Interview with Frank Dilernia

"Trading is about pattern recognition and understanding the probabilities behind each pattern in the market, however most traders think patterns are ‘bar-chart’ formations that appear within the daily timeframe."

Technical and historical, and it depends of which trading style you’re talking about.

For short-term derivatives, it’s technically based on pattern recognition techniques, and if longer term it’s historical. Look back over the years and it’s safe to say that historically index markets grow around 12% per year, if it’s historically growing at that rate each year, then it just a matter of buying or accumulating stocks when year each rotates back down. I suppose I can call it historical-fundamental analysis.

Q. Do you have written trading plan detailing your approach? How would you describe it (e.g. long/short, detailed/broad, complete/work in progress)?

I have a complete trading model, methodology and principles that I apply everyday, whether trading futures or stocks. I’m the developer of a Statistical Time and Price Model that clearly defines Market Dynamics, Market cycles and most importantly Market Risk based on the statistical correlation of Price over TIME.

Time is just a generic term for Week, month, Quarter & Year

Q. On a scale of 1 (simple) – 10 (complex), how would you rate your trading approach(es)? Do you have any comments on the simplicity or otherwise of them?

For medium-term to long term trading then the scale is 1-2 (very simple if you follow the rules). Trading Futures is complex (9), and trading futures is a complex game, that is why I Write the report and coach traders on the best possible trading strategies when day-trading futures by breaking up the day into statistical ranges using the ATR of the market. By the end of the month is gets easier (5)

Trading is about pattern recognition and understanding the probabilities behind each pattern in the market, however most traders think patterns are ‘bar-chart’ formations that appear within the daily timeframe. I don’t look or wait for those patterns, I use the ATR of the market and break the day in three portions and look for precise swing points in the market.

These points are important because they become money patterns; every point into the market has to move away for the swing point the same statistical range. That is why when trading the SPI you’ll see continuous movements based on 22- 44 & 86-point moves in the market.

Q. Many traders acknowledge that having a trading plan is a key to success – it is essential. Yet, most people don’t know where to start to begin writing one, even though they understand the basics of trading. What would be your advice to someone stuck in this situation?

So many traders are trading but don’t have an idea about a plan or what the plan is for.

Is your plan based on retirement and a dividend stream? Or do you want to make trading you primary income?

If it’s the latter then Let’s talk about day-trading.

The starting point begins with how much money does the trader need to earn for trading to become the Primary income? Not how much they desire but how much they actually need. Once they work out the need the want comes later.

Secondly, the trader needs to trade markets that have enough range volatility to meet the income. How much is the trading range, and how much is each increment in dollars terms, and the spread of the bid:ask? The spread should ideally be 1:1

The quickest and easiest way is by looking at the Average daily range of the market, and then it would need to be at least double the size of the desired income. It’s not about picking tops or bottoms in the market, but only taking a chunk out of the range.

Thirdly, the trader needs to work on the system, if the system is operating around 70% success rate then the trader would only need around 150 days per year with 60 losing days to make a decent income. Keep in mind if you are a ‘trader’ you would want to be able to take 4 weeks annual holidays and other days off, otherwise you might as well work for some one else.

This gives you about 220 trading days per year.

Your trading system needs to be a minimum of 2:1 profit:loss, therefore for every trade the risk is less than half the potential profit.

The worse the system then the trading plan needs to be adjusted by holding the trade longer. The higher the success rate the quicker the trade can be exited because it has met the primary plan of income.

Exits need to be systematic and objective that means my exit plan always revolves around a money patterns i.e. if I’m trading two lots, then my exit plan need to be part of my initial goal of income. If my income plan is XX$ amount at a daily amount of XX then by exiting at this point this meets my income.

I always believe the amount of contracts need to be part of the part, trading 2 lots equals the goal of income, but a third contract is the one that runs into the close of the day. Two contracts meet income; third contract runs!

As you can see, the trading plan always starts with the primary goal, not the primary system. First work out the plan, and then plan the system to meet the goal. Once everything works out, then increase the position size so the standard of living is also increasing at the same time.

And spread your wings into long term investing. This is the only thing that is guarantee too make you money and increase your wealth.

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