Averaging into trends using pivots

Discussion in 'Risk Management' started by TraderZz, Jan 17, 2011.

  1. The least probable scenario in a strong established trend is full reversal. I don't think about tops and bottoms, I take what the market is willing to give me, whatever that may be.

    Take the current news about Apple's CEO unexpected or expected leave of absence due to health issues. Maybe it's serious maybe it's not, but one thing is for sure, expect to see countless top calls about the end of the world, and before you know it, market is back to making new highs. Why ? Because that's how the odd works, when the exception occurs take what the market gave you, a win, a loss, a massive win, hopefully your trading never allows a massive loss.

    NAD
     
    #11     Jan 17, 2011
  2. Interesting use of Pivots...I prefer to trade with the trend as it gives a directional bias to trade with...else I am Long or I am Short...never thought of using pivots in that sense...

    ES


     
    #12     Jan 17, 2011
  3. Attached is a suggested method for adding with trend

    You never add unless your position continues to move in your direction, therefore after your first entry, you are never at risk for a loss. You will get many early break even and small wins, but the occasional run will more than make up for it. (so I am told)
     
    #13     Jan 17, 2011
  4. Interesting... so the pivot zones in your attachment act as opportunities to add units AND to update the SL.

    ES

     
    #14     Jan 17, 2011
  5. That is correct. A trendline break does not necessarily dictate exiting a position, as if the trend is valid there is a strong liklehood of a double bottom with the trend to develop. However, by also honoring the trendline, you avoid being faked out by reversal patterns on a smaller fractal. fwiw.
     
    #15     Jan 17, 2011
  6. NoDoji

    NoDoji

    Bighog pounded me over the head with "always expect continuation" for over a year, and I didn't even have a clue about trend-following because I was strictly counter-trend. It was as if he were speaking a foreign language to me. I didn't understand breakouts and the psychology behind them, nor could I figure out why people would buy when price was so high or sell when price was so low. I pretty much thought a breakout was a measure of how many insane people had just entered a position.

    In a given time frame, a trend is defined as a series of higher lows/higher highs or lower highs/lower lows. A trend in one time frame can be a counter-trend pullback or a move within a range in a larger time frame, so it's important to define a trend in the time frame you're trading, though it can be useful to know levels on larger time frames to help with targeting profits.

    The first higher low/higher high that occurs following a significant move (3 or more pushes) down is a possible reversal signal, though if the range of that reversal is narrow and volume remains subdued, it can be nothing more than the start of a channel/flag formation that will set up a continuation breakout for a measured move down. (Normally channels/flags that result in continuation remain within the range of the last trending push, so as long as the previous pivot high isn't breached, expect continuation). Vice versa for uptrends.

    The second higher low/higher high is usually considered a confirmed reversal and attracts buyers who define this as a 1-2-3 or A-B-C reversal (I think that's the term, correct me if I'm wrong).

    So, in a given time frame, the common definition of a trend is higher lows/higher highs or lower highs/lower lows. The 20-period moving average (which is a mobile S/R indicator in a trend) will be rising or falling to reflect the upward or downward price movement, and in most cases the deepest pullbacks in the trend find support or resistance near the 20-period MA. In other words, if price is trending up and pulls back below the 20-period MA and then closes below it, that's a warning sign that the trend may reverse or at least stall for a while.

    A trend can be very strong (pullbacks don't even break a previous price bar's high or low before price continues in the direction of the trend); strong (pullbacks break the high/low of one or more previous bars, but resume in the direction of the trend without touching the 20-period MA); or gradual (pullbacks to/through the 20-period MA, and new highs/lows being rather shallow).

    The gradual trends are the ones that try our trend-following souls. The deep pullbacks look like reversals and it feels "wrong" to enter the trend there, breakout plays usually result in break-even stop outs, and by the end of it all, you're scratching your head and thinking, "If I'd simply left on my initial position, stop and target, I'd be up so much right now!"

    A fellow trader PM'd me last night about a 6E setup. He was looking to go long if price broke the resistance level of a narrow range consolidation on low volume. The move into the range was 3 pushes down, so playing a 1-2-3 type reversal was not a bad idea. However, the first rule of trend-following is to expect continuation. You want to be prepared to sell a break through the previous pivot low before the consolidation, because the chance of a measured move down is high following consolidation.

