We have covered all the Long Term and Short Term variables that go into the Trade Selection Tool as an input to drive the decision making process for Trade Selection.
This post will delve deep into how the Tool calculates an overall score that leads to an objective decision to select or leave a trade aside. This is one of the most critical parts of the Trading System that makes all the difference in determining your success or failure as a trader.
One of the most important reasons why Trade Selection is important is that it greatly helps in preserving your capital. Good trades mostly lead to profit and add to your capital whereas bad trades do exactly the opposite. Apart from preserving capital, do not forget the psychological impact of making good trades. They add to your confidence and your conviction which matters a great deal in taking good decisions. So it is a virtuous cycle. Bad trades undermine your confidence and fill you with self doubt, particularly one that results in a big loss.
Adhering to the Trade Selection process (part of Trade Preparation) requires discipline and character. You need to work on it to make it stronger every day. We will talk about it in the next section when we discuss the Trading Psychology but know that these two are deeply connected.
As this is such an important concept, we think it would be preferable to explain it with the help of some practical examples. Let us start with presenting the input tables that are populated as the Trade Preparation starts before 9 AM and later completed in the window that starts @ 9:45 AM to 10 AM, 12:45 PM to 1:00 PM and 1:45 PM to 2:00 PM.
The variables for the tables below ensure that all major factors that impact a trade are carefully considered and baked into the decision making process of taking or leaving aside a trade. Nothing gets left out inadvertently in the heat of the moment.
Input Table 1 - Long Term Variables (LTV) that impact the trade - Long Term Trend
Example - As on : Monday, 1st Jul, 2024 before 9:00 AM (Trend up to Friday close)
Index | Weekly Trend | Daily Trend |
DJIA | Neutral - Sideways after breakout from a 1-2-3 pattern | |
Nasdaq | Bearish - Bearish Engulfing @ 2T | |
Nifty | Bullish - Strong Uptrend at ATH | Bullish - Strong Uptrend at ATH |
Banknifty | Neutral - Bearish Engulfing | |
Nifty IT | Bullish - Big Green Close above Resistance | |
Nifty Midcap 100 | Neutral - Sideways near ATH |
(Table 1.1 - Input Table for Long Term Trend)
Input Table 2 - Short Term Variables (STV) that impact the trade - Setup specific
Example - As on : 1st July, 2024 @ 10 AM (to be populated between 9:45 to 10 AM).
The identifiable setups on C1 is "Strong Green on C1 with Low below Support". The chart is provided below for your reference.
(Fig 1.1 - Strong Green on C1 with Low below Support - Bullish Setup 6 forms on C1 on Nifty Futures )
Now that the setup is identified , the following Input Table 2 is populated for the short term variables of trade selection. The first variable to be populated should be the setup strength. Only if it is tradable should the other variables be populated as we would ignore the setup if it is not tradable.
Similarly, the table is populated for setups forming on C4 and C5 in the designated windows before 1 PM and 2 PM respectively.
Date/ Candle | Setup | Setup Strength (WR + Pr/Lot) | Chart Pattern 1H | S&R | Setup for Sister Indices |
1 Jul, C1 | Strong Green with Low below Support - Bullish Setup 6 | 77% - Tradable | None - Vertical Rise | Horizontal S at 24110 from previous day | Banknifty - Double Bottom - Bullish Nifty IT - Big Green above R - Bullish MC 100 - Big Green breakout - Bullish All 3 Bullish- Very Strong |
1 Jul, C4 | No Setup | ||||
1 Jul, C5 | No Setup |
(Table 1.2 - Input Table for Setups and related Short Term Variables)
Now that the two input tables are populated, we can feed the values to the Trade Selection Tool and use the Scoring Rules to calculate an objective score for the tradable setup. This would lead us to the final decision of taking or leaving the trade.
