Missing an opportunity

Missing an opportunity for me comes in two different flavors:

One is the missed trade while I was not at the computer for some time and just couldn't take the trade or did not leave a trade open, because I don't like to be in the market when I'm away.

It's a missed opportunity according to the rules.

It might be that I'm angry for a short time, that I think, shit, what shall I do now, that this move has happened and we will most likely see only choppy consolidation for the next few hours. But I missed the trade according to the rules and that is ok, because I have a reason for that rule.

The missed trade which makes a lot more problems and which might actually cause me damage is the missed trade I did not take, even when my inner voice said "Go for it, everything is aligned, you have a signal, take it NOW"

Still for some unspecified reasons, which might be fear, feeling unwell or some other unclear reasons, I override the signal and my inner voice and the market jumps away.

It's these missed opportunities, which cause me problems, because I did not follow a signal, which was there to be taken.

A similar situation arises, when I enter the trade, but then -out of fear to have taken a wrong signal- trail it so narrowly, that the trailing stop will for sure get hit on the slightest wiggle, even if the trade is a good one and the market seconds later does what it was supposed todo.

Most of the times I recognize the symptoms now and stop trading for a while if this problem occurs, because then I know I'm no longer fit to trade. I just don't have the energy and stomach to give the trade the room it needs to develop.
If I don't recognize the symptoms, then the day usually ends deep deep red. Because then unconsciously I will try to make back what I missed with the follow-up trades. And this is a setup which usually ends in disaster.

Monthly Euro-Yen

Euro-Yen is approaching a big round number.

170.00

Here you have a monthly Euro-Yen. As you can see we have a very strong setup, but we are also at a possible monthly double-top area.

And Euro-Yen has already made the second target in this upmove, projected from the consolidation period in the pair from 2003 to 2005.

So we should prepare for a leg-down, before Euro-Yen starts to rally ahead to take out the new targets projected by the current consolidation area, which started back in mid 2007.

Of course timing the top and the start of the leg-down to the 50% retracement area near 159.00 isn't so easy from a monthly chart. Still looking at the 2003-2005 consolidation area might offer clues:

The second high made there was 141.54, before Euro-Yen started the leg-down to the 50% retracement area, which was followed by the leg-up to current highs.

I will watch Euro-Yen for a test of 171.50 and place some shorts there or more likely buy some puts once we are near that area, as I found, that timing longer term tops with options is easier for the mind than trading futures, which I hold intraday only.

Of course the scenario calls for a High Failure Pattern at 171.50, meaning Euro-Yen should better drop below 169 until the end of the month or we have a close above a previous all time monthly high, which would make the 169 to 170 area a very strong support zone.

Emotions

If you trade oil futures try one experiment. It will cost you maybe one or two ticks in commissions, but emotionally you will learn a lot about yourself:
Take a quiet period and go long 1 contract CL N8 (which is the current front month contract) and if possible at the same price Short 2 contracts QM N8.
Make sure you have no stop or target orders in the market.

This position will cost you 150USD in margin as in fact you are flat, you have no market exposure at all, as every tick down in CL will be made up by a tick up in QM and vice versa. The only slight difference comes from the fact, that QM trades in 0.025 increments while CL trades in 0.01 increments. As the tick value in QM is half that of CL you will need 2 QM contracts to offset the CL position.

Now take the time and follow your position during the day. Monitor how you react to the losing side and how different you react to the winning side of that combined position. Notice how you have that urge to take profits in the green position, while you are somehow reluctant to let go of the losing side, instead having the feeling that that loosing position will come back.

At the end of the day, when everything is quiet again, close your position.

I don't suggest taking advantage of extremes, as the purpose of that experiment is to learn how you react different to a losing and a winning trade, even when objectively there is no market risk at all.

You are at no time exposed to any market risk, you may have to pay one or two ticks plus commissions, but that is well worth the experience.

Modified Donchian Channel

For trading priceaction with double top (DT), double bottom (DB), high failure (HF) and low failure (LF) patterns the Donchian Channel (DC) is particularly suited, as it is a channel drawn on the Highest High and the Lowest Low within the given period.

But there is one disadvantage:

It won’t show you a HF or LF pattern as the channel will move up or down once the new High or Low has been made. Thus the channel will behave as if a breakout/breakdown is occurring when in reality prices will return into the channel and reverse.

Now I thought that drawing the DC not on High/Lows but on the highest Close and Lowest Close within the given period would solve that problem. It’s a bit tricky to do that, as Ensign will draw the Channel on the Highs and Lows even if you select the Close as datasource for the DC.