    5-min chart at 9:35pm ET, 6E pivots off a new low at 1.3326 (3rd push down), eventually establishes resistance at a lower high (1.3340), pulls back and pivots off a higher low of 1.3328. The 1-2-3 reversal traders (such as the one who PM'd me) are now looking to go long above 1.3340. The trend followers are looking to short (or add to their existing short) below 1.3326. The price action traders with no bias have bracketed their orders outside the range in both directions.

    During the 12:15am ET bar, price breaks 1.3326, and the shorts can place their stop loss somewhere between 1.3335 (previous R) and 1.3341 (high of range).

    Since the move from Sunday's opening high through the pivot low leading into consolidation was 52 ticks, your profit target for the next push down would be 1.3288, which is 52 ticks below the consolidation range high of 1.3340, because measured moves are common out of flags/consolidation ranges. Price found support @ 1.3284.

    Scaling trend-followers would likely take off part of their position around 1.3288 and then recharge their position on a pullback that left behind a lower high as long as previous support (1.3322 pivot low at 12:15pm ET) held as resistance (which it did).

    You may think that I just picked a perfect setup after the fact. However, last Sunday I posted a live trade CL (crude oil) call with entry, stop and target in CL Redux based on a trend following measured move setup and achieved profit target just a few ticks from the pivot high of the move.

    The reason this stuff works is because traders (and trading bots) are programmed to trade these setups. Self-fulfilling prophecies.

    And if they fail, that's what stops are for :cool:
     
    #16     Jan 17, 2011
    Datum likes this.
  7. Nice post Nodoj. I would like to add an observation if I may regarding the 20 ema. Depending on the size of the bars being added and dropped from the ema calculation a perfect reversal or continuation "setup" may occur on a 15, 20, 30 50, etc.. ema. An ema that seems to be working on a given timeframe/volume chart is just a temporary anomaly. Why? Because that timeframe is always morphing either toward or away from the next fractal, which is honoring "setups" on a different ema. I'm afraid I did not express that very well, but I think you know what I mean. fwiw.
     
    #17     Jan 17, 2011
  8. NoDoji

    NoDoji

    Yes, I understand that all too well from many incidences of buying high ticks and selling low ticks and scratching my head as to why there was absolutely no follow through on the move whatsoever.

    Before I trade each morning, I note S/R pivots in time frames larger than mine, specifically the 60-min and 1-day levels. CL found support Friday @ 90.10, and barely bounced. I took a quick look at the daily chart and saw that 90.10 was right on the rising 20-day MA. If it broke on the retest, decent continuation move down was likely; if it found support at, just below, or just above it, decent move up was likely as swing longs would initiate or add to positions. My 90.15 short was scratched when 90.10 held up for a double bottom following the strong downtrend on the 5-min chart, and I was long 90.19. My long was an early reversal counter-trend trade in the 5-min time frame, but a perfect with-trend pullback entry on the daily.
     
    #18     Jan 17, 2011
  9. bone

    bone ET Sponsor

    I really like the idea of adding to successful pivot (S/R) levels and getting out for your profit target or stop/loss on pivot (S/R) failure.

    It accomplished several things:

    1. keeps you on the correct side of the trend,

    2. dispenses with all sorts of timing strategies like wave counts, oscillators, and the like.

    3. provides stop/loss and profit targets on-the-fly.

    I vote "thumbs-up" !
     
    #19     Jan 17, 2011
  10. Thanks for all the responses.

    Yes, BMWHendrix, I do believe that is what Anek has suggested as a method of adding with the trend :).

    The plus side to adding like crazy when you hop on a trend is that you can theoretically start real small (.25%) and if you get a few adds on a trend at the end of it you can have a major position and start to peal at the main pivot trailig with a break of the prior high/low.

    This will mean your PNL might look lik this:

    -.25%
    -.25%
    -.25%
    -.25%
    -.25%
    -.25%
    +1%
    -.25%
    -.25%
    -.25%
    +10%

    You would be taking advantage of those trends that stop out the countertrend guys, and those trends do happen more often than losing traders tend to think they do, but they don't happen every time...

    Of course, you may have to exercise discretion in how you do this as otherwise you will have lots of small losses which could lead to death by papercuts if you miss the one trend that allows for big profits.

    This would be easier if trading larger timeframes or multiple instruments.

    I don't have any original ideas for now, just watching this all unfold. If anyone has anything else to add, please feel free.
     
    #20     Jan 18, 2011