• Categorize

  • If price action is consolidating

    • Expect it to stay where it has been rather than going to new areas

    • Trade mean reversion

      • Following it back and forth in the consolidation zone

      • Shorting at the top, going long at the bottom

        • The high probability loss would be to try and time breaks to the upside or downside 

  • If price action is directional

    • Expect it to continue moving in that direction until proven otherwise

    • The high probability loss would be to go against it

  • If price action can’t be categorized because it’s too chaotic

    • Don’t trade

• Adapt

  • Focus on when conditions change

    • If directions starts consolidating, don’t forget to switch the way you trade

    • If consolidation turns to direction, don’t go against the direction expecting it to come back

  • Timeframe and ATR (set ATR’s period to 1)

    • Adjust the chart’s timeframe to get your desired trading conditions

      • Lower the timeframes in high volatility

      • High timeframes in low volatility

    • Is ATR itself volatile? Is it all over the place?

      • Be very cautious, because inconsistent volatility makes it hard to categorize price action

    • Choose the right bracket size (your target and stop loss)

      • If you’re trading a 1:1 risk:reward ratio, make sure the target and stop loss looks good based on the current structure of the recent candles

  • Know your strengths and weaknesses

    • Are you good at this price action?

      • Go for it

    • Are you bad at this price action?

      • Sit it out

      • Have pictures of bad and good price action on your reminder document so that you quickly determine whether you should trade or not

        • This can only be determined after many trading sessions, and setting rules like this too early could ruin any chance of success. Don’t put yourself in a box too early.

• Trade

  • It’s either consolidating, directional, or too chaotic to trade

  • Only get stopped out due to a change in structure and/or price action category

  • After the trade is over, was it a:

    • Good trade that won = nice job

    • Good trade that lost = nice job

    • Bad trade that won = bad job

    • Bad trade that lost = bad job

Core Concept

• Categorical trading is a strategy based on classifying price action into two main categories: consolidation and direction

• The approach works across any timeframe since it adapts to current price action and candle sizes

• The strategy was developed through experimentation without outside influence

Key Principles: Price Action Categories:

• Consolidation: Price is more likely to stay where it has already been

• Direction: Price is more likely to move to new areas

• All price action exists on a spectrum between these extremes

Trading Rules: For Consolidation:

• Profit targets placed inside the range

• Stop losses placed outside the range

• Avoid going long at tops and short at bottoms

• Trade within established ranges

Trading Rules: For Direction:

• Target new areas

• Stop losses placed inside the range

• Trade with the momentum

• Avoid trading against the trend

Implementation Details:

• Uses ATR (Average True Range) to quantify volatility

• Recommends starting with 1:1 risk-reward ratio

• Suggests adjusting timeframes to achieve desired volatility conditions

• Recommends bracket sizes of roughly half the recent candle sizes

Trade Management:

• Trades should only fail if conditions change (consolidation to direction or vice versa)

• Avoid trading when price action is too chaotic or undefined

• Don't force trades when conditions aren't ideal

• Adapt bracket sizes to match current market conditions

Personal Adaptation:

• Traders should identify which conditions they trade best in

• Not necessary to trade all conditions - can specialize in preferred setups

• Different traders may excel in different market conditions

• Important to develop personalized implementation of the basic concepts

Risk Management:

• Establish appropriate max daily loss

• Avoid trading during high-impact news events

• Don't force trades just to be active

• Accept that some days may have no tradeable setups

Learning Process:

• Record trading sessions for review

• Keep detailed trading journal

• Document mistakes and lessons learned

• Create and maintain a reminder document

• Regular review of trading rules and performance

Important Tools:

• Screen recording software (like OBS)

• Trading journal

• Reminder document with rules and setups to avoid

• ATR indicator

• Price interval markers

Psychological Aspects:

• Discipline in following rules is crucial

• Avoid FOMO (Fear Of Missing Out)

• Accept that not every day needs trades

• Focus on long-term results rather than individual trades

Common Mistakes to Avoid:

• Trading without clear category identification

• Forcing trades in unclear conditions

• Ignoring documented rules and reminders

• Taking trades at daily highs/lows

• Trading after high volatility candles

• Moving profit targets and stops during trades

Development Process:

• Requires significant time for experimentation

• Need representative data before making conclusions

• Should test different timeframes and conditions

• Must document and analyze results

Practical Application:

• Can be used on any market (author prefers futures)

• Works across different timeframes

• Requires constant adaptation to changing conditions