Trading The Wyckoff Way

[DbPhoenix 42]

I have read this thread entirely and I believe your answer to this has been. " You should only plot the S/R lines that are more likely to affect current price action, these are the lines that are closer to the current price"

 

I have added S/R lines to your chart, assuming the market opens close to the 2741. I would appreciate some feedback regarding my lines, are they enough or to many? Are they drawn in the correct area? (I am aware that this is not a pint pointing exercise)

 

Blue lines are support and red lines are resistance.

 

Cheers.

 

I'm glad you've read it at least once, but you will likely find that once is not enough.

 

Be that as it may, whether there are enough or too many will only become clear in hindsight, which is what one gets from vendors, and most message board inhabitants. But you don't have the luxury of hindsight; you have to decide ahead of time what you're going to do, when you're going to do it, how you're going to do it.

 

Your lines are as correct as they need to be. The challenge is all the contingencies you're going to have to plan for trading in this zone, surrounded by all these ranges ("boxes"), i.e., what do I do if and when price does such and such. Perhaps the best exercise you can engage in now is to think about and list all those possible contingencies. If you're thorough, the market won't be able to surprise you. Those who are reading this should help you, as it wouldn't hurt them to go through the same exercise.

 

This subject of planning and contingencies came up elsewhere yesterday or day before. I posted this. It may be helpful.

 

 

Possibility Mapping

 

Traders often hear about the potential benefits of preparing actionable trade plans prior to the next trading day. The goal of such preparation is to make yourself immune to mental edge breakdown. One of the greatest threats to your mental edge is coming across something that's unexpected during the trading day. Seeing an unexpected price move (especially one you perceive to be a big move) is likely to stress and panic you and therefore cause your psychology to shift into an emotional, reactive state. An effective way to prevent this is to prepare with possibility mapping.

 

Possibility mapping is a process which will mentally prepare you to expect the potentially unexpected, and therefore will allow you to numb, in advance, any potential emotional responses.

 

There are two major types of possibility mapping: Exact possibility mapping, which you would use if you tend to make your trade decisions the day before; and Price Pattern possibility mapping, which you would use if you tend to make your trade decisions while you watch price patterns forming.

 

With exact possibility mapping, you first identify a trade you might make. You would then write out all possible scenarios of price activity following your entry. Yes, there are more scenarios than you could possibly define. However, you'll be able to identify major groups of scenarios where each of the scenarios in a given group would ultimately result in the same signal. These groups are limited and can easily be defined. Then, in your objective state of mind, you decide how you would react in each case.

 

On the other hand, with pattern possibility mapping, you would define the several possible groups of general, overview patterns you might see and decide what actions you would take in each case. Over time, you'll find yourself mapping possibilities faster and more accurately. You can also prepare further by defining what you might think the chances are of each scenario actually occurring.

 

With such preparation, you've already "experienced" tomorrow's markets. Therefore, you virtually eliminate the chance of mental edge breakdown due to unexpected scenarios. Possibility mapping can also drastically improve the quality of your trade decisions and your recognition of certain patterns. In addition, reviewing and comparing your possibility mapping records with your trade diary will help you find key patterns in your trading, identify areas in which you might have a lack of preparation and ones in which you have strengths.

 

--Innerworth

[DbPhoenix 42]

Edit= Do you consider 2650 as support simply because it acted as resistance on the 29th feb and on the 9th of March and resistance becomes support or other other reasons?

 

You posted just before I replied. There's no reason to believe that 2650 won't act as support if price drops down that far, and there's no reason to believe that price won't. I'm not of the "gaps are always filled" school, but there is a gap, and whether it's filled or not, you should take note of it and plan for it.

 

Db

[gaelgss 10]

Thanks DB, I dont feel confident enough to do this but lets give it a go...

 

From the macro, I ha plotted the S/R lines on a 60 minute chart. Since the trend is obviously upwards, I would be looking at going long at a test of support or a a breakout of Resistance that turns into support.

 

In the following 60 min chart, I would be looking at:

 

1- Going long at support around the 2725 area

 

2- Going long on a breakout and test of the 2750 area

 

I would consider the Resistance line at 2775 a potential target, in the charts the green eplipses represent Long entries.

