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Ingot54

Scientists at Work - Diagnosing the Pathological Trade Setup

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  abuguapo said:
Looking at the chart from Ingot again - do you see a place of entry that speaks to what your saying about risk?

g

 

In the past, I would have intuitively perceived risk as entering a long order as price is dropping very fast. And I'm not saying that it isn't risky. Price may continue to drop hard. But it's not always risky, sometimes it's the best opportunity.

 

Think of a gambling casino. Consider if, after a week, all the casino customers had a net gain; the casino would go out of business. There would be more money going out than coming in.

 

The market can't allow most short term traders to make money. It would destroy the investment industry. So the exchanges need to make it hard for you. It's hard to enter at a good price, and it's hard to exit at a good price. How? The speed at which price moves. The time window allowed to enter at the optimal price, or exit at the optimal price is severely shortened. It's shorted by the speed at which price moves. So when you see a price bar or a candle on the chart, and you see that price hit or went through a certain price level, the chart does not tell you or show you have fast price went through that level or how long it stayed at that level. That is something that the chart does not tell you, and it easy to have that fact allude you if you are not watching price action as it is happening.

 

So, people perceive speed as risk, and slowness as safety. Reality is, that your best opportunities happen as price is moving very fast, or right after wards. I'm not talking about volatility. Speed is an element of volatility, but I'm talking about a market that is considered normal volatility.

 

The bottom on that chart is preceded by a long red candle, closing low. Many people, me included, would see price dropping very hard and very fast and have a feeling of danger and see it as a situation that was out of control, and to get the heck out of the way, not to step in front of it. But if you had gone long right under the low of that long red candle, that would have been just about as good a long entry as you can get.

 

So, now the question is, what if you did just step in front of train? My answer to that, is you need confirmation very quickly that it's not a bad entry. The next bar close up, and the second bar gaped up on the open.

 

Risk but verify, risk but verify.

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  zdo said:
“TRO - what you have done on this thread is spread your own thread all over the top of this one”

 

Ingot, no one, no one, can NOT spread their own ‘thread’ all over the top of this one

 

Nothing ‘scientific’ is going on here Ingot. Even if you could get a good sample of ‘traders’ in agreement to utilize those three indicators, it would not mean in any way that they would be on the same page with you on your 3 indicators. Just within a small sample of traders, a literal infinity of systems would emerge and mutate… I’m not saying this is a waste of your time at all, just pointing the dangers of assuming something ‘scientific’ is happening …

 

Also, there is no pathology involved in any setups you may be investigating. Each one either profits or it doesn’t…

 

welcome to the anti lab ;)

 

Perhaps ZDO - you may be right. Keep in mind the title is a play on words - nothing scientific intended at all - just like the forum is not really a scientific "Traders Laboratory". Hope you didn't take any of the figurative language literally. If you have read much of my ramblings you would at once see that I use anecdote, analogy, allegory and now alliteration, to make my points ;)

 

I stand by the dump on TRO - all he did was post up a one-line criticism, plus a big advertising splash of what you can read on 19 out of 20 of his posts on his own thread. There was no invitation to dialogue, nor opportunity to discuss.

 

Counter-productive.

 

If you read my original couple of posts, you would understand that this is not about me - I got the ball rolling with an example of my own, and as you can see there has been much useful input following that.

 

But soon we will be done with Ingot54 and his trading setup - I have already resolved and defused much personal trading angst this week, purely by allowing scrutiny of my setup and trading rationale. I hope to respond later today to those with the generosity to bother to comment on what I have disclosed. Just as the vulnerabilty associated with self-disclosure carries risk, so too does it offer rewards, and I believe I have received those from the forum membership.

 

Next, the thread is hopefully going to move on to other traders with problems, and I would like to throw :2c: worth into the discussion to help them too.

 

Sorry if my play on words appeared to be alluding to scientific analysis, and pathology in a literal sense - it was merely/only tongue-in-cheek to attract interest.

 

Obviously it has achieved that, and next I hope the true objective will be achieved - that of really getting down to serious problem-solving.

 

This forum is going places.

 

I am pleased you have chosen to contribute - thank you.

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  Ingot54 said:
1) What was the risk with the first (successful) setup?

2) What is wrong with the second setup.

