Recommended reading

I'm a regular reader of Brett Steenbarger's blog (Traderfeed) and his recent discussion of intraday price patterns seen in the SPY (ES) is something everyone should follow.

I wrote a comment to his latest post, where he discussed a price pattern giving you an edge of 70% to 80% for a winning trade. I post this comment here as well as maybe some of you, who are not regular readers of Brett's Blog, have some thoughts to add which might help find a very profitable 1 trade a day trading system.

Hi Brett,

your series is becoming extremly interesting. As I've tried to develop some trading systems myself, I would like to add a few thoughts, which you might find worth following up.

First a question: "How many trades do you need to make per day, if you are not employed by a trading firm but trading for your own account only?" Actually the answer is obvious. You don't need to make a trade at all. You have the option to wait for the pattern, which gives you your trading edge.

Now according to your numbers you have identified patterns, which give you 70% or even 80% winning trades. And you ultimately want to look for variables, which will improve the odds of hitting these price benchmarks.

I don't think that's necessary at all. It doesn't matter. You will end up with filters, which will led to less and less trades, while improving the odds by 1 or 2 percentage points, but not more. Actually any filter you add, will leave you standing aside from winning trades as often as from losing trades. At least that's my experience with filters.

On the other hand searching for rules to apply within the trade, which allow you to identify losers as fast as possible and thereby keep your losses down, while letting winners run, is something often forgotten. It's part money management, part trade management.

I've written a Money Management tool, which let me simulate doing 1200 trades at a given Win%/Loss% rate and certain Win$/Loss$ settings.

(Download from http://www.futures-trader.net/MoneyManagement2.xls You need to allow for iterations in Excel or it will give you only warnings)

Let's assume we have a Gap-up day and the odds tell us, that the chance the Gap will be closed is 80%. According to your numbers the average Gap is then something around .14% or 2 ES points. So the win$ on our average trade would be 100$/contract. But when do we know the Gap won't be closed? Ultimatly only at the end of the day of course. You start with an account size of 25,000$ and want to know, what will become of your capital if you trade with a winning chance of 80%.

Let's assume your average loss on these 20% losing trades is 400$ or 8 ES points. I have no idea what the chances are, that the close is 8 points away from the open on the ES. That's something only you can answer. What I can tell you is, that if you trade 2 contracts with these 25,000$ initial capital, your chance to go bankrupt is about 14% and that the chance to have lost money after 1200 trades is 59%.

It looks a lot better if your average loss is 300$ or 6 ES points. Then the chances to go bankrupt trading 2 contract are actually nil. And you will most likely make at least a bit of money. The minimum ending balance over 1200 trades was 27,600$ (from the initial 25,000$), the maximum was 248,200$.

Now we know, that our average losing trade shouldn't cost us more than 300$/contract, if we want to keep our edge. If less the profit potential of the system goes up expentionally.

If your average loss is 200$, then your max profit should be 541,000$. (My system assumes, that with increasing account size you will increase the number of contracts traded as well applying a margin of 10,000$/contract. So for every 10,000$ added to your account you will trade 1 contract more. After 300,000$ I apply a margin of 20,000$ for each additional contract)

But how can we tell, what our chances are, if the trade first goes against us, before it starts to close the gap? I don't have the means to answer this. But it might be worthwhile to ask what the chances are that the Gap closes, if ES after the open goes 1 point, 2 points, 3 points and so on against us before turning and closing the Gap.

Having a 83% winning chance by finding some arcane filters or rules might look great, but won't change a lot at the net numbers.

On the other hand finding a rule, which will allow us to trade with a 4 point ES stop, even if it's achieved only by adding contracts to a losing trade while keeping the whole trade risk at 4 points ES compared to a 6 point stop can mean the difference between 100,000$ and 250,000$ after 4 years of trading or doing 1200 trades.