So we first need to add a Simple Average with length 1 based on the Close, which is in effect a Line on Close and then select that average as datasource for the DC. (Settings have been posted below)

And now you get a DC, which shows you not only DT and DB’s but also HF and LF patterns as marked in this ES chart (The thin yellow and green line is the modified Donchian Channel.

And here are the settings used

 

Internal Margin for your trades

After 3 months of fine trading earlier this year I find myself in a consolidation. My trading results going up, then down, then big down, then up again. As if something in me has changed. Reading this article from Dr. Brett Steenbarger "Getting off the Performance Roller-Coaster" think I found what was going wrong. Overconfidence in my ability to read the longer term market direction correctly. Going so far that I no longer cared where my entry really was, as the contracts I traded were showing such a high volatility, that nearly all trades would show me a profit sometime after my entry. But I coupled that with a desire to squeeze more and more ticks out of the individual trade seeing 50 to 100 tick moves and thinking, that I should be able to get more than 30% out of these moves. Therefore, even with a bad entry I stayed in trades longer than warranted and I did not take the chance to exit when it was offered as I expected follow-through which never materialized as I traded against a longer term trend.

The first time in my trading career I'm going through such a consolidation and I'm not standing with my back at the cliff, where one misstep will throw me in the broken account chasm. And by chance I followed a link to Henry Carstens. In his "Introduction to Testing Trading Ideas" article I found something extremely valuable:

A formula to calculate the Minimum Margin you should apply to all your trades.

You need to know the maximum loss sustained in one individual trade and your Win% and Loss% numbers. I've taken the numbers for 2008, but that's up to you of course. Just make sure, that the number of trades done within the time selected is high enough to give an accurate picture of your trading.

Minimum Margin = (Largest Loss) / (((( 1 + (W% / L%))*W%) - 1) / (W% / L%))

My largest loss this year so far was 5812$, my Win% rate is 63% and my Loss% rate is 12%, the remainder are breakeven trades. I made 377 trades which is high enough to give me statistically meaningful results for my Win% and Loss% rate.

So my Minimum Margin calculates as:
MM = 5812$ / (((( 1 + (63%/12%))*63%)-1)/(63%/12%) = 10347$

I always knew, I should not use less than 10k$ / contract traded and I did so for 3 months, but I violated that rule during the last 4 weeks, when I tried to convince myself to increase size. I did not feel comfortable, but I couldn't put my finger on it, telling myself that I'm just anxious to increase size. Now I have something measurable, something which tells me when it is ok to increase size and when I should still wait.

