Dogpile

This is a highly interesting topic and subject of recent books. To me, it is clear that program trading can dominate at times. If you do not remain flexible, you will get run over by these competing algorithms that are written by extremely smart people trying to take your money. But there is a good argument to be made that all these competing algorithms actually make 'right-brain' synthesis of complex, dynamic information MORE important. If so much money has so much compute power running mathematical programs, then the market is saturated with 'left-brain' compute-intensive strategies. From Daltons latest newsletter (May 2007); Successful trading is for those individuals that can continually combine the left and right hemispheres of the brain to appreciate what is occurring in the markets. From our bookshelf: During our trip to Chicago last month, Jim and I were introduced to a book containing a significant amount of thought provoking information. Our thanks go to Linda Raschke who introducing it to us as a 'must read'. The book, 'A Whole New Mind' by Daniel Pink, focuses on the power of whole brain thinking and how the right-brain will play an important role in the future in ones success. Chapter 6, "Symphony", provides insight to Pink's thinking. Chapter 6 - Symphony - In this chapter Pink demonstrates how there is far more than just focusing on the identifiable, mostly left hemisphere, facts. He discusses the importance of invention and conceptual big picture thinking. If we were to relate Pink's chapter entitled "Symphony'; to trading we might experience: The ability to create something new and / or different such as a new type of chart, or a way to display or interpret volume, or understand a new shape nuance in the Market Profile graphic. The ability to create meaningful pre-session and post session narratives to better prepare yourself for the following trading session. (DLC's next educa-tional letter will expand on the narrative idea.) The ability to synthesize, combine or correlate unrelated ideas or parts into something unique and beneficial such as synthesizing the relationships between different markets and understanding how the markets different timeframes, coexist, interact and merge. The ability to observe, interpret and understand the subtleties and nuances of human behavior as reflected in the markets order flow by understanding inventory balances and imbalances. Today, as you know, we live in the age of information overload. Facts are at our fingertips via search engines, the media, and dial-up information services actually make information less valuable while making its relevance, interpretation and understanding more valuable. In other words, it is our ability to think with our whole brain - not just left or right, that will separate us from our competition. It is this focus that makes this book a 'must read'. This book challenges the reader to go beyond their conventional and structured ways of thinking that were developed by both upbringing and environment. In many ways it is in the same category as Malcolm Gladwell's 'Tipping Point' and 'Blink' in respects to looking at how we look and think about things. "

So if Win 53% and win $ vs loss $ is 1.0 (equal): Kelly Criterion suggests you bet 6% of your bankroll on each trade. So if Expected Win % is 65% and win $ vs loss $ is 0.9 (equal): Kelly Criterion suggests you bet 26.1% of your bankroll on each trade. You can simulate this in excel by having it generate random numbers and excel can project the next 10,000 or 100,000 trades -- simply by taking your percentage win rate. You can then graph the results. The variance is absolutely sick. I suggest you do this long before you ever consider this as a money management technique because you wouldn't be able to stomach it. The Kelly forumula is an interesting one to observe though. It is a nice mathematical way to show the interraction of % vs dollars won. Personally, I think the key to trading is to get your % very high first with very reasonable 'stops'. This takes a long time. But once you do this, you can simply leverage your trades and grow capital without big variance. Variance is a subject that is just hard for people to really comprehend. If your win rate is low and you seek big wins... you can just go on some awful streaks as the variance associated with low % plays out over time.

check out the 'Kelly Criterion' -- a related topic. Kelly criterion - Wikipedia, the free encyclopedia Kelly Criterion % = W - [(1 - W) / R] = What % of capital to bet each time where; W= Win % (Winning Trades / Total Trades) R = Win/Loss Ratio (Expected Dollars Won When You Win vs Expected Dollars Lost When You Lose) The optimum bet for the greatest growth of bankroll is making the full bet suggested by the Kelly criterion, but this produces a volatile result.

<<May has been an up month for each of the past 5 years.>> hmm, May 2006 was a nasty one on my charts...

"I only had to make the same mistake about 100 times before I learned. I didn't learn from making the same mistakes just twice. It can take repeated bashing of the head for something to sink into the skull." 'Market Wizard' Linda Rashke Active Trader Magazine October 2006

its a trend day down on treasuries and will have new closing low -- I do not see wild swings there -- I see classic trend day down... we appear to be building a very large triangle on equities here with major options related influences...