Chris

Technorati Tags: Reading, Psychology

October, Friday 26

Short FTSE 6640

Stopped on that strong upmove, which continues despite weakness in the US and other European markets

Just great FTSE Short 6646 and stopped just seconds later in a News spike

Long FTSE 6664 Exit 6672.5

Have to admit that the exit was based on fear to lose the profits in this spike again. Sure need to work on this.

Account information

I really thought I am immune, I can handle it! What?

My current account information. Here is my FuturesTrader Setup. This is the screen I'm looking at when I place a trade. It hasn't changed for quite some time and I know exactly where to look for the information I consider necessary for my trading

Btw: I talked about the trades I made in COIL this morning. You see the 2 trades at the bottom of the screen in the Tradebook

In the bottom right corner I always showed my Account information. I was at every second informed about my current Profit or Loss for the day. Actually I was informed even within the trade.

But what I realized the last few days was this: I am dependant on that information whether I take a trade or not, whether I close a trade or not, whether I take a stop or a profit. If I'm above my daily goal, I'm reluctant to place another trade, If I'm down big, I'm more prone to take more trades to trade me out of the hole. But the decision has nothing to do with the chart setup I see, it is only dependant on that green or red number I see in my account information. It is dependant on myself nearing a round number or an important milestone in my account. Actually if I'm trading in a range I often think, will I finally be able to trade above that barrier. Only to see myself doing something dumb and going down again. As if I apply my own chart rules and setups to my account. So if it looks like it can only go down, it will. Some sort of self-fullfilling prophecy.

One click and it's no longer on the screen. For demonstration purposes I always had the option in my program to hide the account information. Now I'm doing it in my regular trading and guess what: I feel less pressure in my trading. I'm able to take a stop, when my setup is not working. I think, it's 2 ticks, but the trade is not working, so cover that short. I did so this morning, when Oil refused to go down at first, I no longer look at the USD amount, at the effect my decision will have on my overall account and concentrate on the next trade instead.

Thing is, seeing the results of a trade decision right on your screen might be detrimental to your trading, if you see your account ticking up or down by tens, hundreds or thousands of USD with each tick in the market.
It's one thing to know I'm down 10 ticks on a long ER2, which now trades at a support and most likely will bounce 20 ticks in no time, it's something different to see your account down say 1,000 USD in 15 seconds. Separating yourself from the money your position represents within a trade and only seeing the ticks you'r up or down is one thing, but seeing the result right on your screen makes sure you can't ignore it. You can't say to yourself it doesn't matter that I'm down 1 Grand. You instinctively know how much you can buy with that 1 Grand you just put in the sand (at least temporarily).

Selling Oil at the highs

Oil at new highs. I'm trying a COIL 89.23 short, but get stopped 89.25, when CL is trading another 20+ ticks up above 92 to 92.21

In at 89.25 again short when CL starts to drop

Stopped at 88.92. A big hidden buy order is sitting in the 88.86 to 88.90 area for 10 minutes holding COIL up, while CL tests the 91.75 area. Placing a Stop at 89.92 securing 33 ticks on this trade, as the order is hit at the London open.

Thursday, October 25th

FTSE opens with a classic

Gap up, sell-off, rebound. It was the scenario in my head prior to the open, it was the scenario the FTSE was playing ...and I botched the trade none the less. Real shame on me

What happened:

Entry on the second blue bar cluster up at 6566.5

As you can see on the left, there is huge volume printing at that level and sure enough it wasn't taken out. Instead the FTSE made a 3rd move down, nearly hitting my 25 tick stop, with the low at 6556.5 of that move. From there we bounced. What you can't see on a range chart due to it's nature, is the struggle FTSE made crossing that 6567 level. It traded above only to be sold down again and again. That's why I took a 1 tick exit. The entry for the trade was just to high, so the Risk:Reward was against me. Of course as you can see on the chart the FTSE continued upward for a double top, which would have given me a sweet 20 tick profit at least. But at the time, when I exited, it was in the balance and I did not want to risk it with a possible break to 6550 on the downside.

