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Principles of the Intraday Trading Plan
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Intraday trading—when a position is open and liquidated within one trading day (24 hours)—must be considered as one of the most complicated types of trade and, nevertheless, most widespread among independent individual traders. Its popularity among traders can be explained by some subjective reasons. It might be connected to the small size of investment capital and a trader's desire to receive the greatest possible advantages from margin trading with a large leverage. (As I have already mentioned, the appelation "day trade" is considered an artificial one, because the FOREX market works round the clock, five days a week, and a trader does not have and cannot have obligations to liquidate his positions the same day, even if they have been open without special necessity. Therefore, when I talk about short-term trading, I mean positions held for a period from a few minutes to a few days.)

Short-term trading is considered to be extremely difficult, because its results are greatly influenced by market noises of significant amplitude— sometimes as big as the average amplitude of daily fluctuations. Practically all short-term trading is conducted on market noises, and the trader's problem consists mainly of catching small and medium-sized fluctuations, basically from several pips and up to a couple of hundred pips.

The advantages of an intraday trade are obvious. First of all, it is the opportunity to work with small investment capital by taking numerous positions during the day and placing very tight stops. As for profitability, it can also be more profitable than long-term trading but probably not all the time. That closes a very short list of advantages of intraday trading.

All intraday trading's other distinctive features can be defined as passive, because they basically have a negative character. Intraday trading on FOREX differs by high risk, high labor input, long working days, work under constant stress, and chronic weariness. The specific conditions of intraday trading require a speculator's fast reaction, absolute discipline, calmness, and endless patience. However, the real key to success is an effective and reliable trading technique specially created for this type of trading, which would allows a trader to make optimal decisions under the constraints of limited time and market space.

Any trade should begin with scheduling, and can't be done without it. The planning of each transaction is very important. Planning helps reduce or even completely eliminates the influence of negative stress factors. It must be done in advance, to prevent the necessity of making important decisions in limited time constraints, when the probability of making mistakes grows exponentially. Planning is absolutely necessary for intraday trading; without it, it would be impossible to have any chance for eventual success.

In addition to the choice of a currency pair, preliminary planning of each intraday trade includes four basic elements. Decisions about them should be made in advance. A trader has to decide the following four things:

•  Where to enter the market with a long or short position;

•  Where to cut loss (where to place a stop-loss order);

•  Where to take profit.

•  Whether a new position will be open in an opposite direction (re
verse), in case the stops are triggered.

Having the answers to all four questions prior to the beginning of a trade will make an ideal plan. However, ideal planning in the real market isn't always possible. Frequently, a preliminary plan requires some adjustment because of constantly changing market conditions. It's almost impossible to foresee all the possible situations in advance, and the importance of each separate element of the trade planning is unequal.

Therefore, I follow two main rules:

•  I do not begin a trade if I haven't decided at least the two first ele­
ments, and I do not begin to trade if one or both of them are missing
from my trading plan.

•  The correction of a preliminary plan can occur only inside a basic, ac­
cepted-in-advance trading strategy. For example, some minor details
can vary in the plan, but if the plan is already in the process of realiza­
tion, I can't change it.

The sequence of building a trading plan using the four elements stated above should be done according to the priority which we discuss next. (Elements 3 and 4 of a preliminary plan could be considered less impor­tant details of a trading plan.)

RULES AND TECHNIQUES OF STOPS PLACING

The stop levels should be determined in accordance with one of the principles of the method, which states that the market has only two possible directions in which to go. Therefore, stops should be placed only where the probability of continuation of a movement in the direction against your position grows sharply. The stops for liquidation of long positions should be placed at the point where the market gives a signal on opening of a short position. The same is true for the opposite scenario. For this reason, in many cases and according to my strategy, I liquidate a losing position and simultaneously open a new one in the opposite direction.

If for any reason you can't determine a level of placing stops in advance, it is not worth opening a position at all. Such a situation has happened frequently in my practice. The problem basically arises when I search for an opportunity to open a position in the direction opposite to the current market movement. In order to solve this problem, I apply some money management principles and have one more rule to follow: If I cannot find an acceptable level for placing stops in a sufficient proximity from the current market price, I refrain from making a transaction until the market builds to one that will include all the necessary elements. (Because we are talking here about intraday trading, sufficient proximity can be considered any dis­tance anywhere from 20 pips and up to an average daily range of the particular currency pair you are dealing with at the present moment.)

An obligatory condition should be the binding stops to a technically significant level, that is, to support, resistance, or a trendline. Stops should be placed only where the probability of continuation of a move­ment in the direction against your position grows sharply.

As far as I know, lots of traders usually place stops considering money management reasons only. In such cases, the stops are placed on some fixed distance from a position open price, and typically not further than 30 to 50 pips. Sometimes, traders have some fixed amount in mind that they allow themselves to lose in one trade. Technical levels such as trend lines, supports, or resistances (frequently being close at a short distance behind the stops) are not taken into consideration. Such a practice results in stops that are triggered at the most improper moment. Too frequently, a prospective and potentially profitable position is liquidated and a loss is taken.

To avoid such situations, here is another rule I always follow: Place no stops based on reasons of money management only. The binding of a stop should always be done to a specific technical level. If the nearest suitable technical level lies on a distance more than a trader can afford to lose in one transaction, he should refrain from making a trade until the market comes close enough to such an appropriate level.

In some cases, it might be necessary to open a position against the current market movement because of the opportunity to catch the moment of a market turn. For this purpose, a position needs to be opened near the assumed top or bottom—a task that is very difficult to make with precise accu­racy. Then, the technique I call "postponed stops" can be applied. Postponed stops become attached, not to a specific price level, but to some specific time. More often, the postponed stops attach to the end of a trading day, session, or moment when the market finally builds a new, clearly expressed technical level. This is especially true if this new level can become a new top or bottom on which I will be able to put my new stop. Even in these cases, however, I have to be ensured against possible excessive losses and place a safety stop outside a possible range. This range is the level, which the market probably won't achieve at the present time. Usually, I place these stops within the limits of 100 to 150 pips from the price at which my position was opened. A safety stop should also be bound to a certain technical level. I cancel a safety stop when a postponed stop becomes invalid and a suitable technical level at which to place stops is found.

A stop shouldn't be cancelled under any circumstances or a trade be conducted without using stops. A stop can be moved (if necessary) in one direction only—closer to an open position price. In order to preserve a current floating profit, a trailing stop can also be used. When moving stops, you should always place a new one first and then cancel the old one.

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