 

I look forward to reading other peoples views on this as I am pretty sure mine are very poor...

Edited April 29, 2012 by gaelgss

[DbPhoenix 42]

I look forward to reading other peoples views on this as I am pretty sure mine are very poor...

 

Looks like no takers. But fortune favors the brave.

 

Since you're interested in daytrading futures, I suggest you create your own chart using the ES or NQ or whatever it is and base your plan on that. Unless you want to do the NDX thing purely as an academic exercise, which isn't nearly as much fun.

 

Db

[gaelgss 10]

The 2725 level posted yesterday turned out to be important. It acted as support at the beginning of the session and then as resistance for the channel developed during the trading day.

 

Any thoughts on this?

[DbPhoenix 42]

The 2725 level posted yesterday turned out to be important. It acted as support at the beginning of the session and then as resistance for the channel developed during the trading day.

 

Any thoughts on this?

 

Did you enter the trade? If so, how? Were you watching as the price hit your target? If so, how did you enter? If not, did you place a buystop? What kind? Market? Limit? Stop limit?

 

Db

[atto 20]

Are you guys going to start drifting back?

What are the chances I happened to sign on this week too?

 

Glad to see you guys are still kicking around

[DbPhoenix 42]

What are the chances I happened to sign on this week too?

 

Glad to see you guys are still kicking around

 

I'll be damned. How's it going?

 

Db

[gaelgss 10]

Did you enter the trade? If so, how? Were you watching as the price hit your target? If so, how did you enter? If not, did you place a buystop? What kind? Market? Limit? Stop limit?

 

Db

 

No I didn't enter the trade because I haven't yet defined my entry setup.. I am simply observing how price behaves as it approaches the pre-defined S/R levels in order to identify a pattern.

 

Yesterday, the market tested the 2725 level succesfully twice, the second time on lower volume, indicating lower selling interest at this level.

 

What this be a valid setup to enter the trade? Is this an entry thats worth working on?

 

Attached Is a 1 min chart with the setup identified.

[gaelgss 10]

Today I mantained the same levels as yesterday, but I included the midpoint of the trading range from the 18th to the 20th, which coincided with the midpoint of the 11th-13th trading range.

 

The level also coincided with a recent swing low, at 2710. The attached 60 min chart shows this.

 

Just now I was replaying the market and noticed how price bounced of 2710 violently, giving me no chance to enter the trade on the 1 min chart.

 

I looked at the "anatomy" of this reversal on the tick chart and noticed a double bottom that could've given me a nice entry.

 

Attached you can find the 60 min chart (macro), the 1 min chart where I was looking for the entry and the 1 tick chart, that shows the reversal in detail.

 

What do you think of this Db, I am on the right track toward developing an edge? At the moment I am contemplating two entry setups;

 

1- Test of support on lower volume, as explained in my previous chart using a 1 min chart.

 

2- A double bottom on a 1 tick chart at a support line.

 

I know that there is a lot to this such as stop loss distance, proffit target, and I will need to spend a lot of time testing the setup on historical charts but is this a good foundation?

 

Once I have defined the setup I can go into improving it and doing the possibility mapping right?

 

Thanks a lot for your advice.

 

Edit= THis was a very nice long, I just replayed the rest of the market and it went up to resistance at 2045, a 35 point move

Edited May 1, 2012 by gaelgss

[DbPhoenix 42]

No I didn't enter the trade because I haven't yet defined my entry setup.. I am simply observing how price behaves as it approaches the pre-defined S/R levels in order to identify a pattern.

 

Yesterday, the market tested the 2725 level succesfully twice, the second time on lower volume, indicating lower selling interest at this level.

 

What this be a valid setup to enter the trade? Is this an entry thats worth working on?

 

Attached Is a 1 min chart with the setup identified.

 

S&R and S&R levels are hypotheses. In order to profit from them, you'll have to test them, preferably through sim. The testing will also tell you whether or not the entry -- which you have not yet defined (see my previous questions) -- is worth working on.

 

In other words, I have no idea whether it's valid or worth working on or not. That can be determined only through hindsight – and trades can't be taken in hindsight – or through testing, though even that is not a sure thing, being only a suggestion of probabilities.