What I should have traded instead was the CAC40. It had the same chart pattern as the FTSE, but as it starts trading 1h earlier, the pattern was a lot clearer.

I've market the comparable entry level. As you can see, the CAC40 did also not move up on the entry bar, but the breakdown after it was better confined. It went 7 ticks down to test the 38.2% level at 5709, compared to 20 on the FTSE.

Coming back from a meeting I see the market rallied without me. So I'm looking what to do...

Currencies...CAD trying to break below that multiday low again...Sometimes it helps looking at the cash chart, so here it is, together with the valuable Fib-target lines

Using the July / August consolidation Low to High move, I get the consolidation end of September correctly as first downside target at parity. Next target is now 0.9488 or slightly below the 0.95 level, which makes sense for a stophunt. In the futures that would mean the 1.0528 level. But it might take another FED rate cut to get there.

 

Short FTSE 6607 on downticks on all US and european indexes I follow

Cover at Fib volume support (brown line) for +10 ticks

Short AUD 0.9043

It's below a 26 year high and not taking it out on the second attempt

stopped +2, I don't like the bottom building at 38 to 40. 12 minutes in the trade and AUD is not able to break the lows

These late FTSE trades are really fast. Long 6599, Exit 6502.5

Missed the reentry, but that red bar below my entry together with the fast action spooked me, as it was already annonced on my exit bar with the FTSE jumping down on 50c orders on the Ask which were thrown in, to keep FTSE down.

October 24th

It sure was a black Tuesday for me yesterday. Expensive, as I didn't apply strict Money Management rules. Tried to get my head free for todays trading.

Took the AUD long at 0.8954

Looking at this chart and this one:

The POC on the R10 chart just shifted. According to yesterdays theory this should cause a spike to the upside, as prior to the shift we were trading down.

Stopped on AUD +1. It tried to trade above 0.8967 but was sold off strongly twice. I saw no reason to remain in the trade as the objective for the moment (a cross above the 0.9000 FX level) is not about to happen

Long QM 85.025

The bottom is again holding on a higher low

85.10 is a barrier this morning...Out at 85.125

Made an "impressive" 24 ticks on a 200 tick run up in oil.

I have to say I was just too slow taking the trade, waiting to see the numbers on the news feed before I allowed myself to pull the trigger

Tuesday, October 23rd

Setting up the FTSE

I take a longer timeframe chart and use it to place my Fib-tool, to have indications for the open. Considering the YM move after the FTSE close

I expect a Gap-open in 15 minutes, which usually get's sold for 10 to 15 points, depending where we open and then bounces to the upside. CAC40 and Dax which are already open do not really follow that script, but seem to settle a bit above yesterdays close, so I will wait for confirmation for the bounce on the FTSE

On the CAC40 I've used the open range to setup the Fib-tool, as we opened above yesterdays range. Someone asked me in an email how to use the Fib-tool to get retracement and target levels.

The Fib-tool in Ensign is setup to give me these automatically once I apply it to my charts.
(In this article (October 11th) I posted the Fib-tool settings.)

So I just look for a reasonable High/Low swing in the contract I'm looking at and apply the Fib-tool. That's it. If during the trading day I see that a new major High or Low has been made, I might adjust the Fib-tool.

Tried a continuation long at 6540 (out BE+1), but FTSE is building a temporary Top it seems, so let's wait for the drop before the bounce

Hmm...it seems I underestimated the pain shorts feel, being just 15 points below the drop off level

Today is a strange day for me. I'm not getting into the market. Might be a bit tired. But I'm watching and trying to see something and I might actually have just seen something:

I was watching Oil for a bottom on this downmove, but wasn't commited.

See the red line (POC or highest volume for the timeperiod displayed on the chart) at 86.50.

