Keeping It Simple

For future reference, today provided a good example of a 2B.

First, there's a TL break just before lunch. This tells people that momentum is slowing and that there may be a trend reversal in the offing. However, around 1245, a new high is made. This puts everybody who entered shorts or exited their longs either on the wrong side of the market or out of the market altogether. So they either cover their shorts if short or enter if out.

Ten minutes later, however, price drops below the previous high, This puts everybody on the wrong side of the market again, upping their "fear response". There is a feeble effort during the next 10 minutes to move the price up again, but this fails quickly and price drops decidedly below the 1048 high. This can be an excellent place to enter as it places the trader so close to resistance.

However, if one wanted to wait for evidence of real weakness, price hit 990.5 three times (on the 3m chart) between 1330 and 1345. Dropping below that level would not be viewed with glee.

The long expansion bars which began at 1400 are not typical, or at least they haven't been for quite a while. Perhaps there was a sell program. Who knows? But a sell stop below 990.5 would have been legitimate regardless of the reason for the ramp down due to the 2B setup (note also the rally attempt after 1345; the failure of this just feeds the fear of those who on the wrong side of the market).

Note also that we came within a point or two of target, on both ends.

--Db

 

Thanks for the explanation db, I’m slowly understanding things better.

A question though, about trading the breakout of the opening trading range. Does the system mean that all breakouts from the high or low of the range will be entered, or would there be instances where the breakout is more likely to fail, thus, you hold back your order (ie. market depth, weak pattern, etc.)?

I’m still trying to get a hold of how the gaps are handled. Please correct me if I get anything wrong. So far this is what I think I understand:

When mkt opens with a gap, wait out the 1st 5 mins to let the mkt kind of settle down. Afterwhich, if gap is b/w 1-3% wait and see if the gap will be filled and try to get in the trade if it does. If gap > 3% there’s likely to be a sluggish day, if < 1% the filling of the gap may not be big enough to warrant the risk vs. reward.

1. With regards to the gap, which index do you look at, is it the gap of the Nas100 or the NQ itself?

2. You favor trading against the gap. When this occurs, what would be the entry signal & entry point? And where would you look to be exiting?

3. Also, what would keep you away from trading against the gap?

Sorry if the questions are quite silly. I’m starting up my research on e-minis and trying to get a feel of how they behave and what are the best approached in reaction to them, while trying to come up with a trading plan.

Thanks DB for all your help.

 

by the way guys, I've been looking back at some of the posts to figure out how the system works, mostly using those with discussions on daily activity.

problem is some dont have charts, would anyone know a site that may have some pics of the intraday nq on the dates b/w 11/27/03 to about 1/30/03 (that's the time period of the discussion, more or less).

Thanks.

 

These aren't silly questions at all. But as far as gaps are concerned, I'm not sure I can give you anything but silly answers.

What you "understand" is correct as far as it goes. However, playing the gap is an entirely separate strategy. In fact, I'm not even sure you could call it a strategy. Maybe tactic would be a more appropriate term. In any case, there's a lot to be said for letting the market find its own range during that first twenty minutes-half hour. There's a certain pressure that builds up during this process that tends to lead toward successful breakouts. Without that pressure, the results are not as satisfactory (you're seeing a lot of that these days). I know how frustrating it is to watch price take off almost immediately and never look back. But the fact is that this sort of occurrence is rare, so there's a lot to be said for just leaving the gap alone, at least until there's more participation in the market. Otherwise, you run the risk of starting the day with a loss, and that's always a bummer.

But to answer your questions:

1. the NQ. However, it pays to watch the ES as well. Today, for example, the ES had a pretty nice gap, but as soon as it filled, the upmove in the NQ got choked off. They don't move in lockstep, but they are closely related enough to make watching both worthwhile. Yesterday, when the NQ made a new high in the morning, the ES was way behind. That may or may not be the reason that the NQ faltered and had such a lengthy retracement, but it makes sense. When they were both ready to move up, they both did.

2. By "against" I assume you mean fading the gap. The entry point is the same: two points. Which is why you need a gap of at least one percent to make it worthwhile. As for the exit, you could use the end of each one minute bar or you could just exit when the gap is filled as this is not a "trend-following" strategy/tactic, i.e., its goal is filling the gap.

Two points seems like a lot, and maybe it is, but there's a lot of gamesmanship at the open, and you want to see some serious intent before entering. I'm sure some people just enter at the open and see what happens, but that's outside my risk tolerance.

