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As a discretionary trader I highly believe in the edge of beeing able to read context. After all, I think thats the main advantage we have over algorithmic trading strategies. However, for this exercise this also provides some challenges, mainly how do I trade an approach based on market context mechanically? After some thinking I decided that I would trade like this (for this exercise):

Pre-market I would mark up my charts with important supply and demand levels, where I expect a reaction. Once trading at one of those levels, I would use a mechanical entry trigger to get into the trade. I dont expect getting into trades at each level but only where I get an entry trigger.

Trading Exercise

After entering the trade, my trade management is also completely mechanical with fixed targets and stops.
I trade 3 markets at the same time which are the ES (e-mini S&P500), NQ (Nasdaq100) and the YM (mini-DOW). In the ES i use a fixed 2pts target and 2 pts stop. In the NQ its 4pts target and stop and in the YM its 15pts for both target and stop loss.
I am aware of the fact that my trade management is sub par as commissions will cause my avg. winner to be slightly smaller then my avg. loser, however for the purpose of this exercise I dont care. I also have the strong feeling that my winners would have much more potential but I havent quantified that yet. My backtesting which I did on a bar by bar basis, shows a positive expectancy, one that almost looks too good to be honest but the human mind can be evil. I realize that subconciusly I could have cheated (f.e. seeing a good setup but it was a tick away from the supply/demand area and I still took the trade in my testing, or news events like NFP, FOMC caused some troubles etc.) because my mind is so focused on having an edge, that this could lead to cheating myself without counciously knowing it.
However, all of that doesnt matter too much for that exercise, as I wont be trading like that in the long run anyway. The only part I will keep are my S/D levels to do business at, which is the basis of this approach also and the goal for this trading exercise is to learn to execute my plan without any errors.


Here is a screenshot of my backtesting. Its based on trading 3 markets with 2 contracts each, but I will only trade 1 contract. Although the statistics look good, there is no commission and slippage included which could have drastic effects on the performance. While the expectancy per contract at USD 31.60 is certainly high enough to cover commissions, slippage could have a pretty bad effect. For example, I could enter 2-3 ticks worse because of slippage but my target in the YM would still be 15 pts and while my testing could have potentially resulted in a winning trade, because of slippage this might be a loser.
Never-the-less, Im still confident of trading like this for the limited sample size of 25 trades. Like I mentioned before, if all 25 trades would be losers it would cost me 2500USD, a risk I have fully accepted.

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