Tuesday, September 12, 2006

A very good question

and one I asked myself over the weekend as well:

Hi Christian,
Can you explain to me what major changes you made in your trading for better results.
How do you define the trend now?
Kind regards

I have to admit, that I have no clear answer.

I still do very dumb trades, I still have lucky trades, my Loss$ / loss trade ratio is still higher than my Win$ / winning trade ratio. Lucky I have a lot more winning trades than losing trades, which takes care of this imbalance. It still leaves me with an uneasy feeling, when the shit hits the fan and I have a losing streak.

This eMail forced me to think about my trading, what is my edge, what is working now, which did not earlier, what did I change, that makes trading now so much clearer?

Most notable change was the switch to use Linecharts and admitting

I’m not interested in the high or low of the previous bar

I’m just interested whether prices go up or down when I take a trade


Globetrader_40
Look at the black line, which is the German Dax. It dropped nicely from 5816 downto 5780 after the open (09:00) of the regular market.

If I go short, I like to see the black line pointing DOWN

If I go long I like to see the black line pointing UP

Difficult rule? No, of course not. But this rule makes sure I trade With the Trend in the timeframe I have chosen to take my signal from.

All other information on my charts helps me decide to take a trade or to decide where to expect Support or Resistance

To make sure I don’t miss that prices on average are going down, I have a Blue-Red Regression line on the chart. It tells me the trend:

Blue = Trend Up
Red = Trend Down

Next you see No Grid on my charts. A grid is arbitrary, it fools us in thinking, that there might be resistance or support, when there is none. Instead I have certain lines on my charts.

I mark the following pricelevels with a line on the chart:

Yesterdays Close and Todays Open for Gap trades (blue / green line)
Hi-Volume price levels (red dotted), as here I expect a lot of 2–way action on a retest
The High and Low of the previous bar of different longer timeframes

In regular candlestick theory a long trend is defined by showing successive higher highs and higher lows. Take a trader, which uses a 60min chart. He would expect the previous bar low not to be violated for the trend to remain intact. By marking this hourly Low on my chart I know, that there may be traders looking for a retest of this price level, as it would give them a second chance to board the train in the timeframe they trade.

I mark these priceleves on the right side of the chart

The daily High (red arrow), Low (blue arrow) and 50%-Level (yellow arrow) This gives me an impression where we are trading in respect of the days range
The highest and lowest High and Low of the previous 10 bars, to know with a quick glance whether we are consolidating a move or trending again. This information is secondary and might be removed from my charts at some time.

I mark on my charts also Bollinger Band Zones and Exponetial Moving Average Zones. I use Zones, as I don’t think there is one correct EMA or BB setting and all the other settings are wrong. There is no holy grail, there is not one correct technical indicator. But of course a lot of traders looking at similiar charts and similiar indicators will react predictable. A 20ema and a 34 ema are not a lot different. In a trend move I expect prices to bounce somewhere between the 20ema and 34ema.
Globetrader_44

On the other hand I expect the Bollinger Band Zone to act as Reversal zone. I know once prices penetrate the BB-Zone that the price move is extended and I expect a reversal or sideways movement which brings prices out of this BB zone before the next trend move lower starts. Trades taken from the BB are usually Countertrend, so I take a small stop with these trades, while Trend Trades get a lot more room. Violating this rule usually leds to my worst blunders and very costly experiences. Something I just did today on the HSI, when I took a Short in an Uptrend and it really got very expensive, as I did not believe, that the HSI would disregard precedences set by the Nikkei and the SPI which were down intraday.

Globetrader_45
The Short at 17053 cost me an 80 tick loss this morning.
Compared to my trading just a few months ago, this did not freeze me, seeing my account down 500$ on 1 contract just 1h into the trading day, but I took advantage of the DAX short I posted above and made 40 ticks or 500 Euro on it.

A lot of traders might ask, why did you not stop the trade? And I ask myself that question. I did in the trade, but I saw a clear downtrend in the longerterm chart and most likely tomorrow HSI will be down, retracing all of todays move. But as I don’t swing trade the HSI I let it run into the disaster Stop I use on HSI. Just bad luck, that the move was so strong today. Nonetheless I learned a valuable lesson for my future HSI trading, as I took the short with HSI being up 170 ticks on the day after the morning session and that means in the future I will let the HSI prove itself first before I assume a trend change in the afternoon regardless what other markets are doing.

Oscillators

On my charts I use a longer and shorter Commodity Channel Index. I learned a lot in Woodies CCI-Room a few years back. And after trying the STO, the RSI, the A/D and even a few selfmade Oscillators, I came back to the CCI. It’s as good or bad as all the other Oscillators. You need to know, how they work in trending and ranging markets, you need to know how they are calculated or more exactly, how they react when a consolidation turns into a trend move and vice versa.

But what is most important:

Oscillators are secondary information

They don’t lead prices, they might spike, when a small range suddely is broken and tell you that a stronger move might be expected, but that’s it.

First you look at prices, they tell you that something might happen at certain price levels.

Second you look at the oscillator and if you see a confirming pattern forming you take the trade.

Look at the first Gold trade I marked above. Prices test the EMA-Band. On the CCI a real nice sling is forming. So when you see the EMA-Band rejecting prices and gold trading again below 621 you go Short with the sling on the CCI present.

What turned my trading around was most likely being sure about my edge, knowing what I trade and what I look for in the market. Add to that a lot of screentime and not looking for home runs. Of course knowing how far an average trendmove will carry you, can keep you a lot longer in the trade which helps with the win$ / winning trade ratio.

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