Interesting day for NQ: Mondays session did not touch Fridays POC despite pretty strong tendency to do so. But that was understandable given the strong afternoon trending profile that occured on Friday afternoon after a coil had formed. This upside momentum continued into Monday (on weak volume) before petering out and Mondays session formed 'value' near 1935.00. Then today didn't look like it would touch 1935.00 (Mondays POC) when breadth was awful and the index was trading near 1914.00 What happened? NQ went and touched Fridays POC then went and hunted down not only Mondays POC 20 points higher but ran to yesterdays last hour high, 24 points above the low for the day... NQ is a sick contract... currently, NQ has found a little resistance at Mondays last hour high (to the tick so far).

here was my trade today good for 5 points walter... you are the only sign of life here today so didn't waste time posting it before. NQ+June+12+2007.bmp (image) very interesting market 'structure' today...

test of 15-min 20-ema set up nice short.... all action taking place below last hour low.... very intersting profile so far... there isn't a ton of bar overlap despite being contained almost entirely within first hour range...

60-mins in: market takes out 'last hour low' decisively to downside with ES forming a 9.25 point initial balance... the bond market is challenging the (potential) excess low put in on Thursday. Puts were not bought aggressively this morning despite the large gap down -- a harbinger of a potential trend day down.

Market appears to have put in a corrective move up over last 2 days after making new momentum lows on Thursday on the 120-minute timeframe. There was a trending (skinny) market profile that began on Friday afternoon and continued into Monday. The 'up-auction' tired yesterday as NYSE volume was lightest since May 25th and the profile became 'fat' near 1528.00 for S&P's and 1935.00 for NQ. Combining Friday afternoon with all of monday, the Profile has formed a 'P' distribution. A stem of the 'P' indicates short covering AND new buying. The belly of the P indicates that some responsive selling came in at the higher price level. A 'P' is not bearish though by itself, just indicative that buyers and sellers came into balance for a period near 1528.00 -- ending the short-term up-auction that began friday afternoon. Momentum tends to precede price which would imply we will go below Thursdays low at some point due to the 120-min momentum lows put in on Thursday. This may or may not happen but it is important to be cognizant of the various buy/sell pressures. Summation Ticks have moved back up after getting extremely depressed. Summation ticks are a proxy for net buy/sell program behavior. These line up nicely with the 120-min oscillator right now. This morning; the bond market is again getting hit -- helping to send the S&P futures for a large (~7pt) opening gap down. Today is set up bearishly but the market has already traded down. Due to the strong statistical tendencies, I will be patient and will look for a 15-min 20-EMA touch at some point before shorting. Large gaps to start the day indicate the market is out of balance which implies a significant pick-up in volatility. Comments welcomed. Will soon give up on this discussion board if some other traders don't soon join in...

no options for me. my brother in law is an options trader and we were IM'ing on this subject of options vs futures on friday so I thought I would pose the question to a convert (options to futures). he seems to be doing great but has to take increasing leverage on to make up for the declining 'edge'... still feels like he can make good money but its tougher.

TinGull, what are the primary benefits of trading futures versus your old job? why did you switch out of screwing the customer to competing with your old customers?

I form a thesis for a pattern and then see how it progresses. I will often still take the short side on the parabolic break if no POC touch and no strong trend day indications --- but will do so with smaller size and then reverse long if it makes an attempt down and peters out... NQ swings can be pretty big. you can often read the higher timeframe pattern wrong and still make a few points just on a volatile price swing off the parabolics. other times the parabolics will trigger at the extreme of the swing and you lose a couple of points with just a couple of minutes of exposure. today we had a reversal during 10:30am - 11:00am timeframe (period C -- 3rd 30-minute bar)... this B-C period is very common reversal period for NQ so you have to now think that the day may have made a significant swing low if you see a real nice push up off a c-period low.... then you can be ready to try a long off a mini bull-flag and play for a swing up.

I posted a new chart WalterW... Dogpile Traders Laboratory you can see from the fiboncacci grid on the chart that NQ rejected the move down -- it MORE than 'retraced' back up. the B wave should not have gone up that far if it were a B-wave retracement. therefore, it made the ABC pattern obsolete. there was potential for a lower high pattern to go with the tendency to touch previous day POC. however, when it broke the short-term parabolics to the upside, the play was then to go long for a play to the upside... at that point, NQ only had a 12-point range on the day vs usual 20-25pts... re entries: for NQ, I like using the 3-4 min parabolics because of the way NQ trades... it tends to really burst and run further than you think. the parabolics by defnition keep you from fading a move too early of what could be a parbolic move up or down. (I generally use the 2-3 min parabolic for my initial stop and put a limit out for 3-6 point profit objective). I put multiple charts using parabolic acceleration factors of .02 and .03 up on my screen... I go with whichever one lines up with what I am thinking about the higher timeframe oscillators/pattern and the location of the trade.

you can see how DAX gave early warning of upside push when it took out the selling tails from earlier... Initiative buying. Dogpile Traders Laboratory

drew chart of what I am looking at... NQ+June+11+2007.bmp (image) comments?

