How I came up with my trading method. After trying many optimized indicator based ideas that obviously (after sometime) did not work for too long, I started to think about what would make a trading strategy endure for a long time in different market environments. The idea was to find a common denominator that causes movement in the markets. I found a few references to the similarity between charts in the late 20's and the late 90's and I came to the conclusion that the common denominator between the two periods was US. HUMANS. Specifically, emotions in humans and lack of control of emotions in particular. The next step was to identify certain chart patterns that would repeat themselves in reaction to human emotions. I noticed that most of my losses came from trades that I took after an impulsive reaction to a quick and strong price movement. No most people would do a rash thing (act impulsively), then they calm down and reflect on what they have just done only to do another rash thing in line or against what they have just done. That CALM DOWN period or THINKING WHAT TO DO NEXT manifested itself (in my mind) in the form of NARROW RANGE BARS. So I started to look for candle formations that were comprised of 1 or more large candles followed by 1 small candle, in the anticipation that the next wave of impulsiveness will come in the form of a large candle. At the time when I came up with this idea, I added a condition that the small bar should be on a 20EMA and that I would trade in the direction of the EMA. Also, the small bar had to close agains the direction of the large bar before it. All the above was done on a 5min chart (15min was too long) When I did not find enough setups to satisfy the above requirements I ditched the requirement that the small candle had to be on the EMA but kept the idea of trading in the direction of the EMA. This worked better but I still missed out on many opportunities because the small bar would close in the same direction as the large bar before it or there were 2 small bars that closed in a direction opposing the impulsive move. So I accepted the fact that there could be more than 1 small bar that would close in the opposing direction but I still rejected the idea of having a small bar with a color/direction similar to the impulsive move. In 2009 I bought Al Brooks' book about trading Bar by Bar. It was the best book I have ever bought about trading but it was written very poorly. Trading based on 5min bars was too coarse so recently I switched to the 1min bars but I would still look at the 5min charts. The attached chart will show an example of what I was writing about. Gabe To be continued.
Back to the main topic. Attached is a chart that shows 3 very clean trading opportunities. The problem is that things are not always so clear. There are days without any smaller bars with an opposite color or there are days where the size difference between the directional bar(s) and the retracement bar is very small. Another problem is to define WHAT IS A SMALL BAR? I tried to gather numbers. Getting to a conclusion was impossible. What I mean is that deciding on A number to define the size of the smaller bar or arriving at a % to define the ratio between the small bar and the preceding larger bar did not work either. So I went to charts with 3min bar intervals. Same problems. Than there was the issue of having 2 smaller bars after a larger bar of the opposite color. Any time that I had to make a decision based on a fixed definition (size of a bar or the number of bars) I arrived at a dead end. Sure the idea had worked many times but there were situation (numerous) where it did not. Al Brooks wrote about MICRO TREND LINES in his book that I have mentioned. For a long time I ignored it. Then I saw the SLA threas. Something clicked and prompted me to go back to the Brooks' book and try to implement some ideas from it (the micro trend lines and a few others) In order to use the micro trend lines I had to go down to the 1min interval bar. If I don't lose control, this idea works much better. I think that trading is not easy yet it is not that complicated. Once an idea is distilled, it should be presented to others in a simple and concise way. By all means I am not suggesting that my presentation here is clear and concise but I hope that people will get the hang of the idea just by looking at a few charts and reading several posts. When there are too many moving parts in a mechanism it is bound to fail. Which reminds me of the following quotes âIf you can't explain it to a six year old, you don't understand it yourself.â "Everything should be made as simple as possible, but not simpler." â Albert Einstein This thread will not be long. Some of my findings I will keep to myself as I have spent a long time finding useful components for a trading method but in general feel free to ask questions. Based on this small poll http://www.elitetrader.com/vb/showthread.php?t=282278 it is fairly clear that people prefer visual learning aids combined with some written text and not ONLY written text. So I will start adding comments in my charts that I post in my trading journal http://www.elitetrader.com/vb/showthread.php?t=280007 To be continued. Gabe
After going down to the 1min bars I had many unprofitable trades due to chop. Trading based on the 5min bars had the same results but the situation was worse in the 1min. The next step was to look at the 5min charts for the larger candle but enter based on the 1min. The 1min chart had to form a short trendline in the opposite direction of the larger bar in the 5min chart The attached chart will demonstrate the idea. With the above modification of the method things improved but still there were many occasions where the entry would be following these rules but still ended up unprofitably. Next time I will write about HORIZONTAL LINES or LINES. Gabe
The attached charts show the NQ in GLOBEX and STOCK RTH sessions with horizontal lines - or just LINES as I call them (not to be confused with diagonal trend lines or DIAGONALS) connecting different points where there was a fairly sharp reversal. These lines are not carved in stone. They are an approximation. They could be zones about 2-4 ticks wide if you will (there is no correct number) I usually eyeball the chart and I see these lines. There are many reasons these lines are approximations. 1. Different people will draw them slightly differently because of the way they interpret the alignment of the peaks and troughs.. 2. Data from brokers could be off by 1-2 ticks. 3. The clock of a computer could be off compared with the clock of the computers of other people causing a different location of the peaks and troughs (if you don't believe me just compare your charts with the ones of your colleagues). You will notice that line that you drew days ago are revisited time and time again. These lines could then be used as target to get out of a trade you are in or getting into a trade if you are not in one. One of my pet peeves is the idea that some people have that it is their methodology that is right and all others are wrong and they will try and convince you time and time again to that effect. There is not one way to trade. There are many. I will submit to you that a random entry system with proper money management can make money. Now to all of those who think that I am a very successful trader who makes millions; I have news for you. I am not there yet, but had I known several years ago what I know now, life would have been different. Getting back to the LINES. Price will move from one line to another to another in a seemingly unpredictable fashion but if you will spend some time (could be years) watching charts and how they move, eventually you will assimilate trading, so don't give up. Gabe PS just another thing before I pack it in for tonight. Many people try to explain reasons behind price movement. I think that the reasons are not important and trying to interpret the reason behind price movement is futile. All we need to know is how to recognize a certain setup and respond. Imagine if lightning hits a plane and the pilot will not act to save the passengers but start wondering about why/how the lightning happened. Or imagine a paramedic who sees a soldier hit by a bullet and the paramedic start analyzing the trajectory of the bullet instead of immediately stop the bleeding. Or a driver who sees a football rolling onto the street and instead of anticipating a child running after the ball, he will start wondering why the ball is rolling onto the street in the first place. You get the idea. Good night.,