Friday, March 25, 2005

The Fallback Defense

Thursday was the first day I intentionally and with no emotional problems at all waited for the defense strategy to start doing it's magic when Euro was already 18 ticks against me and my Addon order was just another 2 ticks away.

The order got hit and my exit order went in for the defense contract at 10 ticks profit. 3 or 4 minutes later I was out +10 on the defense. On a pending news release I covered the second contract -7 for a +3 on the whole trade.

Sure it was not the success, Anti likes to have with the defense where each and every individual contract in the defense has to be closed at a profit, but the trade as a whole made a small profit and that's all what counts at my current waypoint on my path to become a trader.

The moment the first contract of a defense gets taken out Anti's strategy calls to enter the Limit defense order again at the same price level. But after short consideration, I decided, that the Fallback Defense is the better system for me as it allows me to bring the average price of the whole trade down, while ensuring, that in case the rally I looked for, when I opened the trade, starts I'm still in with the original position, just from a lower entry price.

How does it work:

Long Euro 1.3322
Average Entry price 1.3322

1. Defense 1.3302
Hit and taken out at 1.3312
Average Entry price of the trade is now 1.3312

2. Defense 1.2992
Hit and taken out at 1.3302
Average Entry price of the trade is now 1.3302

3. Defense 1.2982
Hit and taken out at 1.2992
Average Entry price of the trade is now 1.2992

and so on.

The moment Euro starts to go north again, you are in with the initial position at a nicely lowered average entry price.

Only thing you need to make sure is, that the contract you apply this Fallback Defense goes 2 steps back 1 step forward, 2 steps back, 1 step forward even in a trend move. Euro is such a contract, as after about 20-22 ticks in one direction you usually see a spike of 10 ticks in the opposite direction.

If you'r interested in a recent SFO magazine article talking about this method, a must-read is Boris Schlossbergs Trade like a Dealer article. You will need to register but SFOmag is free, if you give them your email address.

Monday, March 21, 2005

Voodoo Trading

Trading by targets. Look at this nice Euro move from this night
110 ticks for all who took the trendmove from 1.3350 short

The new Targetcalculator spreadsheet tells you where you are and what moves are probable. (To open you will need Excel)

The sequence is always the same:
Trendmove, countertrendmove, trendmove, countertrendmove...
On the spreadsheet the red arrows describe a downmove, the blue ones an upmove

Of course as we all know, sometimes a countertrend changes it's label and becomes the first leg of the next trend move. And the spreadsheet takes care of that, when you look at the dotted lines.

For this spreadsheet to work you need to know 3 things:
1. How far does a trendmove go in this particular contract.
2. How far does the countertrend move go.
3. Where was the last major Daily High or Low

To determine the trendtarget I started with Antiicc's Euro trendtarget of 110 ticks. I don't know, how he calculates his trendtarget so I thought about a way to determine the Trendtarget. Using the Average True Range of the last 22 days on a daily chart seemed to be as good as anything else. I'm open to other suggestions. Only thing necessary: The target needs to be smaller than the average daily (high - low). The average true range seems to give me numbers which are about 68% of the average daily range and which proved to be a good start, as at least on Euro, when i calculated the spreadsheet it gave me the anticipated 110 ticks.

The countertrendrange is usually (in a somewhat trending market) betwenn 38% and 40% of the trendrange. On Euro I got the 44ticks Anti uses by using 40% of the trendrange of 110 ticks.
Last you take a daily chart and look for the last major high (MSH) or low (MSL). Enter it in the yellow fields on the spreadsheet and you get a row of trendtargets calculated your numbers. Now you confirm one of the trend targets you got with the reality and see, if you can confirm the calculated trendtarget with the chart. If it's hit by a few ticks, best if it is exceeded by a few ticks, before a countertrend started you got it. If not, you might need to adjust the countertrend percentage number, until you got it right. By adjusting the percentage number you flatter or steepen the slope of an uptrend or downtrend.

Enter this trendmove target you can confirm on your trading chart in the yellow Pivot box and you are ready to start Voodoo Trading.

First determine, where you are:

Are you in a trendmove or in a countertrend move.
Then expect support or resistance at the minor S/R levels indicated on the spreadsheet.
A consolidation usually will have 2 levels as range boundaries.
If a trend continues, targets, especially trendtargets will get exceeded.
If countertrend targets are exceeded by 50% then a trendreversal has started.

I will keep you posted when I find more answers.

