-------- Excellent post The Rumpled One! IMHO, an understanding of these basic concepts and putting it into practice is truly the Holy Grail in trading. It is a recurring theme in many trading books and is explained over and over many times around but I think it can never be over emphasized as this is truly a game of probabilities and law of large numbers where risk management is key to survival. -"Good traders manage risk, Great traders maximize opportunity"
I would like to share my opinion on this. The potential to buy a new high (higher low) at this point was very high, because the price was making lower highs and a new low before - on a lower timeframe if you want. In my opinion, if you scalp for a smaller amount of cents, ticks, whatever, you want to get in earlier, that means very close to the potential support in this case, which had the potential for a good scalp with the bigger uptrend. Again, I don't talk about triggers here, this is my opinion from what I see on your chart - of course after the fact... These are my two cents...
I combined jjrvat's theory with my BuyZone. Taking the trade in the MACRO direction and WAVE direction through the Buy Zone yields PROFIT!
Interesting - how many points did you use on either side of the open for this? Did you leave it the same as for your JPY trading? Thanks Suss
The Buy Zone is 8 pips wide. Open +/- 4 pips. Enter the trade in the direction of the MA in Color indicator when it is inside the Buy Zone. 7 pip SL. I use my Range indicator to ride the trade for maximum profit.
Developing a price based trading plan (PBP) #4 Indicators #4 I finished my last post on indicators (http://www.elitetrader.com/vb/showthread.php?s=&threadid=113456&perpage=6&pagenumber=49) with the questions do you need to introduce indicators? What will be the cui bono?. Curiously the live chart I used (EUR/USD daily) has given a very good and relevant case on price analysis and whether or not indicators are useful (plus is a key example for the discussion on entries, exits and risk/reward ratio amitman was pointing out before⦠btw, Iâll use the SPY chart in the next posts) As a summary: macro direction was given by price and a basic S/R line, âwaveâ analysis was established using also price (for example 3 consecutive lows or highs) and the trigger was a ârandomâ line every 0.050. Since 2008 2 valid entries (the first 2 >300 ticks and so far >1000 ticks the 2nd one) and a third valid entry that trigger last week (3rd green arrow March 25 at 1.5649 = a close above the trigger line 1.5600 with everything aligned) which coincided with the supposedly top of the pair according to a thread here on ET. Since 2006 there have been 11 perfect valid trades without bending any rule in this PBP and 4 additional potential long profitable entries that missed the higher/low confirmation meaning they werenât valid according to this basic PBP. From the 11 perfect entries 10 were winners (all made at least +200 tick potential profit range and a couple of them more than 800 ticks) and 1 was a valid trade at the end but it âtriggeredâ the stop (-34 ticks) meaning it was 1 whipsaw in the system. Is this the Holy Grail ??? Not at all this is just a real case of a textbook example of a consistent trading plan with rigid price analysis. Itâs not easy to find and even more difficult to forecast an instrument that itâs going to have such a clear and obvious direction.(6 years uptrend!!!). In reality if you are a day trader or a small âscalperâ with very fast charts the concept of a trend is so feeble that using basic price tools for analysis may appear not valid because it can be plagued of small visual distortions. While determining a wave low retracement in a daily chart with support of S/R lines (that have worked for years) is almost âexactâ (Why? Because there are trillions of $$$ there, from mini forex traders to central banks so the implications of a whipsaw a âfewâ ticks below are immenseâ¦), establishing a âexactâ mini wave retracement in your 21 tick YMxx chart it can be as difficult as unrealistic is to turn $1000 in a million in one year of trading. There is when we start introducing indicators and thatâs when exactly the problems start. This basic price based system should have worked amazingly and almost without flaws with this instrument and in this timeframe. The entries are predefined and clear (there is not space for interpretation) and everything is consistent with price. The obvious and probably the only serious failure will appear when there is a change of macro direction but by that time it happens (we donât know when and we donât care, you trade what your see â¦) you already made a lot of money and if your exits are consistent you could have a small lose (if). For the sake of the argument I will introduce some indicators (they are going to be worthless according to the chart) for one particular issue that for me is very important to understand in a PBP: The tradeoff between indicators/efficiency and price analysis/consistency In this chart is a 144 WMA and 25 HMA Iâll continue later with the potential consequences of introducing this indicators. jjrvat
