Looking to Enhance Current *working* Trading Methodology

[Susana 10]

Hello fellow traders,

 

I'm a SPY/Q ES/NQ swing trader. However, I do use intraday to get my surgical entry.

 

I guess you could call me a reversal trader as I'm only interested in low risk high rewards types of plays. Naturally, my accuracy is low, price I have to pay for looking for a minimum of 5-10X risk reward ratio.

 

For the longest time I studied reversal patterns, I will list some of the ones I play:

 

- Head and Shoulders, Inverse Head and Shoulders

- Double Tops, M formations

- Double Bottoms, W formations

- Trader Vic's 2Bs

 

I just don't trade them anywhere. For instance, I like to short high and buy low, this increases the chances of obtaining the high reward I'm after.

 

To supplement this I use Market Profile Value Low and Value High areas, Globex High / Low and Previous Day Highs and Lows.

 

For instance:

 

A confirmed W formation at Value Low

 

A confirmed M formation at Globex high

 

You get the picture.

 

I do well with this system, mostly because I have the correct discipline to let the winners run and I always know where my stop should be placed because the reversal formations are all well documented. After studying the markets for many years I concluded that entering in the middle is a mistake, at least for longer term plays, because your stop is very much unprotected. When you initiate your trade on the edge you are somehow protected by support or resistance and the confirmed reversal formation. This is the only way I have ever managed to consistently make money out of the markets, slowly, but surely.

 

My trading size is a multiple of 2. If I'm trading SPY I use 200 shares, if I'm trading NQ I use 2 contracts. My first target is the next key area of Resistance if I'm taking longs or next key area of support if I'm taking shorts. My last target is an opposite play, in which I close and reverse with a brand new multiple of 2 size.

 

I think that about sums it up.

 

Now, that I have presented what my trading system consists of I would like to ask more experienced traders to help me improve it as any accuracy improvement would be tremendously welcome.

 

Thank you for your time and cooperation.

[jonbig04 10]

Your system is exactly what I'm looking to add to mine. You could not be more right about having you're stop protected. I'm not swing, but I only take around 7-12 trades per week. Anyways sorry I don't have any advice, good luck!

[Soultrader 12]

Support and Resistance, technical and psych levels, and indicators can add structure to your trading in order to minimize risk. (stop levels) This is because you can use these values as a guideline to know when to get out if wrong.

 

My old boss was an amazing countertrend/reversal type trader. He did this by not looking at technical setups but by looking at the overall market sentiment in combination with tape. What are the movers of today? For example, he would look at financial stocks to sense reversal signs. (of course one needs to be aware which sectors to look at at different times of the market cycle) This is an idea that you can look into.

 

Also, for all reversal plays I always look at volume. A classic setup for me would be a high volume followed by a test on low volume. This has to be in line with a S&R level I am looking at. An example from todays trading session:

 

[jonbig04 10]

I could be way off, but I think thats an M top confirmed by hump test that she mentioned.

[Soultrader 12]

You're right... I should of read her post more carefully.

 

Susana, how about pit noise to determine whether commercials are coming in or not? You have levels you watch for already.... all you require is the additional institutional participation to confirm your trade. And perhaps consider moving your stops up/down to break even to protect yourself as your strategy is extremely high risk (but high reward).

[Susana 10]

Yes, volume divergence helps a bit when spotting the reversals, sometimes the usage of oscillator divergence but many times I find the setups lacking these characteristics and working just fine.

 

Tough call.

 

Thank you for your reply.

[Susana 10]

You're right... I should of read her post more carefully.

 

Susana, how about pit noise to determine whether commercials are coming in or not? You have levels you watch for already.... all you require is the additional institutional participation to confirm your trade. And perhaps consider moving your stops up/down to break even to protect yourself as your strategy is extremely high risk (but high reward).

 

Interesting suggestion, will look into the pit noise.

 

Regarding, the stop placement, I don't touch the stop until the trade has somewhat developed into something productive. I've found that one too many times the quick relocation of the stop leads to unnecessary stops.

 

As far as high risk, I respectfully disagree, my risk never goes above 1% on any given trade. Hopefully, you meant, low accuracy

 

Thanks again for your time.

Edited December 18, 2008 by Susana

[jonbig04 10]

I would guess you place your stops in strategic areas so that you are only stopped if the reversal formation fails (and ideally price doesn't reverse). Do you play the failures of the formations at all?

[Susana 10]

I would guess you place your stops in strategic areas so that you are only stopped if the reversal formation fails (and ideally price doesn't reverse). Do you play the failures of the formations at all?