Trading method

Session Start: Tue Jun 03 20:30:45 2008
Session Ident: trader
[20:30] (trader): hi croc
[20:30] (croc): hi
[20:31] (croc): how are you?
[20:31] (trader): Very well and u?..i read you blog...it's big now! But i have a question: In a few lines what did u change in your trading method?
[20:33] (trader): Or can you point to the pages i have to read (in your blog) if not all pages! :))
[20:33] (croc): buy low, sell high or sell high, buy low...to determine what is high or low I use a simple range calculation from yesterdays close
[20:33] (croc): http://globetrader.blogspot.com/2008/03/trade-rules.html
[20:34] (croc): http://globetrader.blogspot.com/2008/05/countertrend.html
[20:34] (trader): Very nice to share!! thanks croc!!
[20:34] (croc): http://globetrader.blogspot.com/2008/05/heikin-ashi-candlestick-charts.html
[20:35] (croc): excel tool: http://globetrader.blogspot.com/2008/04/ib-excel-adapter.html
[20:35] (trader): thanks i think i read the last 2 ones!!
[20:35] (croc): :-)
[20:35] (croc): then you got it already
[20:39] (croc): but that's all in your brain
[20:39] (croc): its about taking really responsibility
[20:40] (croc): the last article has my ideas re this topic
[20:40] (trader): Yes...absolutely agree with you! Nice! Do you have an email or it is in your blog (if i have any question)?
[20:41] (croc): if you think you can do it then you have done it already. You just need to prove to yourself that you can do it, so these nagging doubts leave
[20:41] (croc): anwalt@czirnich.de
[20:41] (croc): there is also a link in the blog
[20:41] (trader): thanks! yes that's suggestopedy!
[20:42] (trader): force ideas prove right if you hardly think about them!
[20:42] (trader): I'll read it! Your blog is very rich and full of good ideas!
[20:43] (croc): problem is you need to trust your instincts 100%, but those instincts have to prove themselves to be right and it takes a lot of time to teach these instincts to do what you want them to do
[20:46] (trader): you still think you need to trade with instinct?
[20:47] (trader): or just instinct to take responsibility and start your own business?$
[20:51] (croc): lol trader, you don't understand, of course I trade with instinct. I can't build a mechanical trading system from my rules, there is always a filter which decides that I take this trade and leave the other. I have the best pattern analysis computer and neural net right between my two ears. I use it, I don't need to know how it reaches its conclusion, I just give it filters and certain rules which should be present and I'm happy if after a trading day I'm able to get an inkling how my brain did what it did throughout the day
[20:52] (croc): I'm no mechanical trader and will never be. I can't trade with 50% to 70% winning trades, or 30% losers
[20:53] (croc): so I need to rely on my instincts or better my subconscious mind to do the analysis for me
[20:54] (croc): as long as you go against your instincts and you have not a proven mechanical system which gives you an edge you will lose
[20:55] (croc): of course I have rules, of course I have strategies, what will I do when x or y happens
[20:55] (croc): but ultimately I need to rely on my feelings what the correct course of action in a certain situation will be
[20:55] (croc): of course these feeling are not 100% right
[20:55] (croc): but overall I have an edge now
[20:56] (croc): and that's all that counts
[21:00] (croc): take a look at brett steenbargers blog. He has some very good articles on training your subconscious mind. How you learn to hear your inner voice and how to learn to trust that voice or feeling
[21:00] (croc): http://www.traderfeed.blogspot.com/
[21:01] (croc): of course you need to couple that with a sound and simple system which "just" needs a filter which picks the good from the bad trades
[21:02] (croc): It's really a bit like developing/programming a neural net
[21:03] (croc): you don't need to know how it's done, but you need to provide input which you know could produce a lot of winners if only the bad trades (at least some) would be flagged and left out
[21:05] (croc): cu tomorrow, I will close now
[23:13] (trader): ok thks!
Session Close: Wed Jun 04 00:00:00 2008

How do patterns form

How do patterns form on different timeframes. We all can agree, that the same patterns are visible regardless of the timeframe. Now have you asked yourself how a Double Top on a 30minute chart looks on a 5 minute chart or a 10 tick chart.

1. The daily highs and lows are visible on all timeframes

2. A double top on the 30min chart might be visible on the 5 minute chart, if the bars forming the top are not too far apart, so you still can see them.

3. You will certainly not see the double top on the 30minute chart on the 10 tick chart, instead the 10 tick chart will form its own pattern. But as we know that one bar of the 10 tick chart makes the high seen on the 30minute and the 5 minute chart that top on the 10 tick chart will look like a high failure or a double top or a failed breakout above a prior top on that 10 tick chart and a reversal down.

Now we have to differentiate:

A. Trend continuation

a. If a trend continues, then we see higher highs and lows on the longer timeframe chart eg. 30min.

b. We have a retracement on that uptrend, which we see on the 5 minute chart

c. And we have the 10 tick chart which forms a downtrend showing lower highs and lows as long as that retracement lasts.

d. Now that retracement comes to an end and a bottom forms. We see lows forming on the 30min chart, the 5 minute chart and the 10 tick chart. We do nothing.

e. We bounce upward and we stall, because Sellers which caused that retracement are not willing to give up so easily. And we go down again.

f. We have a second low on our 30min chart or it happens within one 30min bar, then we see that second low forming a double bottom on the 5min

g. We watch the 10 tick. Yes we see that low, we go up, we stall, we go down and BINGO: we have a higher low or a double bottom on the 10 tick and we are long

h. As you can see to go long on a trend retracement gives you a lot of time to go actually long. You get the preparation on the 30minute, you get advance warning on the 5 minute and you have time to commit while you wait on the 10 tick to form the entry.

i. Here you may decide not to wait for the signal, but to anticipate the Double Bottom forming on the 10 tic chart. I place a limit order 1 tick above the bottom on the 10 tick and if hit I get a great entry for the long.