 

1. The risk with the first setup is from your entry point to the low, or to a midpoint or whatever you can tolerate and have back tested as a part of the setup. But really, it could retest the low and form a double bottom and you'd still be right.

 

2. There's nothing wrong with the setup, per se. How you execute could be a problem though. I am basically blind here, since most of my trading is based on market auction theory, but just using my candle reading ability, I'd say that your problem here would be getting spiked out, since the chance of a retracement is relatively high. Now, I will show my work.

 

I've posted your chart below with a few annotations of my own. Basically, you have a sharp pullback to the midpoint of the up move (shown by the white box), and the candle did not close on its lows, showing that there was some sort of buying going on. I'd be reluctant to just sell into this because it will pop more often than not, even if the move will continue down.

 

You could either buy this on a scalp basis and play for a move back towards the highs, or you could let that move occur and wait for rejection and sell into it. At that point, you'd set your target for the previous lows, or close to them.

 

Honestly, I couldn't care less about your triggers or methods, I'm more interested in what you risked in these two trades and where your targets were. A good trader can make money trading with a coin flip.

5aa71063883d6_TradesetupTL.thumb.JPG.35db987d8455bae6ca7a7a60cd97ca9c.JPG

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As $5DAW states, the indicators are all momentum based. As such, wouldn't it be a better strategy to implement on a higher timeframe? I don't look at MACD/RSI/Stochastics etc. so I couldn't say that you are missing this or missing that to make it a great setup. However, I would definitely think that specific price 'levels' would be beneficial to look at in combination with tentative momentum/trend shifts. I also like the 'top down' approach to certain strategies. Simply entering both long and short trades of this nature to a market say in an overall downtrend is less likely to be as profitable as just short trades may have been(unless the trend is coming to an end of course).

 

On the question raised about the definition of an indicator, this is my take. Price is price. History of price is history of price. Volume is volume and time is time. None of which are indicators. An indicator is used to better display current market behaviour and potential for change. Most of us can look at a plain chart and get an idea of what may happen next based on their own experience and interpretation. However, it's not price/price history itself that is telling us what may happen, but our experiences of past behaviour. So, indicators predict future price movement, traders themselves predict future price movement, price/time/volume show historical price/time/volume.

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  sdoma said:
I'm more interested in what you risked in these two trades and where your targets were. A good trader can make money trading with a coin flip.

 

What do you think of targets based on the last high or last low? If price is going up, it will often break over the last high unless there is indecision or the trend is turning. Or you could have a target at the last high or low. If price goes past the last high or low, that won't maximize your profit, but it increases your odds of getting a profit.

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  sdoma said:
Basically, you have a sharp pullback to the midpoint of the up move (shown by the white box),

 

I don't have any data to prove this, but from observations, price does pull back to a midpoint very often. Thanks for pointing that out because I can get caught up in the details and miss the obvious.

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  Tradewinds said:
I don't have any data to prove this, but from observations, price does pull back to a midpoint very often. Thanks for pointing that out because I can get caught up in the details and miss the obvious.

 

It does, and, more importantly to this setup, oftentimes buyers will come in at the 50-62% retracement zone. The group of traders that plays this way is big enough to affect market activity, so if you have a sharp pull back to the midpoint, I will generally wait and see if I want to get short unless there's some big market event.

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Much as it probably reduces most of you to tears, those who do not cotton onto

Steve46's description of supply-demand bands, might want to rethink their position.

 

I cottoned onto this concept years ago. [before I discovered Trading forums thankfully]

 

Must confess I have dropped all variations of MP, simply because it confirms what I already can see and at the gentle age of 64 I am not in the habit of wasting time on anything I neither want nor need.

By applying the concept to longer frames first and then working your way down the food chain, I imagine you will be more than pleasantly surprised with the % accuracy, size of stop limit and of course the reward/ risk over your trades.

The combination of these three numbers add up to consistency, which tells us how little risk we are enduring and allows us to move onto trading size, where all the lovely money lies.

 

It never ceases to amaze me how straight forward this game is once you come to "discover" what everyone else takes for granted.

 

Never pays to loose sight of the fact that this game is a contracts game played by Traders.

Therefore it comes as no surprise that a small number of Traders control a very large number of contracts and they cannot place them at any one time.

 

That is our advantage as Tiny Traders.

With our rapier like minds, advantaged sense of logic and common sense, not to mention our tiny accounts, we can move at will through the big Boys on a trade by trade basis.

