In 2008 jjrvat made a thread called Daytrading 2.0 for small traders. Here is a link. The thread basically presented the idea that price moves in waves and that you should trade in the direction of the waves. I will summarize the main points of that thread but you can read it if you want (ignore the obvious spammer who joins the thread). SUMMARY Jjrvat explained that price tends to move in waves which are made up of higher highs (HH), higher lows (HL), lower lows (LL), and lower highs (LH). An uptrend ideally consists of HHs and HLs. A downtrend ideally consists of LLs and LHs. Long entries should only be taken following HHs and HLs. Short entries should only be taken following LLs and LHs. Jjrvat referred to this as PBP (price based trading plan). To help you see the waves, Jjrvat suggested putting a "slow" and a "fast" MA on the chart. For example, a 240 WMA and 21 HMA (Hull moving average). The 240 WMA will show you the long term trend and the 21 HMA will help you visualize how price is moving in waves. A quick note: there is nothing special about 240 and 21; they are just arbitrary numbers that happen to serve the purpose jjrvat was trying to illustrate. Depending on the example being shown, sometimes jjrvat used different lengths of moving averages. I do not know if this was due to some calculation he never shared or if it was just cherry picking MA's that happened to fit a certain chart. The obvious issue with this is that you never know which MA is going to work well on a chart ahead of time. Regardless of this, I always stuck with the same values. Jjrvat stressed that the MA's themselves were just to help you see the waves and were not meant to be used as entry/exit signals. Because a specific entry/exit system was never shared in that thread, I used his rules to come up with the entry/exit method presented here. A common criticism is "using MA's to determine your entry and exit will be too slow and cause you to miss part of the move." That is absolutely true. However, I cannot identify HLs and LHs in real time, so I had to use MA's. If you can do it in real time then definitely do it that way as your performance will be better. A method for identifying them in real time was never shared in jjrvat's thread, and I was unable to come up with my own method, so I used an HMA instead. "Aren't you worried about revealing your edge?" No. First of all, I doubt the big players trade this way. Second of all, the only way "revealing your edge" will cause you to lose your edge is if it is using a finite imbalance or something, like if you are arbing something with a limited quantity and there is only enough for you so you need to keep it all to yourself. And third of all, for this to no longer be valid, the entire way the market behaves would have to change. I'd like to see that happen from a single thread I posted. Lol. Jjrvat's charts were all perfectly annotated in hindsight. I believe this was done to illustrate waves. Now, I was unable to tell when price was going to reverse, even with the addition of the moving averages, so I decided that my entries would be based on the slope of the fast MA (in accordance with PBP). There is an inherent flaw in this: just because every uptrend is accompanied by an upward sloping MA, that does not mean that every time the MA begins to slope upward that there will be an uptrend. Read that last sentence 10 times because it explains why every price following indicator is useless. So at its most basic level, this system is just like any other two MA system where you trade in corresponding direction when both MAs are going in the same direction. That method will not be profitable over time, however (try it). What makes it specifically different is the inclusion of PBP, meaning you only take long trades following HH and HL (when the moving averages are lined up), and you only take short trades following LL and LH. SYSTEM RULES Entry criteria: Go long when: - slow MA is sloping up - fast MA is sloping up - price has made at least one HH and HL (a DB will also be an entry signal, basically you are looking for price to not make a LL) Go short when: - slow MA is sloping down - fast MA is sloping down - price has made at least one LL and LH (a DT will also be an entry signal, basically you are looking for price to not make a HH) Jjrvat never talked about when to exit. He was a scalper and targeted between 1-10 ticks per trade. I was never able to wrap my head around that. One to 10 ticks? How do you know when to stop at 1 tick? How do you know when to stop at 2, or 3, or 10? How long do you hold onto losers for? For my version of this method, I held every trade as long as possible. Backtesting with fixed scalp targets of 1, 3, 5, 8, 10, and 12 ticks resulted in more winning trades but overall losses. The only way I was able to test profitably during the time I used this system was by holding every trade until the slope of the MA changed. This results in occasional homeruns which were necessary to maintain profitability. I am very interested in discussing other exit strategies. Let me make a very important note here that not only do many people miss, but is also a fantastic way to see who is trading in fantasy land or trying to pull the wool over your eyes: If you are taking entries and exits based on the value of an MA, such as this system, (or the value of most indicators, including MACD, stochs, etc.), the earliest entry possible is the first tick of the first bar after the signal bar closes. This is why in my charts, I have the long entry point located on the second green candle, and the long exit point located on the second red candle. Until the previous bar closed, I had no way of knowing it was going to