How Do I Avoid the Chop Chop?

[simterann22 10]

Hi all.....

I have been travelling the typical newbie trader's trail....first buying and selling by 'gut instinct' LOL ....then looking for gurus to tell me when to buy and sell....to looking for the Holy Grail..... :crap:

 

Well anyway....I've read John Carter's book "Mastering The Trade" and this opened up a whole new lot of practical insight for me.

 

I am currently testing a squeeze based strategy using the 'PBF' clone squeeze along with the BR_PaintBars similar to the TTM Trend and the Scalper Alert.

 

The strategy works okay when there is momentum but I get slaughtered trying to trade the signals when there is CHOP. Not saying I can't trade the chop (I would love to trade the chop) but the Scalper Alerts are too late to help me get in at the turn.

 

I found a CCI helped in catching the choppy turns but I wanted to know what I can use to determine the shift of a trending market to a choppy consolidation so I can adjust my method.

 

The small blue and red dots on the chart on TS are an ADX show me I coded to tell me when the ADX of 14 rises above 20.

 

The white/magenta, blue/red lines are two fast Hull MA's.

 

I may be staring the answer to my problem right in the face :doh: .... so any help will be welcome...

 

Thanks.

[brownsfan019 17]

Avoiding the chop basically comes down to defining yourself as a trend trader. Once you have decided to be a trend trader then you need to define when there is a trend and when there is not. I'll tell you this - there are many, many ways/ideas to identify trend vs. chop, but nothing is perfect. There is no magical bullet to IMO to make this work, your risk management and money management will be vital.

 

Some ideas in regards to this and also looking at your chart:

 

1) If you can buy your first green arrow and ride that to the top, obviously a nice trade. I see your first red arrow which could signal to get short so there's a potential issue there - your first long on the green arrow is a great entry, the first red is a terrible exit and also a terrible place to go short b/c you then either get stopped or reverse long (which you were already long from before). If you a trying to follow the trend, there's gotta be a way to not have the first red arrow show up. That arrow to short appeared in an obvious uptrend (after the fact of course).

 

2) Your chart has plenty of trend following indicator - moving averages, ADX, etc. Might want to consider something that is non-trend following and see if you can get it all to line up. In other words, if your moving averages + your non-trending marker are both saying get long, might be a good area to get long.

 

3) Along those lines you might want to define support/resistance somehow. For example, could use pivots, fib retracements/extensions, etc. When you get a trend signal to get long & it's just above your support or resistance, I would take it. If you are buying right into strong resistance, could spell trouble.

 

4) I've never found any value of CCI. It can hang in oversold/bought conditions for awhile. Good example here on stockcharts actually. Look at the chart at the bottom - that CCI is held up in 'oversold' conditions for awhile. Knowing when to use CCI as a reversal vs. continuation play is not easy.

 

5) In your indicator at the bottom, when there is a strong trending move, your indicator appears to produce taller lines; whereas the lines are much smaller during the chop. If there's a way to quantify that, you could find what you are looking for. Visually it's easy to see now, after the fact, so you'd need to quantify it somehow.

 

6) You'll also need to identify what kind of 'trend trader' you are trying to become - in other words, if you believe you have identified the trend of the day, week, etc. then you should really only be taking trades that direction - meaning if you believe we are bullish, I would only be taking longs. That could be a great filter for you here if you can identify the bullish/bearish bias ahead of time. If you pull up a daily ES chart (with nothing on it but candles) are we in an up-trend or down-trend? Personally, I'd say up. If that's the case, maybe there's a way to only take your long(s).

 

7) Also, you'll want to research how many of these trending moves occur per day. There will be days of monster moves that go in 1 direction, but those are rare. Knowing that, not sure how many trades you should be taking per day if working a trend following system. For example, in your chart if your bias was to get long, then you have your long at green arrow 1. Whenever you get out, you should either a) be done for the day or b) looking for another way to get long again. But again that requires having your bullish/bearish bias ahead of time.

 

8) Research time of day movements as well. I have a post here somewhere talking about this, but basically the market has 3 stages as far as I am concerned: a) AM b) lunch c) PM. AM = volume and moves. lunch/pm = 50/50 shot if there will be volume present to provide moves.