Developing a price based trading plan (PBP) Indicators #5 As long as indicators are used only as visual aids, they are not going to cause distortions (and there is not a trade off). In the case of the example: Direction Indicators (Macro direction) 144 WMA If instead of using fix S/R as a reference you introduce a âdynamicâ line like a 144 WMA (in the case of a daily chart) youâll have the same results. Look how the green dot line pointed at the same supports as the fix S line. How to use it?: Price above/ below âshowsâ at a glance where is the market going. What is the good of it?: In this particular case nothing special, the fix support line is so clear that the 144 WMA only show the same. But in general it avoids drawing macro S/R lines, its dynamic so it adjust to current circumstances. What are the potential shortcomings? None as long as you use it only as a visual aid for macro direction. Price Analysis Indicators (Wave analysis and current direction): 25 HMA Here is where the problem starts âcause the reasons behind why and how you use this indicator will have considerable influence in the outcome of your trading plan. How to use it?: Option 1: As a visual aid. Just to have a quick visual aid for waves and +/- to recognize where the market is in that particular moment (Current direction). Option 2: To establish wave Highs/Lows = your decision to take a trade will be based on this analysis. Change of âslopeâ green/red will define Wave Highs and Lows What is the good of it?: Option 1: You donât gain a lot but you can have nice quick visual reference of the current direction. Option 2: You may reduce whipsaws on sudden price spikes that can point to âfalseâ lows/highs especially in fast timeframes or less liquid instruments. (For an example http://www.elitetrader.com/vb/showthread.php?s=&threadid=113456&perpage=6&pagenumber=45) What are the potential shortcomings? Option 1: None as long as you use it only as a visual aid. Option 2: If you are not carful you can misinterpret price and take a trade based only on the indicator and not on price analysis + you may not take a valid trade because of the indicator. In the case of the example the second arrow wonât be a valid entry anymore because is a lower high (when on reality price made a higher high (H1=1.4918 < H2=1.4929) As you can see this is one of the tradeoffs I was talking about. You introduce an indicator to improve efficiency and you end up losing consistency. There are millions of cases that the opposite will happen; the indicator will get you in without exact confirmation of price HH/LL but the key issue here is to recognize that every time you introduce an indicator you will have to deal with this tradeoff. Moreover, itâs very important to recognize the exponential implications of this in your trading plan. This a daily chart where waves are naturally smoother but look at the potential implication of introducing a 25 HMA in a 8 tick chart where you can have 100 waves in 1 hour multiply that by the implications of 2 or 3 indicators you may decide to use, you may end up in a net of conflicting signals that will certainly be reflected in bad trading decisions. Indicators for triggers, exits and failures (Timing) 25 HMA as a trigger instead of the random line How to use it?: Either you can trade a close above/below the HMA as a trigger or you can wait for a conservative change of âslopeâ green/red for confirmation What is the good of it?: It can give you an objective entry point, reduce drawdowns and identify warnings that the trade is going to be bad and/or clear exit signals What are the potential shortcomings? Late entries and exits As you can see in the chart the 1st and 3rd trades would have been triggered +/-130 ticks and +/- 170 ticks above the original trigger based on the random line. (Either if you entry on the close above or if you waited for change of slope).Even worse are the exits both trades would have been losses (+/-100 ticks and +/- 200 ticks) if you have traded only the indicator signals. Again thatâs not the key point, there are many cases in which the opposite would have happened, the crucial issue is to recognize why, how and the cui bono of your indicators? If you donât know this and you pretend to find a holy grail that overrides all the tradeoffs between indicators/efficiency and price analysis/consistency you are doom to fail in the long run. It sounds nice in theory but how to you do this in a real small day trader chart?; Iâll continue later with a SPY intraday 0.1 constant range chart. jjrvat PS: TheRumpledOne, thanks for posting these additional self-explanatory real live examples of the power of pure price analysis.