Day-Trading 2.0 for small traders

Ref ; Stops,

I use a 260 volume bar on the YM this equates to waves (in less volatile conditions ) which can produce 10-25pts.
I put my stop above the high of the wave I am trading off which usually is anything between 8-15 pts.Therefore I am getting a r:r of between 0.75 : 1 to 1.5 : 1.

With the price action being in a down trend most of the time by definition the downwards momentum doesnt allow the stop to be hit. But as was said before there are times when the trend changes and the stop is taken out or momentary volatility comes in and blows straight through my stop ,but then carries on in the trend direction.

For this last reason I prefer the YM as opposed to forex because I cant find a pair which trades without the noisy spikes which p;op your stops.

One good thing weith forex which I wish I could have with ym futures is the fact that you can always have a variable size position instead of fixed contracts. When trading small 1 to 2 lot trades on YM constant size risk is difficult to do only by going for the same size stops is it nearly achievable.

Yesterday was another great day for the all day players as opposed to the done for the day style traders. but then again the done for the day traders did get their targets easily and early on so I suppose the golf course/gym day out with the family compensates.

Richard

 

I agree amitman Ive traded the reversal on hitting my stop twice now for good results. You still have to approach it sensibly ie looking like an entry for a reversed position but it seems to happen.

I haven't had any trades hitting my stop and going back in my original direction since reviewing my stop setting. Early days but very promising.

 

Developing a price based trading plan (PBP) #6

PUTTING EVERYTHING TOGEHETER: “MAPPING A TRADE”, STOPS AND COMMON SENSE

It has been some time since I started this thread and I think is time to put all the concepts together in a real PBP example. I will start this post following the same structure I used in my first posts but this time including and detailing all the concepts that have been discussed so far. Thus I will start with the very basic concepts and I will conclude with more specific issues such as stops. For people following this thread since the beginning I would appreciate if you can reread the first 2 pages and “compare” with the following posts so I can correct/explain any missing comments or unclear arguments.

"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.

This was my first comment and it’s (was) the essence of all my other arguments. In order to try to bring back these abstract concepts down to earth I followed a “pseudo” rational approach in which I built upon general macro notions to construct (or try to) a consistent and sustainable PBP. Following this approach I used implicitly or explicitly two general principles in almost all of my post:

1. The importance of order in the analysis: in multiplication (somebody complained about using the word mathematics…) the order of the factors doesn’t changes the result (5 x 8 = 40 and 8 x 5 = 40). However, when trading the order of analysis change everything. I have tried to show how if a trader first focus in how to pull the trigger or stops or current direction, etc he/she can have some results especially in trendy markets, but will be doom in the long run if he/she doesn’t follow a coherent order of analysis.

2. Delimiting your Trading Field: It’s amazing how many struggling small daytraders in forums doesn’t realize how unrealistic and damaging is trying to trade every single move in the market. It took me years even after I recognize this problem to accept and implement this simple concept in my PBP. Like in trading, simple doesn’t mean easy….

For example, these are also the reasons I havent posted anything specific on stops or triggers because if you follow a coherent order of analysis and delimit your trading field you will dramatically improve your entries and exits without changing the specific trigger/stops but only adapting the playing field and circumstances of your PBP.

If the abovementioned concepts are (were) the soul of my comments, price analysis (WAVES) is the heart of a PBP (This is again my exact first post):

3. 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.

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

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




Therefore, the first issue to delimit your trading field is to understand in which part of a wave is the market. Not using a statistical method but using common sense and recognizing waves. The only rule of thumb is the later you enter a new wave the fewer probabilities you will have to be successful.

