OK - everything you've said has made a lot of sense so far; this is a little fuzzy for me, though. It seems we're now adding in numerous other factors that need to be thought about, which may or may not be quantifiable with a "probability" number. I'd like to avoid any kind of subjectivity if possible - perhaps you could clarify how this kind of "probability thinking" would work? Thanks - again, all your input has been a great help!
If you want to avoid subjectivity, then you'll have to take whatever trade your system calls for without regard for whatever you might think about it. Addressing the probability of the trade won't have any place in such a system. --Db
I'm interested in what kind of "mental strategy" you're using to elicit a probability for a trade. Do you run through a sequence - even somewhat unconsciously - "OK, the MACD has crossed over. Could be time to take a trade. Where's the support and resistance? OK, looks like it's going to make a new high at 905.00. Volume looks low, so there might not be a lot of steam behind this move. Yellow flag. This trade feels like it could go either way, maybe 50% odds. I'll hold off on this one." Or does it get more specific than that? I'm curious - I think if you have a lot of experience watching a market, and the emotional disciplines for trade management burned into your nervous system, your brain will ultimately be the best "computer" of all. But I'd really benefit from some clarity here, DB. I'm not sure I have the goods at this point to go the intuitive route.
Essentially, my particular tactic is buying retracements in trends. Therefore, there has to be a trend of some sort in some timeframe, trend being defined as higher highs/lows or lower lows/highs. Today there was none of that after 1100 on the NQ, so there were no higher probability trades after that until 1350, though that was only a setup. Ordinarily I would have taken this retracement, but price dropped below the previous swing high suggesting too much selling pressure and not enough support. This did in fact go up a few points, but failed rapidly. Hardly worth sitting in front of the computer all afternoon. Volume also disappears soon after the first hour or so, making any entry problematic. But I have no problem working for only two hours. --Db
DB - sounds like the method is doing great for you - just not clear on how you're actually measuring probability. Let's say you're using Fib retracements. You see a trend developing - market goes from 880 to 900, MACD is crossed over, volume is looking decent. Pullback begins to occur - it drops past the 33% retracement and continues down. You watch your 50% retracement line at 890. Market comes down, approaches 890, begins to pause. Looks like this could be the place to bounce. At this point - what's going through your head in terms of probability? "We've gotten the 50% retracement, there's a good PROBABILITY that it's going to retest the high at 900. I will go long here and see if I can score 7 or 8 points." Is that about right? What I'm trying to find out is, in your approach, is probability a "feel" thing - or something you're quantifying in some way?
Sophomore, I liked the way you set up this thread and the questions you asked. However, sometime later, I became concerned that you are talking with people who are much more experienced than you at this point and that's tricky. If you are really a new trader, as you appear to be, take it slowly, and learn/build simple strategies to trade. They will not be too profitable yet, but they'll teach you what you need to know and then you'll advance to the next level. If I'm correct (and I could very well be wrong) in assessing your experience level, my suggestion would be to build and seriously papertrade a simple trend-following strategy - say, using the 20, 50, and 200 period EMA on your 5-min chart. There are many books out there explaining that, e.g., by Oliver Velez. Then I would proceed to a simple trend-following strategy, using Stochastics and MACD, on two (or three) timeframes (say, 1, 5 and 30 min charts.) That's very well explained in books like Dr Alex Elder's. Last I would attempt to master reversal strategies, e.g., based on (simple or multiple) divergence. Can't remember a book explaining those right now, but there are some. Ultimately, you want to be able to combine the whole lot into strategies that you feel comfortable with - each has their advantages and disadvantages. Money management (e.g., Ryan Jones' method) is extremely important, but should come later, after you are at the level that you can take money out of the market consistently. Make sense? If you live near a large metropolitan center (NY, LA, etc) there are seminars available and more experienced traders who can answer questions. Any feedback, please fire away - good luck!
No, you're just guessing. The so-called "Fib levels" are just imaginary lines drawn in imaginary sand. If the pullback halts at the last swing high, and volume has been strong on the way up, and volume has been weak on the way down, there is a high probability - and a low risk - that those who feel they "missed" a move upward will jump on the retracement for the next leg up. If they do, you're in the profit column. If they don't, a tight stop gets you out. It's not a question of quantification; it's a matter of knowing when and where traders are most likely to jump on or off the train. As for scoring 7 or 8 points, there's no way of knowing how much you'll make off of any particular trade unless you cut your profits short, and even then there's no way of knowing whether or not you'll reach your price target if you have one. Let the market tell you what to do. --Db
Yannis has a point in stating that you're probably moving too fast. However, I disagree with his steps as stated. A "simple" trend-following strategy isn't going to do much good if you're regularly making trend relativity errors, which you will make if you're not following at least two timeframes simultaneously. You may not care if you're making them if you have a completely mechanical system, but you should nonetheless be aware of making them if for no other reason than that they may provide you with a trade filter. What may be as important, if not more so, is for you to decide whether you want to trade trend, scalp chop, or trade by "appointment", as Quah's system does. If the last, then indicators and MAs and so on aren't going to do you any good unless you decide to use them as filters. If the first, then you're going to have to understand the difference between trending indicators and oscillating indicators, if you decide to use indicators at all. I'm not going to tell you that you absolutely must understand the relationships between price and volume, support and resistance, and demand and supply in order to profit because I can't prove it, at least with regard to scalping and trading by appointment. But I can't imagine trading without understanding all this. Be that as it may, you have to start somewhere, and if you want to start with a mechanical system, then do that, though you will also have to decide whether it's going to be a trend-following system or not. Once you've set it up, you will then have to learn by doing whether you can stick to it or not. If you're like most traders, you won't be able to stick to it, and you'll have to begin adding discretionary elements to it. You may decide that a mechanical strategy just isn't for you, regardless of who claims what. In which case you'll want to begin studying all those relationships I mentioned above. You have to start somewhere. Since you seem to be most familiar with Quah's system, then start there. See if you can tweak it into something that's more comfortable for you. See if you can trade it, i.e., stick with it. See if you can stomach day after day of drawdowns. Find your puke point. Then whatever questions you ask won't be so academic. --Db
Thanks for taking the time to write such a comprehensive entry. In terms of experience level - you're both right and wrong. I've been trading on and off since 1993 in the futures markets, mostly silver and soybeans. Have pretty much gone through the "evolution" Charlie Wright describes in his ET article - purely discretionary, to technical, now moving into the system trader category. So, I have been kicking around awhile, had some success, then failure, took time away to retool, came back trading options, made money, lost some money, and ultimately decided I wanted to get away from subjectivity altogether into a much more disciplined approach (money management particularly). Add in there starting a business, getting married, becoming a dad, etc., and I'm just now getting to where I'm able to tackle trading seriously again. Hopefully for good this time. However, I am very new to systems trading - that's where the inexperience level is. I'm moderately well-read, taken several courses (though not on system trading), and have been befriended by a couple of pro traders who have been kind enough to help me out now and then. I'm also up and running with realtime charts (ESignal), have TS2000i to do backtesting with, and have been forward testing someone else's ES method daily for the last month, with mixed results. So I'm not really sure where I'm at - at times I feel like I'm very close to being able to do this successfully, other times I feel like a green rookie! But I know what the desired outcome is and am working toward it... Maybe this will clarify a little bit where I'm at...if you have any additional input, it sure would be welcome! Thanks again.