B. Trend reversal

a. We have a Top and we see that top on the 30minute, the 5minute and the 10 tick chart

b. Being a Market Structure High, a Reversal starts (something we only know in hindsight)

c. That reversal starts on the 10 tick chart. Here we see a high failure or a Double Top and we go down.

d. We are still within that bar forming the high on the 5minute chart and certainly within the 30 minute bar. These give us no signal. The only signal we have that the market is overdone and ready to roll-over is the 10 tick chart telling us that the market was not able to trade higher.

e. How can we trade such a reversal?
We can, if we jump in front of the Freight Train and say: “Market! Stand Down and Turn around. This is Chris the mighty and I’m telling you: Enough is Enough … Down you Go”
Ask yourself how often you have done it

f. Truth be told you can of course jump in front of the freight train if there are other factors or signals not seen in the price action, which tell you that there is a very good chance that the market will turn. I use round numbers or points from yesterdays close or just my knowledge how far any move in a certain contract on average goes on spikes before we see a retracement to get these outside factors. But you need to be on your toes, you need to be aware, that the market might not bow before “Chris the Mighty” and just leave behind “Chris the Beaten” on its path to new highs or lows.

g. When we have made the top, the next to reveal that there really is a top in place will be the 5 minute chart forming a Reversal pattern and if its really a trend reversal we will finally see the test and failure of the test on the 30 minute chart.

h. To go short in a long trend betting on a trend reversal to happen asks for a fast trigger finger and decisive action. You have no time, you have no ample preparation. You see it happen on the 10 tick chart and you execute your plan as near to the high as possible. If you wait you will be left behind or sit in a losing position until the market decides to really roll over.

 

Here you have a chart of a trend short today on oil. First take a look in the lower right corner. That’s my 30minute chart. I have marked the lower double top which formed today

Then look at the big chart to the left which is my 5 minute chart. There you see clearly the resistance zone formed and marked at the 127.65-127.95 area. And last the upper chart to the right, which is my 10 tick chart.

You could have taken the short at 127.60 or at the second lower Top formed at 127.48. Enough time and options to enter the short for a 50 to 80 ticks trade. For the exit I trail and have target orders, which get adjusted, depending on the speed of the market.

Trend trading that way is not fancy, there is no fame in a lot of trades to be made. That one trade I mentioned made 50 to 80 ticks, that’s 500 to 800 $ / contract. Sure you need to hold that long, you need the conviction to hold onto your winner for 20 long minutes, while you were sitting on a lot of profits always thinking: It might reverse, it might reverse, it might reverse…let’s take the profits now.

Responsibility

There are a lot of professions, where there is one way of doing things.

In trading it’s different.

In trading you need to find your own edge.

You need to find that setup, that method, which speaks to you.

If you find a method which speaks to you, then you can’t make it your own by copying someone else. Even if it is Don or Bruce or another great trader.

You need to do it all by yourself.

You need to test, to build, to try one timeframe, then another. This chart type, then another.

You will go circles, you will hear Don and others tell you to use x and y tick charts in combination. You should try it, but then you need to take the next step alone.

You need to find the setup which speaks to YOU. No one else matters.

I said you will go in circles, because I found myself returning year after year to concepts or ideas I’ve had in the past. It’s a bon writing a blog for a long time, because then you can go back and see, what you have done in the past, what ideas you have already tried, where you did not take a path worth trying now. Actually you don’t go in circles, you go up a stairway going round and round and round up a very high tower. You come back to concepts you have tried already, but with a lot more understanding, which allows you to use that old concept in a new way, a way not tested before.

In trading you need to trust your system 100% or you won’t execute it, you need to trust yourself 100% or you will do a lot of damaging things to your account.

To be able to trust your system and yourself 100%, you need to do it the hard way, you need to do it yourself, because ultimately no one else but you is responsible for your actions. You can’t blame the system for your failure to make money in trading, you can only blame yourself. We go long ways, we invest a lot of time and we pay a lot of money just to avoid that responsibility.

But only when I accept that no one else but me is responsible, then I will be able to do what is necessary to do to be profitable in trading.

Go to other chatrooms, test other methods, learn, learn, learn.

Don from SANUK group saying that only PA works is fine, but do YOU know that? Really? Can you tell me, why oscillators don’t work? Why CCI crossing the zero line, with the slow Stochastic at the 20 level and the Fast Stochastic at the 40 level is not a great long signal? Why a Moving Average crossover system will (not) work?

You need to try using the Stochastic, you need to use a moving average crossover system, you need to look at other things, because you need to come back to PA knowing what works when and when you better don’t use a certain method. You need to truly understand, that there is no Holy Grail.

Of course you can use this bit of information here and that bit from there to build your system. But in the end it must be your system. Not Don’s, not Bruce, not mine.

YOUR SYSTEM, which you trust, which you can trade and which makes you a lot of money.

You will invest a lot of money in your education, but trading is the one profession where you can make it all back in just a few months once you found your edge. It is possible.