Welcome to Auction Profile, a dynamic interpretation of Market Profile.
This series of occasional blog posts will elaborate on aspects of the Auction Profile software and method. In this first post, I would like to focus on the primary question that readers will have: will Auction Profile improve my trading?
In the past year, I have received a couple of memorable spam emails from trading system vendors. The first promised that using its system could turn a $10,000 account into $1.4 million in 12 months with only 10 minutes a day’s effort. Not a bad result. The second claimed that you could make 2-4% a day with a maximum risk of $100. That’s not bad either. That would produce an uncompounded profit of 400-800% over the course of a year. If you are the type of person who can take these claims seriously, I can confidently say that Auction Profile is not for you. I’m not going to make ridiculous claims that Auction Profile is the Holy Grail. It isn’t. The Holy Grail doesn’t exist. I believe that the principles underlying Auction Profile are valid. I believe that it can be used as the basis of a successful trading plan. I do not promise that you will be successful using Auction Profile though.
From many years of sometimes painful experience, I have come to realize that successful trading requires four things:
First, you must have a trading method that has a positive expectancy. This is obviously a sine qua non, but if you are struggling to make consistent profits, it’s probable that whatever method you employ does not work. Your method should be objective and repeatable with as few moving parts as possible. If your method cannot specify entries and exits precisely and unambiguously then you do not have a system and will not be able to know whether your lack of consistent profits is due to your trading method or your faulty interpretation of it.
Second, you must understand the theory of market action that is the basis of your method and believe it wholeheartedly. If you don’t have complete confidence in your trading setups then you will be prone to letting your emotions dictate your actions. You cannot be consistent if your emotional state constantly interferes with the execution of your trading plan.
Third, you do have a trading plan, right? How are you to know whether your trading method works or not if you don’t have a written plan that details what to do in all circumstances? Your trading plan should include the criteria necessary for trade entry, where to place stops, where to take profits, when to change stops and/or targets and your risk management parameters. All of these elements should be unambiguous and leave no room for discretion, especially in the details of trade management. I know from experience that as soon as I enter a trade, I lose 50 IQ points, my brain freezes and I start to second-guess the wisdom of the trade. I give myself no room to maneuver during a trade because I know that I am likely to do the wrong thing if I allow my emotions to override my trade management rules.
Finally, you need the discipline to follow your trading plan. In many ways, the most important element that either helps or hinders disciplined trading is the second point above. If you are confident in your method (even if it doesn’t work), it is much easier to adhere to your trading plan.
I know that I’m not a good trader. After exhaustive experimentation, I’ve satisfied myself that this is the case. This is why I wrote the Auction Profile software. I know (or rather, I believe I know) that it’s a valid methodology, but I need to allow myself no discretion at all after I enter a trade. I can only screw things up when I allow myself the ability to make decisions on the fly. Auction Profile software provides a small number of clear, unambiguous, useful, reference prices that make it easy to construct a trading plan that can be followed to the letter. I can’t give you confidence in the method, regardless of what I say. You must take the time and effort to prove it to yourself. You will know when you trust your setups.
I knew I was becoming confident when I no longer felt the need to intervene during a trade. Now, I still get anxious in a trade but it’s more like the feeling of watching your favorite football team play: you want them to win and are sad when they lose – but you don’t feel the urge to get out onto the pitch to help them out. In other words, after I have made the decision to enter a trade and got filled, I am a spectator. The trade will either hit my stop or my target. I hope it wins but I don’t blame myself if it doesn’t, just as I don’t blame myself when England gets knocked out of the World Cup on penalties as usual.
A good trade is one that is executed exactly according to written rules. Forget about whether the trade wins or loses and trust that your method will result in profits if properly applied over a large number of trades. Congratulate yourself when you execute a trade according to plan, regardless of the result. Over time, this will become normal. Your P&L will be green.
And, which is more, you’ll be a trader, my son.