 

Hi jonbig04,

 

Yes the stop of the reversal formations would be a new high or low of the day.

 

I don't play the failures as this would constitute buying high or shorting low.

 

Great to see someone out there that trades similar!

[Soultrader 12]

Oops... yes low accuracy is what I meant.

[jonbig04 10]

Thats true, people always laugh at me for shorting the LOD or buying the HOD. IMHO accuracy is irrelevant as long as you keep your losses small and let your winners run, eg favorable R/R (which I noticed you do). The traders I look up to don't really have that high of an accuracy at all, but as you said they are disciplined and let their winners run. For me personally, to keep r/r in check I have set targets which are multiples of my stop. 3 targets each at a minimum of 4.5x, 9x, and 13.5x of my 3 point (NQ) stop, usually I play around with it and have them and key levels if I can. My accuracy was around 30%-33% last month, but this month has been tougher and it's been lower (especially this week and last week). So anyways I said all that to say, why are you looking for higher accuracy? What's wrong with the ultra low risk, high reward trades that you're doing? Have you considered adding on the pullbacks once the reversal has panned out? I'm just a noob, but I think we have some common ground in the way we trade.

 

BTW I'm researching M tops and W's right now, where did you go to learn about them? I'm sure there are plenty of places, just wondering if you know anywhere specifically.

[jonbig04 10]

Oops... yes low accuracy is what I meant.

 

 

Yea, if I had to guess I would say her trades aren't high risk at all. From what I see, reversal formations can allow ultra small stops and ultra high (1:10 or much more) R/R.

[Susana 10]

Thats true, people always laugh at me for shorting the LOD or buying the HOD. IMHO accuracy is irrelevant as long as you keep your losses small and let your winners run, eg favorable R/R (which I noticed you do). The traders I look up to don't really have that high of an accuracy at all, but as you said they are disciplined and let their winners run. For me personally, to keep r/r in check I have set targets which are multiples of my stop. 3 targets each at a minimum of 4.5x, 9x, and 13.5x of my 3 point (NQ) stop, usually I play around with it and have them and key levels if I can. My accuracy was around 30%-33% last month, but this month has been tougher and it's been lower (especially this week and last week). So anyways I said all that to say, why are you looking for higher accuracy? What's wrong with the ultra low risk, high reward trades that you're doing? Have you considered adding on the pullbacks once the reversal has panned out? I'm just a noob, but I think we have some common ground in the way we trade.

 

BTW I'm researching M tops and W's right now, where did you go to learn about them? I'm sure there are plenty of places, just wondering if you know anywhere specifically.

 

Yes, with a risk reward ratio of that nature you can't go wrong, over the course of time the equity curve will surely grow.

 

The reversals I just learned from studying thousands of intraday charts, once you study enough, they tend to stick to you.

 

I don't add to trades, when I do that, my position is unprotected. Hence, why I only initiate from extremes.

[jonbig04 10]

I see. I do believe though that you can trade intraday and still have your stop protected. I enter on the pullbacks of the trend now. The majority of the time (except for 2 times last week) when I get stopped out its because trend is changing, or heavily congesting (chops been killing me lately). In other words, when I'm wrong usually I enter in such a way to where if I do get stopped out, price has to break through S or R in a major way, which in turn gives me more valuable information about where it may be going next. IMO there a quite a few ways to have your stop protected by price action. For example, (this is what I aspire to do anyway) lets say price runs into major R and an M top forms and price reverses, you could wait for it to reach a previous S level, wait for it to either break or reverse again. Assuming trend continues and it breaks through the S, you could then enter on the pull back to that level which is S, but now has flipped to R. Your stop could be well above it and therefor protected. Thats all I've been doing. Not the reversal part, but the flip scenario. To me, this is an example of a protected entry during trend. A lot of the time when I get stopped it's because my rules are too strict and the "break" of S was just a bend and its actually going to respect that level. But, for now, strict rules are necessary.

[budfox99 10]

Check out the link below. It explains the use of a 10 minute MA on the 1 minute NYSE Tick.

 

Countertrend Trading the SPY's using the 10 MA Tick: I've found that when the 10 MA Tick > 500, you can look for a reversal to the downside and when the 10 MA Tick <- 500 you can look for a bounce to the upside.

 

 

http://traderfeed.blogspot.com/2008/11/trading-with-short-term-moving-average.html

 

"I find that a 10-minute moving average of the NYSE TICK removes much of the noise from the one-minute values."