As you can see in the miNY Crude Oil QM future charts above and regardless of HH/LL analysis just understanding and implementing this very basic and simple concept will allow us to reduce a lot the size of our trading field (Dont pay attention to triggers!!!). This step is indispensable before choosing the timeframe and time for this QM PBP. I'll continue with this in the next post

jjrvat

 

PUTTING EVERYTHING TOGEHETER: “MAPPING A TRADE”, STOPS AND COMMON SENSE #2

The first variable in the QM PBP) is timeframe. Remember that among other things the timeframe will:

a. define the time between waves meaning how much time you have to make a trading decision.
b. longer timeframes are smoother because fundamentals will clearly reflect on the chart.
c. the longer the timeframe the shortest the time and screen time required to trade
d. shorter timeframes will require more “technology”: auto or semi auto trading, perfect feeds, a good broker, etc
e. longer timeframes will obviously lead to larger profit targets, however not necessarily viable for a small trader who is wishing to make a living
f. define the relations between risk, capital and timeframe. Longer timeframes requires more capital to make them worth which lead to an increase in risk.
g. define perspective in your chart
h. influence triggers, profit targets, stops and exits, and the amount of time and capital required to trade.

So before I choose a timeframe, I am posting these 3 charts to show a good range of options (Daily chart, 610 Constant Volume and 18 ticks) for the QM PBP and to expose the importance and implications of selecting a good timeframe. (The only extra in the chart is a HULL to visualize waves…).


I'll continue later

jjrvat

 

Is there a trick to picking a good number for Constant Volume charts or do you just experiment until you find something that makes obvious waves.

For example, I arbitrarily picked 500 Constant Volume charts for looking at the NQ, and it was all choppy and messy. I changed to 1100 constant volume charts and it looked much better.

The YM has much less daily volume than the NQ, so 500 or 600 Constant Volume charts look better on the YM.

Is there a better way to doing it than just randomly trying numbers until you get something that looks good and tradeable?

 

Hi Ironfist,

I do the same I can't find a easy way of doing it. I don't have the same volume or range bar setting for every index.eg the HSI is so much diff than the DAX.

When i have a new index to trade i backtest (try) heaps and heaps of diff volume and range bar settings until i get something that looks tradeable for short term / scalping trading of that contract.

It takes me a long time to find one that im happy with and not keep tweaking it

cheers NT.

ps: Keep up the great work jjrvat,I'm finally learning something.

 

PUTTING EVERYTHING TOGEHETER: “MAPPING A TRADE”, STOPS AND COMMON SENSE #3

If a trader has done a proper analysis he/she would have “discovered” how “easy” and “efficient” is to trade longer timeframes and why investors and big pro traders make fun of small traders and all their “sophisticate” indicators and technicalities (see daily chart). Also, a small trader would have realized how tempting is to trade very fast timeframes …”if I only write a piece of code to create an auto trading system, etc, etc, etc” (see 18 tick chart). Maybe the most surprising finding will be discover that with only price analysis and the appropriate timeframe (see 610 vol chart) you don’t need a crystal ball to “call” the macro direction of OIL in a trading session (of course not the exact trades but who cares “everybody think that you have a natural gift”) and how attractive is to forget about trading an open a service/web page/blog/thread etc and start selling your holy grail market “signals” to newbie’s and struggling traders.

In any case after an extensive research and testing you realistically decide that a 55 ticks QM chart is the best option for the QM PBP: *** this is just an example!!!

1. Waves are smooth and their frequency is good enough to achieve your first goal of 10 to 15 ticks a day until you master price analysis
2. The chart is slow enough to think and place a trade and fast enough for a couple of trades during your trading hours (volatility).
3. Your broker offer decent commission on energy futures and the DOM bracket order will be more than enough to execute the trades and get filled on time (technology and liquidity)
4. Your research on the 55 the timeframe tell you that the max drawdown to the potential profits, stops, time in the market, etc, etc respect and are consistent with your capital and risk aversion/tolerance (among others)
5. It appears very clear that a simple HMA gives you a lot of perspective to analyze waves and even it seems to be efficient for triggers and stops

*** BTW, I do agree with NOTToday only testing and experience will give you the “right” timeframe for your PBP. TIP: Use “typical” ideas in creative ways … Try Fibonacci numbers …this is not really original but in general most of the time the solution only requires common sense and a little of imagination.

