Preview
Discretionary trading offers traders the flexibility to make informed decisions based on market conditions rather than rigid rules. Our trading system applies this approach specifically to the Micro E-mini S&P 500 (MES), one of the most accessible futures instruments available.
The strategy is built around two fundamental pillars: variable-size range bars and price action. Range bars, which remain consistent within a single trading session but adapt across days, provide clarity in volatile markets. Paired with price action, this system leverages naturally occurring market swings to capitalize on sudden directional shifts—always aligned with the primary trend.
Notably, this strategy avoids reliance on any indicators, whether free or premium. Instead, it prioritizes pure price movement and simplicity. While backtesting was conducted using a single contract to ensure accurate validation (accounting for all commission costs), traders can easily adjust the number of contracts or tweak risk-reward management to fit their individual needs. This flexibility is one of the key advantages of discretionary trading, allowing such modifications to be implemented with minimal effort.
For subscribers, we delve deeper into the optimized take profit, stop loss levels and refined entry techniques designed to enhance your trading edge. The resulting performance can be seen at the following video: Youtube
Range Bars Setting
To create the range bars essential to our strategy, we utilize the Average True Range (ATR) indicator applied to chart with 30-minute candles of the MES instrument. The ATR is set to a value of 225, a configuration carefully chosen to capture recent and realistic volatility while avoiding sudden spikes caused by irregular factors such as holidays or unusually volatile days. This approach ensures our range bars are based on stable and consistent market behavior.
Before the start of each Regular Trading Hours (RTH) session, we shift our focus to the end of the previous trading day. Here, we observe the ATR’s output, which determines the exact number of ticks that will compose our range bars for the upcoming session. This preparation allows the system to adapt seamlessly to evolving market conditions, ensuring our strategy remains precise and effective throughout the trading day.
Trend Identification
Having completed the basic step of determining range bars, we can delve into the basic logic of the trading system, starting with identifying the primary trend. This is achieved by analyzing the natural fluctuations created by market fluctuations and identifying precise highs and lows.
The primary trend is defined as follows:
- Uptrend: The trend remains upward until a maximum is formed with a value below the reference minimum;
- Downtrend: The trend remains downward until a minimum is formed with a value greater than the reference maximum.
This simple and effective method provides a clear framework for identifying the direction of the trend without relying on external indicators. For clarity, refer to the accompanying image above, where the primary trend is highlighted by simple green lines. Specifically the trend changes from upward to downward when the second green line is formed. It changes direction again at the third green line, marking the beginning of another upward trend.
From then on, the primary trend remains upward.
This approach ensures that traders remain aligned with the market’s natural rhythm, creating a solid basis for executing trades in harmony with the dominant trend.
Point of Entry
As previously mentioned, this discretionary trading system does not rely on indicators. Instead, it fully leverages the market’s raw data by utilizing only the Open, High, Low, and Close (OHLC) values. While multiple entry opportunities arise throughout the trading day, they are effectively filtered through the identification of the primary trend (as explained in the previous section). This filtering process enhances the system’s overall expectancy and prevents unnecessary trades within congested market zones.
In the attached image, two long trades are marked by yellow lines, each starting from the entry point and extending to the Maximum Favorable Excursion (MFE) of the respective trade. Let’s break down these two entry examples in more detail:
- Trade #1: The entry occurs because the close (C) of bar -2 does not touch the close (C) of bar 0, but our bar is positive signaling the termination of a clear downward movement. However, this trade ends with a stop-loss exit.
- Trade #2: In this case, the open (O) of bar -3 does not touch the high (H) of bar -1, indicating another downward movement that is interrupted by bar 0. In this case, entry is executed using a buy order (buy stop) placed at the low (L) of bar -2.
This systematic approach ensures that trades align with market structure while maintaining a simple yet effective entry methodology based purely on price action.
Trading System Statistics
The statistics of any trading system are influenced by various factors, some of which are within the trader’s control—money management being one of the most crucial. In managing the operations of this discretionary trading system, we utilize a combination of take profit levels, stop loss placement, and manual trade exits to maximize efficiency and adaptability.
Here’s how trade management is structured:
- Take Profit: We employ two take profit targets:
- A conservative take profit set at 6 points.
- An aggressive take profit set at 12.50 points.
- Stop Loss: Placed just above/below the most recent swing high or low, specifically at the level where the market last reversed.
- Manual Exit: If a counter move develops, identified through OHLC analysis, the position is closed early to minimize potential losses or protect gains.
By following these rules, we maintain a structured yet flexible approach that aligns with market conditions while preserving the discretionary nature of the system. The performance results obtained using these parameters are presented in the attached statistics.
Best regards,
TradingQuant