 

Hope this helps with your countertrend trading.

[sep34 10]

Susana...

 

Patterns that form at key areas have a higher probability of producing a significant move which will effect your accuracy, patterns that form outside of key areas have a higher probability of failure because they are most likely noise and will not attract lots of market participation.

 

Understanding what are "key areas" (regions) can shed a lot of light on why some patterns take off witout looking back and others fail. A good starting point is to study past patterns that where sucessful.

 

 

 

Regards..

[Susana 10]

Pappo,

 

Yes, that's a great tip. Only take those reversal patterns that form around confluential areas, definitely a solid tip, unfortunately I already knew but your input is appreciated.

 

Susana

[BlowFish 10]

Am I right in thinking that you want to improve 'accuracy' (%winners)? Chances are you are going to have to negatively effect RR to make meaningful differences. I guess you want some kind of extra filter? Of course that will get rid of some good trades as well as more (hopefully) bad ones. Market internals or looking at correlated markets might help.

 

More aggressively moving stops up or scratching trades might help % at the expense of overall profitability. I think Ninja allows you to test alternative money management strategies in simulation whilst running your normal strategy live?

[jasont 10]

In my opinion Susana the only thing that will really improve your win% is your money management. If you your plan has you entering at market extremes say, 50% of the time, that will only be half of the equation. Even though you may have got the top or bottom 50% of the time, you could use a smaller target to take profits 75% of the time if you exited at 1 point for instance.

 

I am not suggesting you exit your trades at 1 point gain but more so look into exiting part of your position at a smaller interval as this generally increases win%. So you may look at trading a 3 lot system instead of your two lot system. It could simply be an added lot on top of what you already trade so you're not negatively affecting your current results but taking advantage of a higher win% on a smaller portion to add further consistency.

 

Or you could in fact make the added lot a bigger sized portion of your trading as it provides improved consistency whilst using the last two positions to take advantage of the bigger picture. Just my opinion but is usually something many traders tend to over look when thinking of improving their win% or risk vs reward ratio.

[OAC 10]

Susana;

How about looking at a shorter timeframe chart and trade a breakout of short-term congestion in the direction of your larger timeframe set up ? Your stop placed at the other side of the short-term congestion keep your risk small and an eventual confirmation of your larger timeframe set up makes your profit run.

[waveslider 10]

Multiple time frames, and usage of tick or share volume charts can revolutionize your trading.

[diablo272 10]

Am I right in thinking that you want to improve 'accuracy' (%winners)? Chances are you are going to have to negatively effect RR to make meaningful differences. I guess you want some kind of extra filter? Of course that will get rid of some good trades as well as more (hopefully) bad ones. Market internals or looking at correlated markets might help.

 

More aggressively moving stops up or scratching trades might help % at the expense of overall profitability. I think Ninja allows you to test alternative money management strategies in simulation whilst running your normal strategy live?

 

 

I don't want to move this thread off topic, but could you elaborate upon the correlated markets idea a bit if you don't mind? I trade the ES, and I've tried comparing YM to the ES, and I can see divergences and confluences between the two, but I haven't been able to think of a way that these divergences or confluences could give me an edge with my particular strategy. I have read a bit on this subject (only a bit), and I'm just wondering if you could give your own opinion on it.

Edited December 31, 2008 by diablo272

[Susana 10]

For what is worth I have found the following to be useless.

 

• - Market Internals
  
• - Indicators or its respective divergence
  
• - Other e-mini correlation
  

[DbPhoenix 42]

Perhaps the suggestions made would be closer to the mark if you were to define the problem. "Improving accuracy" is inadequate, particularly when you say that you "do well" with your strategy as is.

 

Essentially, your strategy is to trade double and triple tops and bottoms off of MP, Globex, and PD highs and lows. You will be more likely to receive useful suggestions if you provide charts showing both successful and unsuccessful trades at each of these levels. It is likely that your successful trades are successful for reasons other than you assume and that your unsuccessful trades share common characteristics that elude you.

[Susana 10]

Perhaps the suggestions made would be closer to the mark if you were to define the problem. "Improving accuracy" is inadequate, particularly when you say that you "do well" with your strategy as is.

 

Essentially, your strategy is to trade double and triple tops and bottoms off of MP, Globex, and PD highs and lows. You will be more likely to receive useful suggestions if you provide charts showing both successful and unsuccessful trades at each of these levels. It is likely that your successful trades are successful for reasons other than you assume and that your unsuccessful trades share common characteristics that elude you.

 

Very well, next time I have failing set up, I will post it.