 

All this reveals itself to me within the price as I have never ever meet a Real Trader let alone a Big Trader.

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Mechanical Trading Systems

 

My main trading method is a mechanical trading system, however, it is not automated. My intention in building this system was/is to automate in the future so all the buy/sell parameters are (I think) code-able. I'm not here to create a shit storm of controversy as to the meaning of a "true" mechanical system or a debate over PA (price action) trading vs the use of Technical Indicators or TA (technical analysis). They are two different styles of trading that attract legions of followers, I say, "to each their own."

 

A basic mechanical system could be as simple as when, moving average#1 crosses up thru moving average#2 I buy. When ma#1 crosses down thru ma#2 I sell. Albeit a crude example, that's the theory, no user discretion is involved and all signals are taken.

 

For me to consistently extract money from the market, I found (for myself anyway) I needed to devise a way to replicate my entries and exits. To achieve this goal of replication, I constructed a totally mechanical method of trading. A mechanical system of trading involves no user discretion, and thus (if traded properly) relieves traders from the grip of emotional trading. Most importantly (imo), a mechanical system creates a model that can be tested and evaluated with precision over different markets and time frames. However, if the entries and exits of this system are not automated the user may be tempted to pick and choose (discretion) entries and exits and find him/herself back in the grip of emotional trading and the proven back and forward test results will not be achieved.

 

This is a style of trading. Every position begins with at a hard entry price, a hard target price and a hard stop. When using a mechanical system, some entries will not be filled, maybe by a tick or two, or maybe there was insufficient volume at the price where the order was resting. The same can be said at the hard target, these are some of the unavoidable negatives of automation. This style of trading is not for everyone (for obvious reasons), just as price action trading is not for everyone. This method is nothing new and the nuts and bolts of this type of trading are well defined in Mark Douglas's book, Trading in the Zone. Traders with a deeper, more serious interest, may find Robert Pardo's book, Design, Testing and Optimization of Trading Systems, a good source of guidance or inspiration.

 

I spent hours, over a period of months, sifting thru data trying to find that sweet spot where, Risk, Capital, Profit, Drawdown and Consistency came together to fit my psychology and personality as a trader. Then, forward tested the system on a simulation platform for another period of months, constantly evaluating the extremes of the results.

 

Only after rigorous testing proved, I had a system that could;

A. Be traded with my meager account

B. Be traded with an acceptable/comfortable amount of risk, per trade

C. Be traded if the deepest documented drawdown occurred immediately after I started trading the system, my account would survive

D. Show a consistent profit great enough to meet my financial objectives

did I start trading it.

 

The journey above was mine alone, and it was not a walk in the park, hours of frustration and days of depression paved my way. I came to believe that this is/was the true, hard work of trading, and anyone who's willing to invest the time and effort can indeed build a mechanical system and find success in the markets. I sure don't fit in with the Soros, Jones and Rogers crowd, but I do have total confidence in my system and I keep its workings to myself, as many do. I proved to myself (you can believe me or not) a trader can enter the market, knowing, he/she is going to win before they begin.

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  $5DAW said:
Mechanical Trading Systems

 

My main trading method is a mechanical trading system, however, it is not automated. My intention in building this system was/is to automate in the future so all the buy/sell parameters are (I think) code-able. I'm not here to create a shit storm of controversy as to the meaning of a "true" mechanical system or a debate over PA (price action) trading vs the use of Technical Indicators or TA (technical analysis). They are two different styles of trading that attract legions of followers, I say, "to each their own."

 

A basic mechanical system could be as simple as when, moving average#1 crosses up thru moving average#2 I buy. When ma#1 crosses down thru ma#2 I sell. Albeit a crude example, that's the theory, no user discretion is involved and all signals are taken.

 

For me to consistently extract money from the market, I found (for myself anyway) I needed to devise a way to replicate my entries and exits. To achieve this goal of replication, I constructed a totally mechanical method of trading. A mechanical system of trading involves no user discretion, and thus (if traded properly) relieves traders from the grip of emotional trading. Most importantly (imo), a mechanical system creates a model that can be tested and evaluated with precision over different markets and time frames. However, if the entries and exits of this system are not automated the user may be tempted to pick and choose (discretion) entries and exits and find him/herself back in the grip of emotional trading and the proven back and forward test results will not be achieved.

