Grading my set-ups

People always ask me what my win rate is...as I have said in the past, it is around 80%.

It is high because I focus on great set-ups. And, a by-product of focusing on great set-ups is that you have fewer trades per day, and you can better monitor those trades to maximize the profit potential. If you notice warning signs that price is about to reverse, you can protect your profits by closing the position. And, if a set-up fails altogether you can usually get out with a small profit (or break-even).

Having said that, I notice at times I get lazy on my set-ups and start taking some that are mediocre. I usually look for red flags, and if I see a few I will pass on the trade. But, after a long winning streak I will start taking chances even though several red flags are there. And, if those chances pay off then I continue to take chances; put another way, the worst thing that can happen when you trade a bad set-up is that you make money!

So, I am instituting a "grading system" to focus my attention on the quality of the set-ups I take. It is very simple:

A - a perfect set-up, no red flags.
B - a great set-up, one red flag.
C - an average set-up, a few red flags; more risky and I need to have a great reason to take it.
D - a mediocre set-up, several red flags; very risky and should not be taken.

Most trades I take should receive a "B" grade - only because there are not that many perfect ("A") set-ups! And, when I go back and look at all my trades 90% should receive an "A" or "B", with a small percentage reserved for "C" (as stated above, I need to have a great reason to take a "C" set-up). The idea is to have no "D" set-ups (and, very few "C" set-ups).

To see how this system applies to the real-world, I looked at several trades over the past few weeks and rated them:

GG - I give it a "B" because of the long upper tail on the second bar. But it was an orderly pullback that stayed in the top 50% of the first 15-minute bar.
RIG - I give it a "C" - the third bar had a lower low than the second bar, and the long upper tails/wicks on the second and third bars (while bullish in some cases) in conjunction with the lack of an inside bar were all red flags.
JOYG - I give it a "B" because the entry was below the OR high. So, by definition there was some risk. But it was an orderly pullback that stayed in the top 50% of the first 15-minute bar.
MVL - I give it a "B" because the entry was below the OR high. So, by definition there was some risk. But it was an orderly pullback that stayed in the top 50% of the first 15-minute bar.
AMLN - I give it an "A" - the second bar closed above the OR high and the first two bars were nice "hammer-like" candles that closed strong. Although I could make the argument that any set-up after two bars is more risky and thus deserves a "B" (my experience is that the most reliable set-ups occur after at least three bars). Such is the nature of trying to give an "A" grade.

Anyway, I think you guys get the picture. I will start assigning a grade to all set-ups (BEFORE I enter a trade) and will include that grade on the trades I post here.

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Tags:
Trader-X, Stocks, Fibonacci, Trading, Technical Analysis