Trade Selection Tool - It is a spreadsheet based table and has a section each for Long Term and Short Term variables. These sections are populated based on the recording from the input tables as above, in the following way:
Long Term Variables (LTV) from Table 1 -
For Bullish Trend : B (Buy)
For Bearish Trend : S (Sell)
For Sideways or Unclear : N (Neutral)
Index | Weekly Trend | Daily Trend | LTV Score |
US Indices | DJIA - Neutral Nasdaq - Bearish Overall - Sell | 1 S | |
Nifty | Bullish - Buy | Bullish - Buy | 2 B |
Sister Indices | Banknifty - Neutral Nifty IT - Bullish MC 100 - Neutral Overall - Buy | 1 B | |
Total LTV Score | 3 B, 1 S |
(Table 1.3 - Trade Selection Tool - Section for LTV )
Short Term Variables (STV) from Table 2 -
Strong Confirmation of Setup : 1 (Strong Confirmation of Setup)
Against the Setup : (-)1 (Against the Setup)
Neutral to the Setup or Unclear : 0 (Neutral to the setup or Unclear)
Short Term Variable | STV Score C1 | STV Score C4 | STV Score C5 |
Setup Strength | 1 | None | None |
Chart Pattern 1H | 0 | ||
S&R | 1 | ||
Setup on Sister Indices | 1 | ||
Total STV Score | 3 |
(Table 1.4 - Trade Selection Tool - Section for STV )
Once the scores are calculated as above, the trade is taken if it meets any of the two criteria below :
Criteria 1
LTV = Minimum 3 B
STV = Minimum of 3
Criteria 2
LTV = Minimum 2 B
STV = Minimum of 4
So in this example, the score for the setup for a long trade is:
LTV - 3 B
STV - 3
Since the score meets Criteria 1, the trade is taken.
Lets take another example from an earlier date, Tuesday, Oct 10, 2023. The identifiable setup that forms on C4 is Big Green above Resistance (figure below).
(Fig 1.2 - Big Green above Resistance - Bullish Setup 3 forms on C4 on Nifty Futures )
The LTV and STV sections of the Trade Selection Table are provided below :
Index | Long Term Trend as on 10th Oct, 2023 | LTV Score |
US Indices Daily Trend | Big Green above R - Bullish
| 1 B |
Nifty Daily Trend | Breakout above 1-2-3 - Bullish | 1 B |
Nifty Weekly Trend | Hammer at Support - Bullish | 1 B |
Sister Indices Daily Trend | Banknifty - Sideways Nifty IT - Mild Uptrend MC 100 - Sideways Over all Bullish | 1 B |
Total LTV Score | 4 B | |
Short Term Variable | Analysis for C4 on Oct 10, 2023 | STV Score |
Setup Strength | 81% - Tradable | 1 |
Chart Pattern 1H | Breakout above 1-2-3 pattern - Bullish | 1 |
S&R | No strong resistance nearby - Bullish | 1 |
Setup on Sister Indices | Banknifty - Big Green - Bullish Nifty IT - Sideways at 2T - Neutral MC 100 - Big Green - Bullish Overall Bullish | 1 |
Total LTV Score | 4 |
(Table 1.5 - Trade Selection Tool for Nifty Futures)
This is the maximum possible score for both LTV and STV. Hence the trade confirmation is very strong. The trade did not make much headway for the day and ended up as modestly profitable. However, the price did gap up the next day by about 80 points.
The next example is for Bearish Setup 3 - Big Red below Support that formed on the 12th of April, 2024. It looks good on the chart as it forms on a breakdown from a Double Top pattern but not tradable as per our strategy, because it lacks setup strength (Win Ratio <70%).
(Fig 1.3 - Big Red below Support - Bearish Setup 2 forms on C4 on Nifty Futures )
Though the setup worked in this example, our recommendation is to stay true to the trade selection rules and avoid such trades. Do not fall for the temptation to take every trade that looks good on the charts! That is the precise reason why we have a tool for trade selection to pick only the best trades with the least amount of risk. There will be plenty of good trades that fit our rules.
If adhered to diligently and religiously, trade selection will certainly become instrumental to your long term survival and profitability in the market.
With this, we have concluded our discussion on Trade Selection, the third pillar of our Trading System. Please click on "Next Post" to navigate to an Introduction to Trading Psychology, the fourth and last pillar of our Trading System.
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