"pinball sell" worked nicely... tested up above previous day high on continuation off the strong Friday afternoon profile (trending action). hit responsive sellers during periods A-B and flushed down to 15-min 20-ema. This first move down was potential A leg of a bigger for ABC down that would go test previous day POC... tough to look that far out though at this time...

alleyb wrote: "Back in 1986 Pete Steidlmayer wrote about needing to wait for the first 4.5 hours in ES to pass before establishing a trade and as per usual I contend nothing has changed over the years" I wasn't aware of this. Market Profile trading per Steidlmayer generally waited/waits this long before doing a trade?

One difference between now and Feb 27 is that May-Oct is seasonally weak for equities while Nov-April is seaonally strong. Take it for what its worth -- a bias -- nothing more, nothing less.

Tradestation code for Pinball: value1 = RSI((C-C[1]), 3); its the 3 period RSI of the 1 period change.... for whatever reason, it tends to capture a day of a reversal or simply a 2-way (a candle with wicks). In either case, there is generally a trade that sets up in direction that the pinball predicts (a flush).... keep it simple, eh?

Considerations For Monday: The futures closing prices on Friday were all well above their daily POC's. The afternoon trend showed no signs of sellers but note that NYSE volume tailed off during the afternoon push higher. Dogpile Traders Laboratory The high close sets up a potential 'pinball sell' for Monday. This set-up generally looks for a good flush down so long as price doesn't trade to a low first. George Taylors trading 'technique looks for a short-sale using location somewhere at or above Fridays high for a test down below Fridays high. Rashkes book uses a break of the opening 60-min range to trigger a move lower. Buy programs ran on Friday for the first time in 3-4 days as seen in the 'summation ticks' indicator. Buy/Sell trading programs cycle up and down. They are always a wildcard. Fridays move up allowed the summation ticks to correct up off of extremely depressed levels. Thus you have summation ticks cycling up but you also have a strong tendency to go touch Fridays POC. Hence, should the market trade higher early on Monday, could offer a nice asymmetric location for a short, IMO. Should the market advance on very strong volume, strong breadth etc, this needs to be respected as buy programs have potentially begun a good cycle up. Comments appreciated...

ok alleyb, I see your point. you effectively say that traditional MP practicioners underestimate the upside potential after a wide initial balance due to a bit of a change due to more electronic markets, especially for Normal Variation Days. (fyi, Normal Variation Days are days that essentially see 1 push, followed by some acceptance of that price --- and then higher timeframe players extend the range later in the day). Traditionally, 'normal variation days' (NVD) do not have as wide an 'initial balance' as normal days. A normal day is swift early entry by other timeframe players, creating a wide initial balance, followed by little directional movement. Thus, 'normal days' and 'normal variation days' look similar until the point of the range extension later in the day. so Alleyb, you are saying that if you do get a NVD, it can often extend 2x to 3x the width of the initial balance. so either: (2-3x opening 60-min Range) + (low of day) Thus the real issue is distinguishing a NVD from a normal day quickly as they will both look the same before the afternoon range extension.

I think of trend days as a day where no price is 'accepted' by both buyers and sellers -- that is, any day that has a 'fat' profile is not a trend day... I use 6-7 TPO's as measure of acceptance. by this measure, 15% is too high. by your measure, 15% may indeed by consistent over time. I just don't know what your definition of a trend day is so 15% does not have much trading application to me. Are you saying that the market builds 8 TPO's at a given price 85% of the time? Doesn't sound right and might not be what you are saying. I am trying to combine your previous post with this one. Maybe you can elaborate what the 15% number means in terms of a trading strategy application??

<<for what in essence you are asking is when does the profile change from a responsive to an initiative style>> that wasn't what I was asking but a thoughtful response nonetheless. I was just trying to derive the value where buyers and sellers agreed enough where it is a price that can be used in the future as a spot where more activity might occur (a re-test). To me, it is useful to know that price returns to its previous days POC 75% of the time as I can use that information as 1 bias/tendency to mix in with other tendencies to create an effective overall strategy. I generally expect a morning reversal (responsive activity) and afternoon trendiness (initiative activity) as a default rule. Clean trend days these days (like Thursday) are so rare that I think most investors are far too overly-concerned on catching these. What do you think? I try to be realistic whenever I see dogpile type of action. The odds are strongly against a trend day every day --- Thursday had a nice 'shock event' of the bond market collapse/climax that supported a trend day. Most days do not have such unusual circumstances.