Factor Trading Plan

The Factor Trading Plan Factor LLC trades real markets in real time with real money with a real performance record. The markets traded by Factor LLC include futures, forex, ETFs and stocks. The Factor Trading Plan governs the trading activity of Factor LLC and is based primarily on classical charting principles as defined and described by Richard W. Schabacker (Technical Analysis and Stock Market Profits) and Robert Edwards and John Magee (Technical Analysis of Stock Trends). Classical charting principles attempt to understand market behavior by identifying recognizable geometric configurations such as: •

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Head and shoulders tops and bottoms Symmetrical triangles Right-angle triangles

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Trendlines Rounding pattern Channels

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Double and triple tops and bottoms Flags and pennants Horns or sloping patterns Rectangles And the like

As a general rule, Factor establishes positions at the breakout or completion of these patterns. Factor focuses its search for patterns to monthly, weekly and daily bar charts and does not intentionally enter day trades. Factor may utilize a variety of risk management techniques, and as a general rule uses a risk per trade between 25 basis points (1/4 of 1% of capital) and 100 basis points (1% of capital). Factor expresses its trading size, or leverage, in units of $100,000 of capital.

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The types of entry signals and methods of trade management designed into the Factor Trading Plan are shown in the grid below: Factor Trading Plan – Signal and Trade Management Options Trading signals – Trade given full berth, Trader given moderate duration of chart stops moved hesitantly, berth, stops moved patterns profits taken at target actively according to rules, profits taken at target Six months or longer Currently employed Inactive (monthly and weekly charts); reversal or continuation patterns 10 to 25 weeks (weekly Currently employed Inactive and daily charts); reversal or continuation patterns Inactive Inactive 6 to 9 weeks (daily charts); continuation patterns Less than 6 weeks Inactive Inactive (daily charts); continuation patterns

Trades guarded tightly, stops moved quickly and aggressively, quick profits taken

Currently employed

Currently employed

Currently employed

Inactive

During the history of trading by Factor all of the above combinations have been employed, depending upon the type of markets judged to exist. As of this writing, Factor is using the signals and trade management techniques indicated above.

Factor’s Primary Focus Factor’s primary focus is to identify and trade in real time those 10 to 20 chart patterns that will, with the benefit of hindsight, stand out as the best examples of classical charting principles each year. This remains Factor’s principal agenda. Additionally, Factor will trade shorter-term patterns (6 to 9 weeks in duration) with the intent upon taking quick profits of between $500 and $1,200 per contract.

Trading Lessons Learned by Factor During the Years •

Except for a few tremendously gifted traders (not including me), day trading is a loser’s game. 2

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Trades decided upon at a moment in time during active market hours will contributed negatively to my net bottom line Combating my emotions (fear, greed, hope) is my primary challenge in trading. It is better to miss a trade all together than to be obsessed about being in a certain market. I do not need to recover the losses from one market in the same market. A given market owes me nothing. I need to maintain little or no tolerance with breakouts that are not decisive or that put a trade into the red; Agonizing patience with trades that remain in the black – giving a trade plenty of leeway to reach its target. My focus needs to remain the search for the 20 or so best examples of classical charting principles each year, with the goal of successfully trading the majority of these market situations. The trading plan will be profitable in about 35% of trading events over an extended period of time. However, over shorter periods of time the plan may be profitable in as few as 15% of trading events. Expect the bottom line over an extended time frame to be represented by only 10% of all trades. The other 90% of trades will be washes. There will be losing trades, losing weeks, losing months, and very unfortunately, even losing years. Every year will experience a drawdown of 10% of assets. Many years will encounter a drawdown of 15% of assets. Most chart patterns, especially those of shorter duration (less than 8 to 10 weeks), completely fail or morph into part of a larger chart construction. Being profitable over an extended period of time is far more important than being right on the next trade or series of trading events – consistently following a sound trading plan is not measured by the results of any given trade or series of trades. An emphasis on sound (in fact, ruthless) risk management protocols with the faith that preserving trading assets is a prerequisite to be positioned for long-term profitability. A trader’s pile of chips needs to be protected as a first priority. Severe drawdowns are very difficult to overcome. A trader should never be more than one to three fully leveraged good trades away from new capital highs. I need to retain an intentional alertness for a few trading events per year (two or three) that are characterized by multiple technical confirmations (the stars becoming aligned) and a low risk entry point where extraordinary leverage can be employed with only marginally greater risk A difficult by necessary component for success is an extreme amount of patience, waiting and waiting for a pattern to become fully mature – and then the discipline to pull the trigger with an appropriate amount of leverage. A sum of profits or certain rate-of-return is not a legitimate goal in trading. Rather, the goal must be to properly execute clearly understood strategic and tactic maneuvers. Control the controllable, let go of the uncontrollable! Failure to achieve the above will happen. A trader needs to have the ability for immediate self-forgiveness when getting off the script, realizing that a focus on past/recent mistakes can lead to a vicious cycle. Edited 3/28/11 3