3. A gap that's too narrow, though until some of this indecision is dealt with, I may not play anything before 0950.

This is not necessarily a bad time to be studying this particular strategy or even to be trying it out. These are really weird conditions, and it helps to have the experience of trading really weird conditions. But until we start trending, there're going to be a lot of days when you're not going to be doing much other than observing and studying. And that can get boring when it's its own reward.

-Db

 

I believe QCharts has an archive. If they have a free trial, you could sign up, access the archive for the period of the trial, then cancel. But I don't know that I'd bother with Thanksgiving week, Christmas week or New Year's week, or any day that shuts down early.

--Db

 

If I understand correctly, then with the small gap and big open trading range today, there were no trades to be made today based on the system.

The basis for the gap then is the nq's close at 4:15pm and open at 9:30am. Am I correct here? Because if we were to use earlier times (at which the nq were open before 9:30) I think there wasnt any gap... I'm kinda getting confused with the times. Just goes to show that I'm really new at this.

I assume that after the first 5 mins when trying to fade the gap, we use 1 min charts to see the pattern. Then take the position when 2 pts from that 5 min mark as the nq tries to cover the gap?

Please correct me if I'm wrong, for example, after the open trading range, the nq breaks upwards. so on +2 we enter, then it only goes maybe +4 to +6 pts (something below target), and slips back. In this manner, we do not try to salvage a profit even when the mkt seems to be weakening and just let it hit the stop (if it gets there)? I'm not questioning the logic, but more of understanding the details.

Lastly, if you don't mind, I've noticed that the markets have been more rangebound lately, how's the system been performing?

Thanks again Db.

 

Quote from arzoo:

If I understand correctly, then with the small gap and big open trading range today, there were no trades to be made today based on the system.

Not unless you wanted to try that break below the opening low at around 0950. But I don't like to take those when the price has come back pretty much straight down (looks like a tent).

The basis for the gap then is the nq's close at 4:15pm and open at 9:30am. Am I correct here?

Yes.

I assume that after the first 5 mins when trying to fade the gap, we use 1 min charts to see the pattern. Then take the position when 2 pts from that 5 min mark as the nq tries to cover the gap?

That's what I'm working on. As I said, this has nothing to do with the strategy I posted. It's something to do during the first half hour, mostly because those early moves can sometimes continue. But once the gap is filled, be cautious. And tight.

Please correct me if I'm wrong, for example, after the open trading range, the nq breaks upwards. so on +2 we enter, then it only goes maybe +4 to +6 pts (something below target), and slips back. In this manner, we do not try to salvage a profit even when the mkt seems to be weakening and just let it hit the stop (if it gets there)? I'm not questioning the logic, but more of understanding the details.

If the gap isn't filled and you haven't reached breakeven, I wouldn't let it slip past breakeven. But that's up to you. But if it makes only a half-assed attempt to fill the gap, the odds that it will break out the other side of the range are that much greater, so don't relax for a while. If the gap is filled, I'm inclined to take the profit at the fill and worry about re-entry after that.

Lastly, if you don't mind, I've noticed that the markets have been more rangebound lately, how's the system been performing?

If you want to stay out of chop and trendlessness, it's been working just fine. Boring, but fine. However, I'd rather be bored than losing money.

Eventually I'll find a scalping method I like, but it hasn't happened yet.

The market will come back eventually, but it will benefit only those who are here. Therefore, your primary goal is to last.

--Db

 

great point...!!

 

I second that. Gone through scalping and personally, it's just too exciting for my blood. I prefer the system you're using and hopefully I'll be able to modify it to suit my risk appetite.

Thanks for your help Db... I'm getting the hang of it.

zoo

 

Hi Db,

I've been using a simulator to test the system the past days and the patience of staying out of the choppiness lately paid off today (assuming I did it at least partially correct).

I did some points when I got confused at what to do especially in the trail stops. The trendlines were a big help in determining the strength of the trend.

This is how I did it, I know there are still mistakes, I hope you can correct my mistakes.

for the NQ: entry at 974.5 with stop at 979.5. I did move the stop to +1 from LRH each time the TL was broken and almost got taken out at 969 at around 12nn EST (though I was tempted to get out when it reached 968 right before 11 thinking it was ready to reverse)... the next confusing part came in b/w 1 and 2:30 when the mkt became flat (since it didnt go above 960, I just kept my stops)... then just got out as the mkt reached closing at 953.50.

I get the general idea, but the steps arent too clear. If it isnt too much of a bother I'd really appreciate it if you could show me the proper way the system shouldve been used today. (if possible with a chart attached). Thanks.

You were right, system is simple, straightforward and when you are in just let the market take care of the rest and with stops in place you can do other things without being glued to the screen all the time.

Thanks again.