 

Good luck in your quest. If you are serious, you got your work cut out for you but the reward is well worth it if you get there.

[uexkuell 10]

Brownsfan has made already all the important points.

 

 

I'd like to repeat only a few things in a less technical way:

 

For me it made a big difference to look at the charts with more common sense.

 

If there was a big move upwards the normal thing would be to stay there for some time.

If a big downmove is following this would mean:

Many people come to realize that they got lured into buying but there is no substance to it so better get out quick.

This is not the normal thing, you should only think this situation is going on when you have strong hints that it is so.

 

 

The big boys are hard working on their screens. Therefore at lunchtime they get hungry and normally market activity stalls. If they continue their trading up to 12:40 they must have a good reason - probably news that have to be priced in.

But surely at 12:40 they think: Enough is enough. And they don't want to engage in a new battle downward.

 

 

Some technical thing: "Indicators" are generally not so very helpful, volume is (would show you the stalling).

 

 

To make it short: When you want to trade trends try to start from some quiet region.

[simterann22 10]

Awesome guys. Thanks for the responses.

 

I guess I still haven't worked out how I want to trade yet. I like a new indicator so I adapt. There's the problem. I like the squeeze but I think by nature I'm a kind of 'hit and run' congestion guy.

 

....maybe I just want it all !!!!!!! LOL

 

I read a lot about the 'real traders' trading off volume and price only. Is that ultimately the best way to trade?

 

My intention is to eventually learn to read the tape and understand market dynamics more....with a hell of a lot of reading! :missy:

 

So do you think it's the case of making life more difficult with indicators? In other words .....abide by the KISS principle?

[brownsfan019 17]

There is not right answer here. There is no one size fits all. And contrary to the prevailing current trend around here, you can use indicators and make money. Of course the key is making it work. Having 5 indicators all showing trend strength won't cut it. Having 5 that show reversal strength won't work either.

 

You just have to find what you are comfortable with. The options as I see it are:

1) Trade w/ the trend

2) Trade against it

3) Take little trades here and there

So you have to define yourself as a trader. Trend traders can make a killing when right, but as you've seen, can get ugly when wrong. Reversal guys love picking off the highs and lows, but can get beat up during a strong trending move. Taking little trades throughout the day is fine as long as your risk management works.

 

Good luck and click around the forum as there is info all over the place. Just requires time and patience to weed through it.

[Head2k 10]

For me the simpliest way to tell that the momentum is slowing down and trend is changing into a consolidation is to watch trend lines and swing points.

If you drew a trend line you could see that it is broken around 12:40. That should be the first warning. If you watched extent of swing points after that (some of them are marked by white dots on your chart), you coud see that price doesn't make a new high (~12:48 and 12:50). So at this point you can clearly see that you are either looking at a beginning of consolidation or a beginning of reversal. Then it makes a new swing low only by 1 tick (~12:54).

So if you are a trend trader, the best thing to do is to wait until the traders who are moving the market show you which way they want to go from this consolidation.

[BlowFish 10]

[quote=simterann22;67022

 

 

I guess I still haven't worked out how I want to trade yet. I like a new indicator so I adapt. There's the problem. I like the squeeze but I think by nature I'm a kind of 'hit and run' congestion guy.

 

Nothing wrong with indicators but you need to know how they work and what they are showing you. Just going on the chart you posted I think that one is pretty horrible. Even in the trending portion it gets you short at the bottom of the pullback (though does flip long again) and just generally looks 'late'.

 

Have you seen JPerls 'Trading with Market Statistics' threads? He presents a couple of tools (indicators if you like) but explains there construction what they show and exactly how you might consider using them.

[rgaind 10]

I find that the way to avoid chop is to trade with a "fast" chart and a slow chart

[ZOSO 10]

To make it short: When you want to trade trends try to start from some quiet region.

 

The most valuable point you make.

 

By the time those indicators--especially adx--confirm a trend, a lot of the easy money has been made.

[Tams 20]

The most valuable point you make.

 

By the time those indicators--especially adx--confirm a trend, a lot of the easy money has been made.

