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Feature
 The
Importance of Your
Trading Road Map
by
D.R.
Barton, Jr.
"Would you tell me, please, which way I ought to go from here?"
"That depends a good deal on where you want to get to," said the Cat.
"I don’t much care where--" said Alice.
"Then it doesn’t matter which way you go," said the Cat.
"--so long as I get SOMEWHERE," Alice added as an explanation.
"Oh, you’re sure to do that," said the Cat, "if you only walk long enough."
(Alice's Adventures in Wonderland, Chapter 6)
--Lewis Carroll
Last week, I attended a very interesting “round table” type of event
where folks gathered to discuss issues they were having and how to
solve them. In this
case, the discussion was on broader business issues, but I was
struck by how much it related to trading.
The first three people were all at very different places in their
journeys. I suspect the probabilities were extremely high that just
about anybody listening in could make an excellent predication about
where each person would end up.
The first lady was full of passion about helping student athletes prepare
for life after competitive sports.
However, she lacked any plan for turning that idea into a
useful program that student athletes would want and then monetizing
that program. I would
guess that if she finds the right resources and develops a solid
plan to get to her destination, she’ll do well.
If not, she’ll most likely flounder (though passionately).
The second person up at the round table was a bit of a mystery.
Obviously, he was an intelligent guy, full of life
experience. He had so
many areas of interest and so many skills that he had no idea what
he wanted to do, let alone how to go about doing it.
We could have very well substituted his name for Alice’s in
the quote above. Until
he gets a destination in mind, there’s no way he can put a plan
together to get there!
The last person at the meeting had a vision for helping lots of folks.
He had a plan — a road map — that would direct his
actions and navigate the bumpy spots in the road.
He still needed some resources and some infrastructure but
this person had intention, a destination and a plan.
If I had to back one horse, this guy was the one.
The lack of a destination and, equally as important, a map to get you
there keeps many travelers from getting where they need to be.
And so it is the same with traders and investors.
The lack of a plan or a road map leads to days, months or
even years of frustration.
A Destination and a Map of the Territory
Lewis Carroll was so insightful with his books on Alice.
This exchange between Alice and the Cheshire Cat has been
drilled into our collective mind so deeply that it has spawned its
own saying: “If you don’t know where you’re going, any road
will take you there.” Lewis Carroll (Charles Dodgson) actually
never wrote that phrase; it appears to be another of those sayings
that grew out of the “collective wisdom” of people through the
years remembering the sage advice Alice received from the smiling
cat.
In Van’s groundbreaking book Trade
Your Way…, he does a great job of showing us the value of
objectives. (That
section with fellow Market Wizard Tom Basso is so good that it’s
worth a re-read if you haven’t looked at it lately.
Pages 50 -59 in the second edition).
Arguably, after we have our objectives, the rest of trading is about
creating the plan—the road map—and then executing the plan.
As with most areas of trading, weaknesses in the trading plan are
magnified for intraday traders.
This is because the opportunities for mistakes are multiplied
in the intraday time frame and the leverage available makes mistakes
more pronounced.
That’s why a daily road map is so important for intraday traders.
And every day trader I’ve worked with uses some form of a
very unique road map to get them headed in the right direction every
day.
Our Intraday Road Map – The Key Number
Ladder
The unique road map used by all top day traders I’ve worked with is a
“key number ladder.” This
is the tool that tells them what price levels require action, and
when to sit quietly and wait.
The markets change. Today’s
markets have very different characteristics than the markets of just
a few months ago. And a
year ago, during the market meltdown, the markets were very
different, as well.
The map that professionals use to navigate on a daily basis the ever
changing markets is the key number ladder.
One of these top traders is my great friend and business partner
Christopher Castroviejo. I’ve
included a little about him at the end of this article so you can
get to know him better. One
snippet: He has 37 years
of Wall Street experience and among other things, ran a hedge fund
desk that achieved 34% compounded returns for eight years.
Pretty darn impressive.
Christopher helped me bring the “key number ladder” concept to a
sharp focus even though I had studied the idea with many folks
before. The utility of
the key number ladder never made great complete to me—until
Christopher showed me his personal notes compiled over many years.
In short, key number ladders tell us the points that require action
during the trading day. These
are the few price levels where the market is most likely to have a
major launch, or a significant pullback.
To understand how we use the Key Number Ladder, here’s an example we
gave in a webinar last week for our E-Mini course graduates.
The night before the webinar, we identified an area of the
number ladder that would be an action area for us on the following
trading day. Here’s an
excerpt from that Key Number Ladder:
We had three numbers that were grouped within less than three quarters of
point of each other, giving us a key level to act.
If the market gapped up and traded down to this area, it
would have been a place to buy.
As it happened, price gapped below this level and traded up
to +/- one tick of the key number zone three times during the day.
Here’s what that looked like on the chart.
As you can see, this really was a KEY zone that day!
The trading signals aren’t always that clear-cut, but most
days, the Key Number Ladder gives us the road map we need to make
clear trading decisions and isolate the few low-risk,
high-probability entry points for the day.
In your trading, identifying these key areas will ease stress and can
help get you in when the market is ready to move.
To get you started, look at areas like floor trader pivots,
recent daily highs and lows and key moving averages.
You’ll be amazed at how the market has a memory for key
points from the recent, and not so recent, past!
Great trading,
D. R.
P.S. As promised, here is a
little more about my co-instructor, Christopher Castroviejo.
As I mentioned earlier, Christopher has spent 37 years in and around the
markets. His resume and track record on Wall Street became
something of legend: stints with Smith Barney and J.P. Morgan, a
partnership at Bear Stearns, financial consultant for The Vatican
Bank. Christopher was hot and getting hotter. Highlights include
turning $10,000 into $178,000 in four weeks, 8 straight years
of 43% compounded profits as a top hedge fund manager, a sleek
Manhattan brownstone and a spacious summer getaway in the tony
Hamptons. Christopher
even struck up a friendship with his money making idol,
billionaire George Soros (to be honest, the people Christopher has
worked with in the field is a veritable “who’s who” of Wall
Street elite).
Along with multi-million dollar wins, there were a few huge losses; in
just six short weeks, $10,000 became a cool million, and quickly
nothing but air. And, in one monumental transaction gone wrong,
Christopher lost $15 million dollars in just a few months…$1.5
million of it his own money. But, unlike the Vegas poker player
who can’t leave the table, Christopher learns from the missteps
as well as the wins. “You have to reinvent your performance all
the time. I used to see the business as just about orchestrating
wins, but the rational way of thinking about it is really about
controlling your losses.”
Anyone who has read Jack Schwager’s Market
Wizards series (the first of which featured a chapter on Van)
knows that many of those top drawer players became the traders
they are by learning lessons in their own personal “trials by
fire.” Christopher
has certainly been through his own version!
Today, Christopher is active intraday and swing trader and he continues
to manage money for a select list of Wall Street insiders.
He teaches a few courses a year with me; we hope you can
join us.
About
D.R. Barton, Jr.: A passion
for the systematic approach to the markets and lifelong love of
teaching and learning have propelled D.R. Barton, Jr. to the top
of the investment and trading arena. He is a regularly
featured guest on both Report
on Business TV, and
WTOP News Radio in Washington, D.C., and has been a guest on
Bloomberg Radio. His
articles have appeared on SmartMoney.com and Financial
Advisor magazine. You may contact D.R. at
"drbarton" at "iitm.com".
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