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Old Jan 5th, 2008, 07:35 AM   #1
jjrvat
 
 
Join Date: Oct 2006
Posts: 359
A couple of weeks ago I started a thread (“going back to the basics”) but I am moving it to elitetrader ‘cause I think a broader audience can enrich its content. Feel free to post any NON COMMERCIAL HONEST suggestions, ideas, questions or comments.

The beginning …

“In the last few months its amazing how many posts I read of struggling scalpers trying “to learn” how to use LT rainbow (is a scalping method of multiple MA). All or at least most of them share in my opinion one thing in common that it has nothing to do with the LT method: they don’t understand the basics of trading or even if they do, they underestimate its importance.

Maybe the following posts are because I used to have these problems when I start trading (maybe I still have some?) or maybe because I need to socially reaffirm my beliefs. Whatever the case, for me the following concepts are always useful (I hope also for someone else), especially for regaining objectivity when I start losing perspective after a couple of bad trading days or after a round of outstanding trading weeks …

So let me start with 3 basic key concepts Direction, Timing and Momentum.


jjrvat
 
Old Jan 5th, 2008, 07:38 AM   #2
jjrvat
 
 
Join Date: Oct 2006
Posts: 359
“Trading is just a probability game based on pattern recognition” (taken from italianfx email)

If every potential trade is a probability game, the job for a trader/scalper is not forecast the future but to minimize risk using every available tool to find the best available scenario.

1. The importance of order in the analysis. In mathematics the order of the factors doesnt changes the result (5 x 8 = 40 and 8 x 5 = 40). However, when trading the order of analysis change everything.

a. If you only focus in how to pull the trigger (“timing” i.e LT rainbow, Stoch Crossover, MA Crosses, CCI, etc ,etc ,etc ) you can have some results especially in trendy markets, but you are doom to fail in the long run.
b. If you only focus in “direction” you will have 95% hit rate but only in your head ‘cause u will end up getting stopped out every single time, full of loses because whipsaws or caught with million doubts every time a S/R or trendline is touch or broken.

But before analysing DIRECTION, TIMING and MOMENTUM...

2. Price moves in Waves. Regardless of the instrument and timeframe and despite of the market direction or its condition (in a trend or in a range) markets always move in waves. That’s why the Elliott Wave Theory and its followers. But we scalpers are not interested in counting waves or forecasting the next possible move but in minimizing the probabilities of a bad trade.

a.What we don’t know about waves:
i.The exact beginning or end of a wave
ii.The potential height of the next wave

b.What we know:
i. Where we have less probabilities for a successful trade regardless of the direction or condition of the market

c. Have u ever wonder why you end up trading the death lows or highs in a trend (in Rainbow terms even if is a clear trend and the spine is align and the flame just broke the last H line…) … Your analysis might be right, the direction, condition and timing might be good but you are playing a low probability trade because you are forecasting that next wave is going to be a lot deeper than the previous one when statistically this is not true.

3. The first factor for a scalper is to understand in which part of a wave is the market. Not using a statistical method but using common sense (sadly the least common of the senses). Before you analyze trend S/R lines, Direction, Timing, Momentum and despite the drawdowns, etc a trader should ask himself in which part of the wave is the market. The only rule of thumb is the later you enter a new wave the less probabilities you will have to be successful. (this a BP example in different timeframes smoothed with a LSMA for explicative purpouses)



4. Look at the EUR/USD daily forex example below. If we have just traded without any further analysis the beginning of a new green wave we would have make millions. On the contrary if you have waited until price breaks resistance you still will have make some pips (because is a big trend) but you are not playing high probability trades… I can post 1 millions of example like this in any timeframe but my point is not that you should focus only on waves but that you, FIRST have to recognize where not to place a trade even if it follow the direction of the market.




jjrvat
 
Old Jan 5th, 2008, 07:45 AM   #3
jjrvat
 
 
Join Date: Oct 2006
Posts: 359
“Trading is just a probability game based on pattern recognition”

Forgetting waves in the analysis definitively reduce the probability of good trades but is the analysis of direction where everything gets messed up.

1. Markets are always going in a direction even if your timeframe is showing choppy action. The problem arises because the analysis of direction MUST be consistent with what, where and when are u trading. I used to make the mistake of ploting trendlines in a 5 sec chart that corresponded to 5 min S/R level (without knowing), there are even people that use hourly and even daily trendlines for scalping 5 secs charts. And you wonder why you aren’t consistent!!!

2. If you are in this forum is because +/- you consider yourself a scalper. I do not use the traditional LT rainbow for scalping, nevertheless I strongly adhere to LT principles which are usually also forgotten in the analysis in favor of the “technicalities” of the rainbow. A quick reminder of 3 of them:

a. Identify the time and you are done for the day within 30-60min. meaning stop trying to catch every single move during a day, doing that will reduce a lot the probabilities of placing good trades. In terms of direction: we only need to find the direction of these 30 or 60 minutes no more!!!

b. Identify the direction of the current move you see on the screen. For me, that’s the most important thing you will ever learn in scalping and sadly was the last thing I paid attention to.

3. If “Trading is just a probability game based on pattern recognition” and you are +/-scalping (= meaning an average of 1 to 6 pips MAX per trade) and not any other type of trading, a trader should recognize two very important but different concepts:

a. The direction for the current time (“macro” direction) and;
b. The direction of the current move (“wave” direction)


I ‘ll continue later

jjrvat
 
Old Jan 5th, 2008, 08:58 AM   #4
Icarus5
 
 
Join Date: Dec 2007
Location: Atlanta, GA
Posts: 194
Good post.

What are LT Rainbows exactly?

I
 
Old Jan 5th, 2008, 09:23 AM   #5
jjrvat
 
 
Join Date: Oct 2006
Posts: 359
Icarus5,

According to his author is a method for scalping very fast timeframes. In general you plot many Weighted Moving Averages (10,20,30 to 240 WMA) and you use Horizontal and Vertical Grids to trade... However, for me it is just a visual aid (I dont use it anymore...).

If you are intereseted, this is his original thread
http://www.forexfactory.com/showthread.php?t=52515

Because of its popularity now he has his own forum:
http://www.cyrox.com/forum

jjrvat

Quote:
Quote from Icarus5:

Good post.

What are LT Rainbows exactly?

I
 
Old Jan 5th, 2008, 09:33 AM   #6
Icarus5
 
 
Join Date: Dec 2007
Location: Atlanta, GA
Posts: 194
Very nice, thank you.
**
Another question (just to make sure I understand were you are coming from).

Do you advocate scalping in the direction of a "trend"?

For intra-day moves (mainly financial indice) there is a lot of back-and-forth in price action. And while trends do develop, there is also a substantial amount of money that can be made from, say, having a dual confirmation type of technique and catching the ebb-and-flow of the waves.

I
 
 
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