 

 

 

here's a trading idea on ADX:

 

Why ADX > 20 Is a Lie + Easy Trading Method

http://www.traderslaboratory.com/forums/f34/why-adx-20-lie-easy-trading-5839.html

[Uli Schmuli 10]

I use range bars in my trading, and chop (consolidation) is identified after only two bars using my technique. 90% of my trades are taken only on pivot confirmations, as explained in this video I created.

 

Created with Camtasia Studio 5

 

Uli

[momentom 10]

The key is trade location.

 

If you are a breakout trader, wait for the pullback so if its chop, it doesn't matter. Your trade off is missing the trade if there is no immediate pullback.

 

Your other option is to be aggressive and enter early, again to get a better trade location so the chop doesn't matter.

[snowbird 10]

Rgaind,

 

I'm interested in more details on how you use a fast and slow chart to help avoid chop.

 

Snowbird

[jonbig04 10]

I doubt I can add much to what has already been said, but anyways...

 

 

To me, everything between my S/R is chop and I don't trade it because I'm not good enough. Now that "chop" may be another's PA wet dream, but its all relative. I look at a larger time frame chart and attempt to find the key S/R level in that chart. If I've done my job, then chop is of little concern. Price can do whatever it wants to between those areas and I simply don't care. I save my attention for when it arrives. Since these levels are built off of a larger time frame, they are more likely to be respected...in other words, the market (providing your level is good) won't chop your level all to hell-which is more than even the best intraday* developed s/r can say for itself. I used to trade intraday and my levels would always get chopped to hell. So, to me, using a larger time frame helps with the chop. I only zoom in (5 sec) when I'm trying to enter.

 

 

*I realize that all levels are created intraday at some point, but I'm talking about levels that are noticed and taken account for by looking at days or weeks of data, as opposed to a few hours worth.

[edabreu 10]

Rgaind,

 

I'm interested in more details on how you use a fast and slow chart to help avoid chop.

 

Snowbird

 

How to avoid the chop.

 

Previously mentioned you need to identify yourself as a trader...are you a trend trader, counter trend trader, etc. I agree wholeheartedly.

However, what really is chop? Would you say a trading range of 5 points is chop? How about 3 points, or 2 points. When does it become chop for you?

Is this chop?

 

 

Here we have a 50MA and a pair of bollingers. For me, each tap of the upper bollinger and each tap of the lower bollinger is trade-able. It will work until it stops working. So here we have 6 trades. They all worked. The range was 908.25 to about 915. It was clearly range bound, but it doesn't look like chop to some. To me it was trade able because it was a clearly defined range of at least 3 points or more.

So, chop is not necessarily a bad thing, except when its too narrow; or if you fail to recognize it soon enough to either take the first correct trade, or decide in time to just stay out of it altogether.

One of the things I look at is a 1 min chart with a bollinger band set to 8. If price is not at least 3 points, then its chop and un-trade-able. Otherwise, a range of more than 3 points is trade-able if I have the right kind of tool set to handle the trade setups. I like a pair of bollinger's for this at 17,3and 13,2.

Keep in mind that I am a scalper, so every trade gets to first target, and then the runner is gravy.

[BlowFish 10]

I use range bars in my trading, and chop (consolidation) is identified after only two bars using my technique. 90% of my trades are taken only on pivot confirmations, as explained in this video I created.

 

Created with Camtasia Studio 5

 

Uli

 

A simple and elegant way of defining consolidation.

[BlowFish 10]

How to avoid the chop.

 

Previously mentioned you need to identify yourself as a trader...are you a trend trader, counter trend trader, etc. I agree wholeheartedly.

However, what really is chop? Would you say a trading range of 5 points is chop? How about 3 points, or 2 points. When does it become chop for you?

Is this chop?

 

 

I would say no not in this 'time frame'. Imagine what a higher time frame (say 1 bar for every 5 bars on you chart) would look like. This shows a common and interesting characteristc of price movement. When price is clearly consolidating in a particular time frame a chart in 'the next lower timeframe' (e.g. *5 bars) will very very often be making beautiful trend runs back and forth across the higher time frames consolidation.

[daedalus 10]

A couple great ideas given in here.

 

I would second the idea of using rangebars to eliminate some of the natural consolidation in the charts.

 

Also, think about the natural indications of chop... what does it look like on a chart... typically its bars without large dense bodies, and lots of wicks, usually on both sides of the candle.