 

Db

[DbPhoenix 42]

Today I mantained the same levels as yesterday, but I included the midpoint of the trading range from the 18th to the 20th, which coincided with the midpoint of the 11th-13th trading range.

 

The level also coincided with a recent swing low, at 2710. The attached 60 min chart shows this.

 

Just now I was replaying the market and noticed how price bounced of 2710 violently, giving me no chance to enter the trade on the 1 min chart.

 

I looked at the "anatomy" of this reversal on the tick chart and noticed a double bottom that could've given me a nice entry.

 

Attached you can find the 60 min chart (macro), the 1 min chart where I was looking for the entry and the 1 tick chart, that shows the reversal in detail.

 

What do you think of this Db, I am on the right track toward developing an edge? At the moment I am contemplating two entry setups;

 

1- Test of support on lower volume, as explained in my previous chart using a 1 min chart.

 

2- A double bottom on a 1 tick chart at a support line.

 

I know that there is a lot to this such as stop loss distance, proffit target, and I will need to spend a lot of time testing the setup on historical charts but is this a good foundation?

 

Once I have defined the setup I can go into improving it and doing the possibility mapping right?

 

Thanks a lot for your advice.

 

Edit= THis was a very nice long, I just replayed the rest of the market and it went up to resistance at 2045, a 35 point move

 

Whether or not you are on the right track will depend on the results of your testing. Note, however, that you have made some changes to your original strategy, introducing the 1m and tick charts, buying off swing lows, double bottoms, and so on. If your primary objective is to observe, then observe (see my Journal, below). Don't even think about entries. Or exits. Don't think about trading at all.

 

 

Db

[gaelgss 10]

S&R and S&R levels are hypotheses. In order to profit from them, you'll have to test them, preferably through sim. The testing will also tell you whether or not the entry -- which you have not yet defined (see my previous questions) -- is worth working on.

 

In other words, I have no idea whether it's valid or worth working on or not. That can be determined only through hindsight – and trades can't be taken in hindsight – or through testing, though even that is not a sure thing, being only a suggestion of probabilities.

 

Db

 

 

How many trades are necessary to backtest a setup and get an idea of its probabilities of success?

 

Many thanks again.

[DbPhoenix 42]

How many trades are necessary to backtest a setup and get an idea of its probabilities of success?

 

Many thanks again.

 

Depends on how many trades per day/week your strategy generates. And if you change any controlled variable in the process, you have to start over.

 

Db

[gaelgss 10]

Depends on how many trades per day/week your strategy generates. And if you change any controlled variable in the process, you have to start over.

 

Db

 

Ok so assuming my strategy generates 10 trades a week on average and all variables are mantained, how many trades would be necessary?

 

I think I remember Mark Douglas suggesting a minimum of 20 trades but I'd like to know your opinion on this.

 

 

Cheers.

[DbPhoenix 42]

Ok so assuming my strategy generates 10 trades a week on average and all variables are mantained, how many trades would be necessary?

 

I think I remember Mark Douglas suggesting a minimum of 20 trades but I'd like to know your opinion on this.

 

 

Cheers.

 

Accepting a margin of error of 10%, you'd have to backtest for 10 weeks, or 100 trades. For a margin of error of 5%, you'd have to backtest for 40 weeks. However, if you go back 40 weeks, it will be likely that the market is not comparable to what you are trading in the present.

 

With replay, of course, you can do 100 trades in a weekend.

 

Db

[kenhigh 10]

Thanks DB for your kind work. I would like to ask if any tutorial for the S/R

[DbPhoenix 42]

Thanks DB for your kind work. I would like to ask if any tutorial for the S/R

 

See the first post in this thread. It provides links for those threads and other information sources which provide the background for participating in this thread.

 

Db

[blueberrycake 10]

Ok so assuming my strategy generates 10 trades a week on average and all variables are mantained, how many trades would be necessary?

 

I think I remember Mark Douglas suggesting a minimum of 20 trades but I'd like to know your opinion on this.

 

Unfortunately there is no single number answer to your question. There are various rules of thumb (e.g. statisticians typically look for a minimum of 30 points in a sample), but they are too general to be of much value.