At this point the QM trading idea is moving from a rough draft to a more substantial PBP Why? Because it has been consistent with the fundamental principles: The importance of order in the analysis and delimiting your Trading Field. So what?

1. Defining your timeframe has also allowed to define the potential TIME of the day to trade (depending on what you want for your PBP it can be where the waves are smoother or volatility is higher/lower/ or whipsaws are minimum or profits are bigger, or simply when you have time to trade) . In this particular case I will choose the “atypical” US LUNCH time for the PBP. Why? Why not…. During this time the research on timeframe has tell you that waves are smaller, small chances for a change of macro direction, no news (except for unexpected externalities) and the big money is having lunch but there is enough liquidity and volatility to grab the initial goal of +/- 10 to 15 ticks (this is not fix just a general objective) a day with 1 or 2 contracts.

2. From thousands of potential trades in a day, choosing a 55 tick chart will limit the trading field to only hundred trades but trading only during +/- 2 hours US LUNCH time will further reduce the potential to only a dozen at most. But not only that, if a trader is consistent with price analysis (HH/LL) the trading field will be limited to only few.

3. Reducing the number of potential trades is not important per se but the implications for risk, triggers, stops and negative psychological issues have significantly been reduced which obviously increase discipline and it will be reflected in a more consistent and efficient trading plan.

4. Without further analysis and with a simple HMA for wave analysis and as trigger, the PBP is tested in a demo account. Thursday May 22, 2008 US LUNCH TIME:

Summary: (All trades: Contract = 1 / Profit Target = 8 ticks / Stop Loss = HMA changing slope)
# Trades = 4
Win = 3 (Blue arrows and 1st red arrow) = 24 ticks
Loss = 1 (3rd red arrow) = - 6 ticks

Although it seems like a very good day (18 ticks) there are some details that are not fully convincing in the PBP. The first trade (1st red arrow) is a clear HH/HL but it didn’t follow the way you will expect in such a clear scenario why? and the 3rd trade was it a failure? was there any option to avoid this trade?

This QM PBP may need some extra visual aids especially for macro direction…

I’ll continue later

jjrvat

 

Hi jjrvat

From the last post , trading the QM, I would say that the PBP your using in this instance is based on price structure HH-HL etc but not nescasarily in tune with the macro direction on this time scale.

Your point of reference H0 instead of using the 240 wma gives trades but not all in the direction of the 240WMA macro.

The first trade was correct referencing L1 as a Higher Low but it is going against the trend. Momentum of the move giving the ticks but it has less probability of another going with the trend.

Trade 2 short , this is now in line with the trend and is triggering of a lower high.

Trade 3 , the macro for the time frame is still down but you took it off an equal high H4 there hadnt been a lower low L3 is still intact.

The probability of this trade working is less and is shown by H4 being taken out and stop being hit. A pullback after L3 would have been the optimum trade to have taken as momentum would have been continuing down.

Trade 4. In this instance it is triggering of hh-hl but it is against the macro direction for this time scale. The slope of the 240WMA is still down , but momentum is carrying it upwards towards the 240WMA which eventually catches it and it turns down shortly afterwards.


I hope my analysis is correct .

Thanks for your time jjrvat it is appreciated.

Richard

 

Here's my attempt.

- first long, stops at apparent resistance of first bar of chart, also the entry was quite late (several bars and ticks away from pivot) thus not the best Risk / Reward trade

- the 3rd trade has a (valid to me) unmarked HL and a W formation at the LOD, so i wouldnt fade that

ps. of course, thanks for your contributions jjrvat, very generous of you!