 

But the other thing I want to suggest is that you limit the time of day you take setups. The first hour and a half of trading there is a lot of movement right? Then this is a good time to look for setups because "chop" is unlikely when the market is moving and all of its players are taking positions. Midday... not as likely... and chop is more probable... last half hour - hour of the day can be big and directional but can also be complete crap... I avoid anything after 2:00PM CST. Basically I take signals from 9:00AM CST (First 30 minutes are a gamble IMHO) to 11 and from 12-2.

 

The last thing I would mention is this use of chop... I think we are talking (potentially) about different things here. You are using a squeeze indicator which means by definition you need the market to consolidate (ie chop) to give you a squeeze for a potential trade right? So what you are really talking about when you say chop is probably more "how can I avoid false breakouts without follow through?" And that... is probably a different answer than whats been given.

 

I think your best bet is to focus on money management and potentially skipping trades that signal beyond the prior swing high/low and trying to have a way to reduce risk as the trade progresses towards those natural areas of rejection and failure (if you are already in the trade).

 

Hope this helps.

 

Cheers!

[edabreu 10]

Identifying chop is easier for me on a range chart. I use a 6 range chart and I draw boxes when I see the bars tick up and down in a sideways pattern. When at key areas using simple drawing tools like trend lines and boxes helps me time my entries.

[waveslider 10]

I like Joe Ross's definition where if you have an "A_B_C" pattern in one direction that fails, then another "A_B_C" pattern in the opposite direction that fails in the same price range - price is locked in a range.

 

Best to see that on a higher time frame and do your trading one time frame lower.

[zdo 20]

I like Joe Ross's definition where if you have an "A_B_C" pattern in one direction that fails, then another "A_B_C" pattern in the opposite direction that fails in the same price range - price is locked in a range.

 

Joe Ross also has a pretty good definition of price pattern congestions (ie it's codable) in The Law of Charts 'book' and it's companion article. Also has some techniques for RossHooking out of congestions - although, in-situ and pure / alone, those don't test out well.

 

Now if I had to choose just one desert isle indicator for identifying congestion for automated systems work, I would go with a 4 period JMA (using (H+L+C+C+C) * .2) for price input parameter) as the JMA tends to get flat quicker than any of the other adaptive central tendencies (like HMA etc.). If slope / angle goes flat two bars in a row, then in congestion.

 

hth

[simterann22 10]

Edabreu, I like your style. I am drawn towards scalping with the idea that every trade should begin as a scalp....and welcome the gravy if it comes your way. What fast MA are you using overlayed on your charts? HMA? JMA?

 

I've found trading the morning session with a 133 tick chart on the ES good. This small timeframe has been good to minimize stops. I've added to my trading using 3 different timeframes charts side by side to enable me to get a bigger picture. I've managed to catch breakouts by placing bracket orders outside of "small" congestion boxes.

 

BTW....thanks to all those who have left comments following my post.

Edited June 12, 2009 by simterann22

[edabreu 10]

Edabreu, I like your style. I am drawn towards scalping with the idea that every trade should begin as a scalp....and welcome the gravy if it comes your way. What fast MA are you using overlayed on your charts? HMA? JMA?

 

I've found trading the morning session with a 133 tick chart on the ES good. This small timeframe has been good to minimize stops. I've added to my trading using 3 different timeframes charts side by side to enable me to get a bigger picture. I've managed to catch breakouts by placing bracket orders outside of "small" congestion boxes.

 

BTW....thanks to all those who have left comments following my post.

 

A 133 is too fast for me. I use a 6range/4range combo. I use a 10HMA. What matters is that you set up your charts and then spend some time looking at it and see if there are setups that are identifiable on a repeated basis that you can put some entry rules around and add some mm to it. Scalping does not imply fast. To me it implies precise entry to acquire first target 80% of the time.

[markl67 10]

A 133 is too fast for me. I use a 6range/4range combo. I use a 10HMA.

 

What do you mean by 6 range/4 range combo? Thanks.

[edabreu 10]

A 133 is too fast for me. I use a 6range/4range combo. I use a 10HMA.

 

What do you mean by 6 range/4 range combo? Thanks.

 

It's like a higher time frame, but in this case a bigger price bracket on the bar.