 

Some points to consider:

 

1) If your strategy has more or less equally sized wins/losses, then you need fewer data points than for a strategy where the results are determined by a small number of outsized winners/losses

 

2) If your strategy is highly profitable (e.g. wins 75% w/ 1:1 risk/reward), then you need less trades for verification than for a strategy that's mildly profitable (e.g. 60% win rate)

 

3) Also you want to verify your strategy not only based on the number of trades, but based on various market conditions. Analyze performance separately for periods of up, down and sideways markets, as well as highly volatile vs congestive periods.

 

As a starting point, DBs suggestion of at least 100 trades is not a bad one. Unfortunately without knowing the precise characteristics of the outcome distribution for your strategy, its not possible to provide a good answer. In other words you may want to analyze a few dozen trades first, and then based on how the trade results are distributed, you can get a clearer understanding of what kind of sample size you need for various degrees of confidence in the observed results. Though even then a one number answer is likely to prove elusive.

 

-bbc

[DbPhoenix 42]

A buystop here for the aggressive trader:

 

[Niko 10]

I don't want to be offensive, but if you have a proven system, I'm not sure why you asked the questions you asked in your last two posts. You should know on the basis of your testing where the best entries and stop placements are. If you don't, the system isn't proven. If it is proven, the answers are self-evident.

 

But let's say your system is proven at some level and you want to make it better, which entails a whole new course of proof. Where you intend to buy and sell is in concert with W's approach. And as to your initial stop, yes. But how you trail your stop depends only partly on what the approach would suggest. Much more than that are how familiar you are with the instrument and how its traders behave, what it's most likely to do, how it moves, whether it's calm or nervous. Your own risk tolerance and how you've dealt with your fear are also important components. The risk-averse and fearful tend to have stops that are far too tight. They can't give price room to breathe. So there is no right answer as to whether to move the stop up or not.

 

Db

 

Db, thank you for your reply, as I said, I currently trade a non-wyckoff system that I created mainly using moving averages (When I said proven by my standards, it is because although it is profitable, I think I can get much more of it), I just recently started studying Wyckoff (less than a year) and I have tryed to include volume and price movement in the system, that has improved substantialy my percentage of profitable trades.

 

I currently consider myself a very fearfull trader as my previous experiences with the market were not as good as I expected them to be. So as you pointed, this has led me to define very thight stops and to move my trailing stops very soon, wich at the same time causes me to almost never reach the take profit targets I initialy define on the trades. This is also the motive to increase my knowledge base using Wyckoff in order to understand better the relation between price and volume when setting the trailing stops.

 

In the other hand, I have NEVER been able to consistently make money on non-trending markets where my moving average system simply doesnt work. That is why the charts I posted were charts of non-trending markets, for wich I am trying to develop a system based on W. rules.

 

Thanks again for your reply.

[SunTrader 10]

More times than not, volume follows - not leads - a breakout.

[Gary Fullett 10]

 

 

 

 

There is a substantial risk of loss in trading commodity futures, options and off exchange foreign currency products. Past performance is not indicative of future results.

[20814md 10]

I don't want to be directive . It's your life. But I do want to suggest alternatives. Trading EOD, for example has certain advantages, not the least of which is the ability to pyramid, if you're trending. And the sleeping issue isn't the problem it often is with stocks, though others may disagree. ........

Db

 

Db: I'm not sure I am interpreting your thought given the context. Do you mean that trading EOD futures might have less gap risk than stocks, or vice versa?

 

Sorry to appear a little thick.

Thanks

[DbPhoenix 42]

Db: I'm not sure I am interpreting your thought given the context. Do you mean that trading EOD futures might have less gap risk than stocks, or vice versa?

 

Sorry to appear a little thick.

Thanks

 

A voice from the past (this is the guy who created a csv file of Section 7).

 

There are no important gaps in anything that's traded 24/7. There may be gaps over the weekend in the e-minis, but otherwise the only "gaps" will be those that may occur when you're not at your screen, but this wouldn't be any different from a "gap" that occurred because you took a nap during the day.

 

It's also a lot more difficult to pound futures one way or another than it is stocks because futures have no float. And even if futures are on a tear, you've got time to act. Assuming you're there.

 

But if you trade EOD, these dramatic intraday moves aren't going to affect you one way or another, as long as your stop isn't hit.

 

Db