Equity Graph As Traders' Treasure Map

...continued from yesterday

John Mills ran a chain of hair salons while competing in the World Cup trading competition. He won four Bull and Bear trophies between 1989 and 2000.

He starts with a decision as to how much he wants to make each year. Dividing that one year profit by the number of weeks in a year, he gets a rough idea of how much he should be making each week to reach that goal.

He uses his weekly profit sub-goal as both a profit guideline and a stop-loss amount on each position. Furthermore, he sets a floor amount for his total drawdown, the maximum amount lost below his starting capital at which point he will quit trading. If and when profits accumulate, he raises the floor amount. For example (this is not exact), once he accumulates 50% profits, he moves his quitting point to breakeven and changes it from a “quitting point” to a “conservative trading” point. Then when he accumulates 100% profits, he moves his “conservative trading” point to starting equity plus 50%.

Due to his hair salon duties, he created a system whereby he only has to be in front of his computer on an intra-day basis on select days. On most days, he only has to look at end-of-day price data. Here’s how he selects days on which to do intra-day trading:

1. Start with a weekly bar chart. Locate the last weekly pivot high and last weekly pivot low.
2. If price goes above the last pivot high or last pivot low, he waits at least two more days.
3. If step 2 is satisfied, he further waits until (in the case of price rising above the last weekly pivot high) price on a daily bar chart makes two lower highs or (in the case of price falling below the last weekly pivot low) price on a daily bar chart makes two higher lows.
4. If step 3 is satisfied, he will sit in front of a computer on an intra-day basis. Intra-day, he will wait for price to rise above yesterday’s high (in the case of price rising above the last weekly pivot high in step 3) or fall below yesterday’s low (in the case of price falling below the last weekly pivot low in step 3).
5. If step 4 is satisfied, he waits for price to retreat either the breakout up or breakout down by an amount equal to his weekly profit goal.
6. If step 5 is satisfied, he will enter on stop when price resumes the intra-day breakout past yesterday’s high (in the case of price rising above the last weekly pivot high in step 3) or yesterday’s low (in the case of price falling below the last weekly pivot low in step 3).
7. If a position is entered, he uses his weekly profit goal amount as his stop loss exit and also as a guideline for taking profits. He tries to grab as much profit above his weekly profit goal as he can before they disappear.

John says he uses a graph to track his trading equity. On that graph, he compares his actual trading equity to his profit goals. He says he found using a graph to compare his actual equity to his desired equity to be invaluable during the World Cup trading competition and that he continues to use it today.

continued tomorrow ...

Copyright 2007 Raymond T. Lee. All rights reserved.
Leisurely e-Mini Futures Trading
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