be green. It could have turned back to red on the final tick. There is no possible way to enter on the signal bar itself. Keep this in mind when you're looking at other systems. Many system vendors show an entry on the signal candle in their screenshots; this is 100% BS 100% of the time. At best you can take a position on the first trade of the candle after the signal. Reread this paragraph until you understand it. Also note that sometimes, following PBP will cause you to miss big runs, but generally speaking it will help reduce the amount of losing trades. In backtesting, the aspect that changed this from losing to winning was the inclusion of PBP. Without it, you are just going long when both MAs are long and short when they are both short and that is unprofitable. Don't trade on options expiration day. You can also take the day before off if you want. Use premarket action to determine the HH/HL/LL/LH structure to figure out if you should take trades near the open or not. No new trades after 2pm CST. Close out any open trades by 2:55pm CST. You can use whatever timeframe you like. Jjrvat had a little diagram that I can't find anymore that I think said very fast and slow timeframes are best for beginners but like one minute charts or something were harder. I don't remember the reasoning. This system was profitable while I was testing it on the YM in 2008 but I ended up getting a job and kind of drifted away from trading for a while. I'd like to revisit it and discuss it here. How my chart is set up: I'm using SierraChart. The slow MA is colored green and red based on slope. The fast MA is yellow and magenta based on slope. The price bars are green and red based on the slope of the fast MA. Ideas: - Use jjrvat method with pivot points (for example, don't take a short trade immediately above an S level even if all the criteria are met) - Use with market emotion (this was an indicator Anek played around with for a while in his AHG thread but supposedly that's not even how he actually traded so maybe he was just messing with us) MAIN IDEAS: - jjrvat posted nice charts showing price moving in waves, but he used different MAs in each chart. Since there is no way to know ahead of time what MA will be best to use, it is probably best to always use the same MAs. - jjrvat never gave a method for entering in real time. Because of this I came up with the entry method presented here. - jjrvat never gave a method for exiting in real time. Because of this, I came up with the exit method presented here - If you can identify the waves in real time then you do not need the MAs and you will have better entries and exits. - Price will sometimes rally after making a LL. This system will miss those trades. However, overall, by not going long after LLs, you will stay out of more losing trades that would eat your profit. - Price will sometimes tank after making a HH. This system will miss those trades. However, overall, by not going short after HHs, you will stay out of more losing trades that would eat your profit. - All trades remain open until the slope of the fast MA changes, in which case you exit on the first tick of the next candle (the earliest possible exit), or until 2:55pm CST, which you should close your trades at anyway. Here are some charts illustrating when to enter and exit:
You've done a fine job providing the shortcomings of MAs, so the question appears to be whether you'd be better off finding a way of making them work or finding a way of identifying HLs and LHs in real time (in which case you could just drop the MAs). With regard to the latter, what is it that you're not seeing in real time?
You don't need the moving averages just follow price and exit when the supply or demand line PLUS the last swing high or low doesn't hold.
IronFist, welcome back! I've always enjoyed your posts, when you used to be around. And all these years, I thought you had found your edge, and made your millions...lol The MAs have always been my favorite, and even now, I still keep one MA on my fast, and primary charts. I've traded multiple MA systems in the past, but now, I just trade price using the single MA as the guide line. The major downfall of all MA based systems are the "chop", or "range bound" price action. I too, use the price swings to stay in sync with the long term MA. You're right, sometimes it's hard to see the swings in real time, except on the trendiest of the days. I use candlestick analysis to gauge supply/demand, momentum, and micro trend lines to identify the swing points. The entries/exits are based on candlestick analysis around horizontal lines of interest, and supply/demand lines. You don't hear much about candlestick analysis these days anymore, but I'm old school, so.... Hope to read some more of your findings. Schaefer
I trade this way and I approve this thread (That said, my particular plan is more complex in terms of entries and exits.)
IRONFIST.... Good to see you back. The summary you did on Jrvat's thead was excellent. I look forward to your thread.. good luck toucan
Complexity is not a synonym of profitability, far from it. In fact it's quite the opposite, "simple" trading systems are far more robust and profitable than the "complex" ones! Again, trading does not have to be complicated, one can make a good living just trading with very simple bread and butter chart patterns, day after day, week after week, month after month.
MAs are tools to analyze price. If there is a problem it is in the analysis, and not in the tools (and definitely not in the price). The major downfall of all MA-based systems is therefore in the user and/or the system, and not in the MAs/chop/price action. The chop is a symptom that the analysis was subpar