 

This is a style of trading. Every position begins with at a hard entry price, a hard target price and a hard stop. When using a mechanical system, some entries will not be filled, maybe by a tick or two, or maybe there was insufficient volume at the price where the order was resting. The same can be said at the hard target, these are some of the unavoidable negatives of automation. This style of trading is not for everyone (for obvious reasons), just as price action trading is not for everyone. This method is nothing new and the nuts and bolts of this type of trading are well defined in Mark Douglas's book, Trading in the Zone. Traders with a deeper, more serious interest, may find Robert Pardo's book, Design, Testing and Optimization of Trading Systems, a good source of guidance or inspiration.

 

I spent hours, over a period of months, sifting thru data trying to find that sweet spot where, Risk, Capital, Profit, Drawdown and Consistency came together to fit my psychology and personality as a trader. Then, forward tested the system on a simulation platform for another period of months, constantly evaluating the extremes of the results.

 

Only after rigorous testing proved, I had a system that could;

A. Be traded with my meager account

B. Be traded with an acceptable/comfortable amount of risk, per trade

C. Be traded if the deepest documented drawdown occurred immediately after I started trading the system, my account would survive

D. Show a consistent profit great enough to meet my financial objectives

did I start trading it.

 

The journey above was mine alone, and it was not a walk in the park, hours of frustration and days of depression paved my way. I came to believe that this is/was the true, hard work of trading, and anyone who's willing to invest the time and effort can indeed build a mechanical system and find success in the markets. I sure don't fit in with the Soros, Jones and Rogers crowd, but I do have total confidence in my system and I keep its workings to myself, as many do. I proved to myself (you can believe me or not) a trader can enter the market, knowing, he/she is going to win before they begin.

 

Sounds like you have done a lot of work preparing.

A question for you: If your draw down occurs at a point that is inconvenient, such as in the beginning or soon after you begin, how are you going to deal with it psychologically? Continue? stop? or change?

 

And, what if your draw down occurs and begins to get bigger and deeper than you thought, then what do you do? Stay the course? Stop the system? Change the system?

 

Keep in mind I am not calling into question whether your method is effective or your analysis was thorough, or if mechanical trading is the right thing to do. I am asking you how you are going to react if A and or B occurs.

 

MM

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  MightyMouse said:

A question for you: If your draw down occurs at a point that is inconvenient, such as in the beginning or soon after you begin, how are you going to deal with it psychologically? Continue? stop? or change?

 

And, what if your draw down occurs and begins to get bigger and deeper than you thought, then what do you do? Stay the course? Stop the system? Change the system?

 

I am asking you how you are going to react if A and or B occurs.

 

MM

 

Thanks for the intelligent questions, MM

 

Yes, I have an absolute "pull the plug" system stop. My system stop is 2x the maximum run of losing trades revealed in testing. To answer the next logical question, no, I haven't had to "pull the plug." The deepest DD to date (after 32 months) went 36.6% beyond the maximum run of losses.

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  $5DAW said:
Thanks for the intelligent questions, MM

 

Yes, I have an absolute "pull the plug" system stop. My system stop is 2x the maximum run of losing trades revealed in testing. To answer the next logical question, no, I haven't had to "pull the plug." The deepest DD to date (after 32 months) went 36.6% beyond the maximum run of losses.

 

That's Great!. Has there been anything that occurred that you didn't expect?

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  MightyMouse said:
That's Great!. Has there been anything that occurred that you didn't expect?

 

Absolutely, I had no idea what I was getting into. I was not prepared for the mountains of data I was about to uncover and had no idea how to categorize the data so it could be recalled and used in a useful manner. If I had to boil down all the unexpected occurrences and list them in their order of significance, developing my computer skills would without a doubt top the list.

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I finally figured out how to post a chart!

 

I wanted to post this chart in an attempt to kill two birds with one stone. First, it is a mechanical system, it has set parameters for entries, HARD STOPS and HARD TARGETS. Second, up-thread the topic of entering positions on pull-backs was raised, ALL my systems use pull-backs to trigger entries. This chart is the 6E not FX cash market. Euro traders will be quick to recognize the price action of 4-01-11. Both positions (short & long) were triggered, and both hard targets were filled.

chart175.thumb.png.499264d0cc1a5aff992fc75eb247afbd.png

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