Day-Trading 2.0 for small traders

Discussion in 'Trading' started by jjrvat, Jan 5, 2008.

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  1. jjrvat

    jjrvat

    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
     
  2. jjrvat

    jjrvat

    “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)

    [​IMG]

    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.


    [​IMG]

    jjrvat
     
  3. jjrvat

    jjrvat

    “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
     
  4. Icarus5

    Icarus5

    Good post.

    What are LT Rainbows exactly?

    I
     
  5. jjrvat

    jjrvat

    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

     
  6. Icarus5

    Icarus5

    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
     
  7. jjrvat

    jjrvat

    I,

    More than scalping in the direction of a trend is trading in the direction of the current wave... It seems kind of a vague "academic" difference but let my try to explain you in the next posts...

    a. The direction for the current time (“macro” direction)

    I read this somewhere else but if you can’t “see” the current “macro direction” in the first couple of minutes you see a chart you better turn off your computer and come back later.

    1. The importance of establishing the current time direction is not because you are going to trade its signals but because you want to know in which side you will have the best probabilities for a good trade.

    2. Therefore a scalper shouldn’t need to overanalyze it, or perfectly understand every single S/R and potential entry or exit in the “macro”. Common sense is the key.

    3. If you have experience you should be able to see the general direction at a glance of the price in a naked chart. Otherwise, simply use visual aids:

    a. The “spine”. In reality you just need a 240 WMA (changing color according to the slope is even better). It doesn’t mean that you only must look for shorts if the slope is going down, it means that in the CURRENT TIME you will have better probabilities if you go short. (even if the price is really close to the 240 WMA, the important issue is its slope)

    b. Plot Pivot Points (I really like PP). Again you are not going to trade PP and you don’t need to know PP by heart you just looking for factors that help you with your probability analysis. Two simple and easy guides.

    i. Look if the price is above or below its PP. If it’s above/below, only means that you would have better probabilities of going long/shorts.

    ii. Once you have done that look where the current price is in relation with this next Support pivot (S1, S2, S3) or Resistance pivot (R1,R2,R3). For example if the price crossed above PP and it hasn’t touch next R1, means that you will have A LOT of probabilities if you look for longs (as long as it hasn’t touched or breached).

    iii. A scalper is not interested in taking the whole move to the next pivot point, neither is trying to forecast when its going to happen. A scalper is only looking for the “macro” direction in the current time for increasing his probabilities of making a good round of scalps.

    c. Of course, the best case scenario (in terms of probabilities) is when the 240 WMA slope is up, price is above PP and it hasn’t touch the next pivot resistance level.

    4. Conclusion: Because of waves you know where not to place a trade (low probability trades) and because of the “macro direction” you know that you would have much better probabilities if you trade in its direction.

    jjrvat

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  8. jjrvat

    jjrvat

    b. The direction of the current move (“wave” direction)

    The macro direction is showing that you should look for shorts and u know that price moves in waves, therefore a scalper must establish which exactly the direction on the current move is (only the last few bars).

    1. With experience (“screen time”) a scalper should be able to recognize the direction of the current move just looking at price, or max using the Horizontal grid (Its amazing how good round numbers H lines work… i.e every 10 pips 1.3440, 13450, 13460, etc)

    2. Otherwise, you can always use visual aids:

    a. “The flame”. In reality you just need price. However, if you want to make the waves look clearer and smoother you just need a fast WMA (i.e 6) (changing color according to its slope will be even better).

    b. Look at the deep of the last wave.

    c. Basic Price Analysis. Look if the last wave low was lower than the previous, and the opposite with highs. Common sense, if they are making new lows you have more probabilities to trade shorts (or the opposite for longs)

    3. Look at today BP scalp again but this time with the 6 WMA. This analysis is still not complete because you need the last two factors: timing and momentum but nevertheless are still valid trades because the probabilities although not the best are in your favor….

    a. The “macro direction” was telling that you may have a high probability round of scalps if u trade shorts.(look previous chart)

    b. +/-9:12 a new wave starts (1st Blue Arrow). Notice how it coincide with the Middle S2.5 pivot point (Dash green line) and also is exactly match with the break of a round number 2.0450 but its going against our supposedly high probability direction.

    c. So you need to wait until the next wave (that you know is going to be in your direction)

    d.Because price moves in waves we know that we should try to get in as soon as we realize the formation of the next wave.

    e.+/- 9:15 the new wave starts the one you already know you are going to trade. Go Short 2.0464 1 contract only with a predefined TP of 6 ticks which is pretty “healthy” for scalping BP and a SL 1 tick above the previous high (2.0474). (1st Orange Arrow)

    f. +/- 9:16 …40 seconds later you target is hit. (2nd Orange Arrow)

    g. +/- 9:18 … 3 minutes after a new wave start (moving against your direction) (2nd Blue Arrow). Theoretically we should trade the next wave BUT because BASIC PRICE ANALISIS, the last low (the one we traded) was higher than the one before …. Meaning be careful ‘cause the probability of the next wave making a new low is lower.

    h. +/- 9:22. A new wave in your direction starts but you already know that previous low was higher than the one before but at this time u also know that the current high is higher than the one before … SO this a NO NO situation for me

    i. …but let’s say you are stubborn and blind and decide to take the scalp. Short at 2.0467 (3rd orange arrow) … few minutes after your 6 tick target is hit (4th orange arrow) … Done for the day 12 pips 20 minutes…

    4. Conclusion: When scalping, the order of analysis change everything. If you know how to recognize waves and where not to place trades and if you follow the “macro” direction and the current move direction even a mistake like the second scalp can turn out to be good. Why? Because you are trading high probability scenarios…

    jjrvat

    [​IMG]
     
  9. Joab

    Joab

    ALL FOREX TRADERS NEED TO UNDERSTAND THIS



    Your missing "the most important" piece to your puzzle.

    The forex market (Brokers charting platforms) are NOT real but manufactured, therefor you are basing patterns of human behavior on NOTHING but a computers algorithm... not reality.

    It's the equivalent of trying to understand love by having sex with a rubber doll.

    Your wasting your time !

    :cool:
     
  10. jjrvat

    jjrvat

    Joab,

    1. I do agree with you and thats why I only trade Futures (The examples above are FX futures and I used only for explicative purposes... it also works for stocks).

    2. My central point is not the exact timeframe and instrument you should trade but that any SMALL DAY-TRADER should understand basic price analysis before anything else ...

    jjrvat
     
    #10     Jan 5, 2008
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