Now on this chart the POC has changed to 86.20

and only seconds later this spike happened

What happened is easy to explain: There was selling volume meeting a lot of buying which was absorbing the selling pressure. The moment the volume surpassed the previous highest volume, the sellers seemed to accept defeat and started covering, thereby adding to the buying pressure, which then caused the spike. It looked very automatic to me, so there might be programs out there watching for that.

I myself will monitor CL in the future to see, if this pattern repeats itself. If yes it's a nice little edge when trading CL.

Long FTSE 6595.5

and stopped -28 ticks (underestimated the selling pressure for a gap fill at the US open)

Long Oil 86.12

Stopped -13

That Stop was too narrow!

Long again 86.12

Hmm, I'm trading against a downsloping EMA, stopped again

3 in a row...I'm out

Trading HSI

Thinking about trading HSI, the index of Hongkong shares traded on the HKFE. It's 50 HKD/tick which is about 7 USD/tick and it trades in 1 point increments. It used to be a great trading vehicle. Fast, but managable. But since August it is no longer that, it's just a wild animal.

On this chart each bar represents 25 ticks or 175$

That breakdown was worth 2240 USD, the following upswing range from the low another 1750 USD.

Problem is, it's so extremly thin, that it now has spreads of 30 or more ticks in a fast move, which was 2 to 8 ticks prior to August. By thin I mean the size flashed on the exchange. The volume itself isn't thin, just this volume is not displayed, which makes these break ups and downs so fast.

Still intraday you can handle it, if you are a fast finger trader, but what it did today might throw off even real good traders. Suppose you hold a short HSI over night and wake up with this:

Yes, that's a 850 point gap. In real money that's a 5950 USD Gap. And I can tell you it is a 50% chance that you get that one right, why?

On Monday it was 750 points down. Well...it seems it balances out over time:-)

Monday, October 22nd

Just starting the day, looking over my charts, seeing the CAC40 is still on October even when it expired on Friday, Looking further I see a 15min chart of the YM, which is still up from Friday. Take a look at it

See that friendly green 2nd target line at the bottom. I've no idea what timeframe I used to get that one, but it sure nailed the YM right to the spot.

Yep a 60min chart had been used to set the High and Low for the Range used with the Fib-Tool

It seems someone using my template has a lot of money to sink. ...or could it be that by accident I stumbled across a nugget explaining market dynamics

I had a few 1 or 2 tick trades when I wasn't able to trade fast enough on the FTSE. Had the regular target when it was giving only 10 or 11 ticks profit on trades and reversing extremly fast.

One 16 tick trade though here

But even there you see this sharp reversal against my initial position. Just because I had not adjusted the stop I was able to participate in the following swing up. But I have to admit I missed the following swings. Sure a shame

Higher highs while holding the lows, which are about to be broken on this latest downswing, which looks like a trend change, as the advance on the highs is flattening

 

Took the FTSE long 6479.5

Stopped on this spike down

As I said, this is a volatile market today. Had the stop moved after the FTSE moved down from 82 to 72 only to bounce up from there. Trading at the 85 resistance I moved the stop to 80.5 and was taken out. In hindsight

it's a bugger, but unless I manage to get my entries better, I will be stuck with these "wiggle out" trades I guess.

Long FTSE 6513

Downto 6503 and then finally another good one for +20. Did not hold beyond as the rangechart I was using was too small.

The standard R250 would have told me about the target at 6531

80$ missing to be back to breakeven on that YM disaster from Friday. Interestingly the YM just printed 13550, a -50$ exit had I held my contracts that long. But to tell the truth, I'm glad I covered my contracts last night, when I had a chance to do so at 13505 instead of sitting through that morning slump downto 13410 and back up.

Earlier I did it again. I bought the High and waited through a 20 point wiggle. Seems I get used to it. Sure not proud of it, but a phone call came in and I couldn't really concentrate. No excuse I know and it tainted my next trade (which is posted above) as there as well I bought the High of the swing and waited through the wiggle.

Taking a break now

Sunday Night Woes

Got Stopped. Simple as that. So no holding against the trend in the future.