Relaxed trading

Saturday, March 12, 2005

Measured Moves

Take any chart, no take the chart with the contract you usually trade and look at it using your usual trading timeframe.
For me that would be the Russel 2000 500V timeframe, but a ES 5000V or a Euro 500V work as well. For most of you it will be either a 3min or 5min chart, it makes no difference at all.

Look at it, identify the Swing Ranges, and mark one up.
Here is an example from Friday afternoon.
ER chop, marked by the green lines

Now extend the Range between the Swing High and Low to the downside by 100%
(To the downside, because the break happened to the downside. But it works as well in upmoves.)
On the chart you see the yellow lines, which mark the 100% extention.

ER overshoot the range by a few ticks, at other times it failed to get to the projected target by a few ticks. But that's something I will not bother with right now, actually I will just set the target of my short trade to 75% of the range.

This week brought some nova to my trading:
I applied Antiicc's Defense Strategy:
He actually said that like in football, if you are on the defense, you take the hits as they come upto 5 times, until you are ready to move forward again.
Say you are long ER 630, with the swing low at 629.10.
Now you build your defense at 629.30, 628.30, 627.30, 626.30 and 625.30 and scale out 1 at a time until you are flat again. So he takes 1 point defenses 0.20 ticks above the low of the initial swing low.
I adjusted this to my account size, as even if my margin parameters might allow for 5 cars, I don't like swinging 5 cars with an account barely in the 5-digit region. So I looked at ER2 and said, ok, a full swing on ER2 is 4 points, so I will place my defenses at 2 point intervals. And guess what, not only was I able to trade this defense successfully on Thursday, I also had no emotional problem to trade it.
Yes I know, it goes against everything you have learned as a daytrader:


But this only applies to an add-on, which is not part of your trading plan. If you have sound reason to add to your trade, eg. strong support from a longer timeframe below and you just misjudged the countertrend by going long at the 20ema of the trendchart (on ER I use the 3000V for trend) and have the 34ema below giving you a nice additional support level, there is reason imho, to apply the defense strategy.

I had reason to believe, that my long would eventually work, so I applied the defense strategy and it worked. Actually it would have been a homerun, had I not closed out the trade early. But that's ok. I don't care about these missed profits, I care about protecting my account in a logical way, using all the tools available and not by limiting my thinking.

The other thing I did on demo on Friday was a Stop-Reverse at the Range Low.
This gave me a loss of 7 ticks on a Demolong entered earlier and a profit of 20 ticks on the follow-up Short, for a profit of 12 ticks incl. commission.

Both strategies are valid, you just need to know, when to apply which one.

And this "just" is it where all the trouble starts.

A Stop-Reverse will literally kill you, when you just get a range expansion and not a real break, while the Defense Strategy will be strained to extremes on a trend day.

And here the Measured Moves might help. I say might, because it's new for me, I'm writing this here to get my thoughts in order, to see if they represent valid and reasonable logic.

What do we have for now:
We have a Swing High, a Swing Low, a Range in ticks measured by substracting the swing high from the swing low and we have Breakout targets by adding the range to the swing high and substracting the range from the swing low.

We know, that previous Support becomes Resistance and previous resistance becomes Support. But what does this mean?
It means
price will retest the previous low after a break and making a new low
price will retest the previous high after a break and making a new high.

It also means, you Don't expect to make a Home-Run with the Defense Strategy
While it might look stupid in hindsight to exit at Breakeven, when you just needed to hold on to make a home-run with your defense position, I have traded too long to not assume, that there will be a lot of cases, when the retest of the Support or Resistance will offer you the last cance to exit, before the contract really breaks.
I'm sure, in case you exited your defense and it looks as if it could have turned into a homerun, your tradeplan will give you a new signal to reenter the trade.
But being flat inbetween calms you down, you can think objectively again and you can revaluate your position.

For the defense strategy to work, this swing to previous Support/Resistance should bring you to at least breakeven, because this really might be the last man's exit offered to you. So you need to make sure that your defensive add-on's to your initial position bring your average entry below the previous Swing Low (if you are Long) or above the previous Swing High (if you are Short). Take a calculator and apply the numbers on various trades to see what add-on's will be necessary to get your breakeven price outside of the previous range.

Thursday, March 10, 2005

Something to celebrate

For the first time in 3 years my account crossed the threshold to 5 digits again.
I can tell you it feels great. And I can see Mr. Market waiting to humble me again, but not today. Today I will just leave it as it is and start tomorrow with a clean slate.

After making 2 nice HSI trades I posted in the room, that I made my DG, and that my plan calls for a stop once I made it. Not to stop me dead in the tracks when I'm hot, but to make sure, I have consistent profits, not the home-run, deep fall days. But at 8.30 am in the morning being finished for the day? No, I thought about trading more cautious. Sure enough the next trade I took gave me some heat, but I finished it without violating my rules for a profit, ending the day on a real nice tone prior to lunch.