Cheers,
i

 

PUTTING EVERYTHING TOGEHETER: “MAPPING A TRADE”, STOPS AND COMMON SENSE #4

Triplepack, exactly!!!

iluv2trade, I do agree with you (especially the observation on the pivot). Moreover, your comment on the 3rd trade is a perfect example on how an indicator (although very smooth) imperceptibly can distort price analysis.

Mapping a Trade

Even if you don’t a trade OIL, you know that it is going up so simple logic tell us that we should follow the obvious direction and try to look for longs (or the very bad option of trying to outsmart the market and “call” the top). However, and as you know, a 55 tick QM PBP is not necessarily aligned with this monthly/weekly and daily uptrend so this bullish sentiment is of little interest in your 2 hours US lunch time trading. The only important variable for a PBP is establishing the current time direction that is only valid for you and your timeframe.

“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”

There are 2 basic but very powerful visual aids that can be introduced in this PBP as Direction Indicators (Macro direction): ***because they are only visual aids, it’s not important the technicalities behind the indicators

1. The simplest and clearest is a long moving average (i.e. 240 WMA). If price and slope is going down you will have more probabilities for shorts and the opposite for longs. When divergences (sometimes price chopping around the WMA) the current time direction is about to change.

2. The second is pivot points. If price is below the daily PP you will have more probabilities for shorts and the opposite for longs especially if the next pivot hasn’t been touched.

The importance of introducing these visual aids is because they allow to “MAP” the potential zones where your PBP will have better probabilities… “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.”

Observe how helpful they are:

1. The first trade (1st red arrow) although a winner it wasn’t a perfect setup because “macro” direction was pointing at shorts

2. The second trade (1st blue arrow) was obviously a perfect setup. Also, observe the “zone” where the trade is trigger, is the next pivot S.5 a good place to take profits? Of course… that’s an extra aid of pivots (Remember that this PBP is not about trading pivots they are just a good visual aid)

3. The third trade (2nd Red arrow) it’s not only important because it was the only loss but because this trade didn’t respect a theoretical perfect setup. 3 important observations:

a. The long WMA gives you additional information. The greater the distance between price and the WMA the less probabilities that the next wave is going to move deeper. Does this mean that you are not going to trade a clear signal? NO! or you should try to trade a potential reversal? NO WAY!, it just means that you will have more risk in your trades. BTW, that’s why I hate sharp trends when daytrading

b. Look how the pivot S.5 provided support, especially the bar before the second red box that couldn’t break the pivot

c. But the most important issue in this trade is PRICE. One of the shortcomings of using indicators (in this case the bars colored according to the HMA) is that they can obscure price action at a micro level. If you pay attention to detail, you will notice that the entry, although valid according to the trigger, it didn’t reflect exactly what was going on. WHY? The previous green bar closed below the pivot and in a fraction of a second later the market rejected that break and closed again (our entry) above the pivot given two clear warnings to NOT take that trade. First, the bar close of the trigger was above the previous close (Thats a very bad signal in a short) and 2 consecutive rejection of a pivot that hasnt been broken (as iluv2trade pointed out) .

4. Finally the 4th trade (2nd blue arrow) can raise some comments but it’s up to you to take it or not. For me a 240 WMA is just a visual aid. In any case, compare this trade with the first one. It took 1 extra bar after the trigger for the 240 WMA slope to change (validating the theoretical perfect entry) however it was possible to take that trade in the blue arrow because it broke the 240 WMA, the last high and the pivot point all at the same time.

Now the PBP is in a much better shape without even analyzing, tweaking and suffering about trigger or stops. Why adjusting triggers if all the winners have a healthy range over the PBP profit targets and there weren’t any failed trades because of bad triggers? Or why tweaking stops if the only bad trade has a “very good” – 6 ticks loss and it was triggered way before the natural stop (last swing high or low) and it can be avoided with experience?. … Of course this is only a 1 day of trading so again it needs, testing more testing and even more live testing before even considering tweaking the triggers or stops

jjrvat