish and bearish candlestick patterns on different time frames - Tweezer, double botton, lightning bolt, switch 9. **Volume** - Large moves with low volumes will usually be reversed even if the original move eventually continues - Look for a 40% reversal - Gaps are essentially very large moves with zero volume 10. **Economic Cycles** - FED Policy - rates rising, falling, flat? - Inflation - rising, falling, flat? - Manufacturing & Services PMIs - above/below 50? rising, falling, flat? - Unemployment claims - Secondary to price action, and never used for a long term view, these indicators can help detect overextended conditions - Higher probability: when stock prices/ relative sector performance/ are overextended in the wrong direction - e.g. steep rallies when rates are rising 11. **Relative Asset Class Performance** - Treasury bonds - Corporate Bonds - Metals - Oil - Real Estate - Small, medium, and big stocks - Cryptocurrencies 12. **Multiple Time Frame Analysis** - Ranking and evaluating all indicators on differnt time frames ### Signals --- ## Plan to execute the edge ### Risk Management 1. Risk per trade - max 2% of account equity 2. Risk per day - max 5% of account equity 3. Risk per month, 3 months, 6 months, and 1 year - 2%, 4%, 5%, 10% of account equity (as of starting of that period)