Buffy has a great article on her site, which I read at new years eve. I will repost it here as I think it's a great description, of what is necessary to become a trader:

Steps to Successful Commodities Futures Tradingas published in Commodity Futures Trading Club Newsand in Traders Organization's Real Success Daytrading Course
1. We accumulate trading information - buying books, going to seminars and researching.
2. We begin to trade with our 'new' knowledge.
3. We consistently 'donate' and then realize we may need more knowledge or information.
4. We accumulate more information.
5. We switch the commodities we are currently following.
6. We go back into the market and trade with our 'updated' knowledge.
7. We get 'beat up' again and begin to lose some of our confidence. Fear starts setting in.
8. We start to listen to 'outside news' & other traders.
9. We go back into the market and continue to donate.
10. We switch commodities again.
11. We search for more trading information.
12. We go back into the market and continue to donate.
13. We get 'overconfident' & market humbles us.
14. We start to understand that trading success fully is going to take more time and more knowledge then we anticipated.

Many Traders Will Give up at this Point as they Realize Work is Involved

15. We get serious and start concentrating on learning a 'real' methodology.
16. We trade our methodology with some success, but realize that something is missing.
17. We begin to understand the need for having rules to apply our methodology.
18. We take a sabbatical from trading to develop and research our trading rules.
19. We start trading again, this time with rules and find some success, but overall we still hesitate when it comes time to execute. We start trading again, this time with rules and find some success, but overall we still hesitate when it comes time to execute.
20. We add, subtract and modify rules as we see a need to be more proficient with our rules.
21. We go back into the market and continue to donate. We go back into the market and continue to donate.
22. We start to take responsibility for our trading results as we understand that our success is in us, not the trade methodology.
23. We continue to trade and become more proficient with our methodology and our rules.
24. As we trade we still have a tendency to violate our rules and our results are erratic.
25. We know we are close.
26. We go back and research our rules.
27. We build the confidence in our rules and go back into the market and trade.
28. Our trading results are getting better, but we are still hesitating in executing our rules.
29. We now see the importance of following our rules as we see the results of our trades when we don't follow them.
30. We begin to see that our lack of success is within us (a lack of discipline in following the rules because of some kind of fear) and we begin to work on knowing ourselves better.
31. We continue to trade and the market teaches us more and more about ourselves.
32. We master our methodology and trading rules.
33. We begin to consistently make money. We begin to consistently make money.
34. We get a little overconfident and the market humbles us.
35. We continue to learn our lessons.
36. We stop thinking and allow our rules to trade for us (trading becomes boring, but successful) and our trading account continues to grow as we increase our contract size.
37. We are making more money then we ever dreamed to be possible.
38. We go on with our lives and accomplish many of the goals we had always dreamed of.

Where are you at the moment?

Tuesday, March 08, 2005

Swing Trading Part I, Part II, Finish

Part I (yesterday around 2.15am EST)

Yeah I wanna be a Swing Trader.

Anti has 44 / 105 tick targets and I wanna grab some of these

Euro, Swissi, Sterling and Aussi all have bullish ZLR's on the Daily.

Take a 500T chart Euro and Go Long with the next signal
I did so around 2.15am EST, when Euro had a spike and seemed to go up afterwards

1.3240 Long

AUD is also bullish:
Long we go 0.7896

Fudge, a FAKE

Euro down at 32, AUD 93
a look at the 5000V Euro (after I made the entry) confirms, Euro is not really in an uptrend right now, but the daily said Long, and so I stay long

But YEN looks nice, there is buying in this market
Long YEN 0.9535

3h later, the drama unfolds

Euro down 30
YEN down 15
AUD down 10

around 1pm EST
Euro back to 1.3220
YEN at 0.9525
AUD 0.7900
finally it's reversing and continuing the upmove

Fudge 2, another Fake

Short target now around 1.3180 (I'm long as you all know)
AUD holding

around 8am EST
EURO down 50
YEN down 30
AUD up 6

A quick review of the FXstreet news confirms: Major tradeprograms gave sellsignals in a quiet market, so there is selling to be expected. And btw: The move on Friday was overdone according to the writer. As if I did not see that

around 11am EST
EURO down 40
YEN down 40
AUD up 10

my account is swinging (you remember I wanted to be a Swing trader) around the -1k$ mark, depending on the direction of the AUD

My deadline is looming in the future and I know, at 1pm EST (7pm my time) I have to stop. I promised my wife, that we would go to the cinema tonight.

