Chapter 02 · Designing a trading method
Entry, exit, and the thing you will not do
Entries get the attention because they feel like action. Exits and refusals are where the account is actually shaped. This chapter writes all three for the plain method from the previous chapter, in a form you can tick.
An entry is a conjunction
In the example, two facts must both be true: a weekly close above the 30-week average, and three years of positive operating cash flow. One of them is not a hint to start watching. It is a no. Conjunctions feel pedantic until you notice that every bad trade you remember was missing one of the conditions and taken anyway because the other condition was exciting. Write the conditions as checkboxes. A checkbox that is blank is a trade that does not exist yet.
Two exits, so a winner has a job as well
The wrong-exit is 8% below the entry on a weekly close. It is allowed to be boring. Its job is to cap the rupee loss you already sized. The right-exit is a weekly close back under the 30-week average. Its job is to say that the trend assumption, which was part of the entry, is no longer true. If you delete the right-exit, you have a method that can hold a stock from a peak all the way back to the entry and then to the stop, and you will call this patience. It is an unspecified hold. If you want a longer hold, write a longer rule. Do not leave the winner to your mood on the day it stops feeling like a winner.
The refusal list
The thing you will not do is part of the method. For this example the list is short. No intraday trades. No adding to a position that is below the entry. No replacing a stopped-out share with the same share in the same week. No tips acted on the day they arrive. No use of futures to ‘express the same view more efficiently’, because the size rule was written in delivery shares and a future would sneak leverage past it. A refusal list is how a method stays the method when a new product is advertised.
Tick the week
| Check | Yes or no | If no |
|---|---|---|
| Weekly close above the 30-week average? | Required | No order. |
| Three years of positive operating cash flow, from the report, not from a summary site you half remember? | Required | No order. |
| Rupee loss to the 8% exit, at this quantity, within one month of surplus? | Required | Reduce the quantity. Do not widen the exit. |
| Any item on the refusal list true? | Must be no | No order, even if the three checks above passed. |
What to remember
- An entry with two conditions is not ‘almost on’ when one is missing.
- Write the exit for being wrong and the exit for the idea having played out. They are different facts.
- Widening the exit to keep the quantity is a size cheat.
- A refusal list is how leverage and tips stay outside a method that was not built for them.
- Tick the list before the order ticket, not after the fill.