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.