At 1pm EST
AUD up 25, my wife is calling, STOP AUD +20, was hit while we were having Dinner
EURO down 25
YEN down 25
account near the -400 mark

I'm now a swing trader and the daily still tells me to remain long. Ok, not on the Yen, this was an impulsive fudge trade, but so what, I'm stuck with it and YEN will surely go below 105 cash again.

The first 15min in the cinema I still thought about my open position, but then I forgot and remembered again only when the film ended. At home at 10.30pm EST,
EURO down 20
YEN down 20
and YEN news overnight. What a prospect, but the 5000V Euro and the 1000V Yen both told the same story: UP we go and if in a trade from below you should just do one thing: Nothing

I rechecked at 18.00pm EST, waited for the first bunch of news, which did absolutly nothing and went to bed.

Part II
This morning at 23:45pm EST (5:45am my time)
Nothing happened overnight. A reassuring report telling me about some Stops in the 104.80 cash area on the YEN, which traders might try to target.

1.30am EST
HSI is open, I'm still swinging -500 in my account and I hate trading when I'm down on open positions. Really distracts.
So I let HSI running up 70 ticks, waited for a pullback and took a small grab of 18 ticks against resistance at 13800

Finally the account looks better now.
Actually I'm up on saldo as Euro and YEN gained a bit as well

2:30am EST
I had to leave for 30min.

coming back I see
Euro up +7
YEN down -6

Hey that's something

Euro Stop BE+1, I can't stand another round of swing trading
YEN trading around the 105 cash level. Come-on guys and gals, do your job and target 104.80

Oh fudge, Euro Stop hit
Euro swing trade out BE+1
YEN finally crosses 0.9535 upto 0.3938

Euro breaks 1.3254 and stays above. Finally going in the direction of my swing target (without me)
YEN takes a second attempt to go below 105 cash, I'm out at 0.9537, it spikes to 0.9544

All in all, I think I need to look at this Swing Trading again, revaluate my approach. But for now I'm emotionally drained. While Euro spiked up, I took a long AUD only to cover at BE+1 right before it spiked. Yes sure there was a seller, I saw him on Forex cash, and when he was gone AUD followed Euro up, as expected and actually according to my tradeplan which triggered the entry. But once in the trade I was not able to hold it. And so I took the BE+1 and was angry at me afterwards.

Forget it, leave it behind Chris. Take your dogs for a walk and reenergise your mind batteries.

Relaxed trading to all of you

Btw. Comments re Chris you need to use smaller Stops / should have reversed when you got a second short signal are futile. I know this, I trade this 95% of all days, but there remains this 5% rest, where I'm just blind dumb and deaf. These are the days, when I have a bias and am stubborn. What do you do, when you hear this voice of reasoning with you and just tell it to be quiet? I don't know yet. I know I'm acting crazy and still I do it and follow the stony path, instead of returning to the smooth road to happyness as Cheese would put it.

Tuesday, March 01, 2005

Sitting at hands

..but what signal do all these other traders have, when they trade, while I sit on my hands.
I just don't get it. They should see the same I see, still they trade.
They buy the high, they sell the low and they make money, while I sit on my hands seeing my contract move without me.

Frustration sets in, I will also buy the high, this is a trend move.

Ahh this 150c order on Tier3 of the market depth, if it gets taken out, the way is free to unknown highs and riches. Just put a StopLimit Buy one tick above.

Did so on HSI today, I bought the high at 82 and HSI tested the Lows, but firm to my new trading plan: NEVER cover at a loss, I held, ...
ok, ok, I admit the 30 tick stop on HSI did not get hit either, still you get really ingenious coming up with names for your own stupidity of buying the high, as if you never learned that breakouts usually fail.

HSI came back in a 25 tick spike and I was taken out +4, it reversed below my entry, but my happiness having found another fool buying the high, was just a short interlude, before HSI made another 15 ticks to test 14000, which was my first target.
But when 14000 held, did you see me going short? Me neither!
I sat on my hands.

Dax testing it's lows of the day, making divergence, I sat on my hands, because it was 5min to the news. Come the news with not so much than a ripple in the market, but Dax had made another 5 points already.
Ha, me buying another high of a move, not again.
You know: Once you can try it and I might fall for it, but twice,... I'm not a fool

It seems other traders did not have this experience and wisdom I had, they continued buying Dax for currently another 15 points (for those of you not familiar with the Dax that's 487,50 $ / contract)

And me, I'm still sitting on my hands, staring out of the window in a cold and sunny winterday.