Trading the Storm - Methods for the Struggling Trader

[Maelstrom 10]

Hello all,

 

My purpose with this thread is to detail my trading strategy and methods, and hopefully, help anyone who may be struggling to find a suitable and most importantly, profitable, way to trade.

 

I am mainly a daytrader, but a long-term daytrader, if that makes any sense. I take 1, maybe 2 trades a day, and look for gains of 60-100+ per trade on the YM. I have been posting my trades on my other thread "YM Daytrading", and try to post the entries and exits beforehand or as close to realtime as possible, and will continue to do so there.

 

I trade using support and resistance, simple candle/chart patterns, and no indicators. I will glance at volume from time to time, but I honestly have never seen anything useful enough in it to make it something I routinely watch. I know lots of traders use it with great success (don't flame me), and have all the respect in the world for those that use it well.

 

My frustration for many years was in determining WHAT is significant in price action. Why does support hold here, but it doesn't there? Why will price breakout now, but not an hour ago? Sound familiar? I have gone through 100s of indicators, training seminars, advisory services, and blown out numerous accounts. I have micro-traded, trying to catch every nip and tuck of the market, traded stocks, options, forex, futures, etc, spent 1000's of hours looking at charts, felt the elation of coming up with "THE SYSTEM", and felt the dark feeling of it failing and going back to square one.

 

For this thread, I would like to go into the details of my method, including in no particular order:

 

1. Using a sensible "timeframe" to see significant levels

2. How to confirm valid swings vs. noise

3. Validating support and resistance levels and how they can be used

4. Determining sensible (and profitable) entries, and most importantly exits

 

I would love for this to be a great discussion and discovery thread for all who contribute. I will try to be as clear and definitive in what I do as I can, and encourage everyone to jump in and offer ideas, suggestions, or new ways of looking at things. I am always learning, and that will never change.

 

Lastly, because I have read many boards and seen many things, I will state a few things now: I am not selling anything, not now or ever. The way I trade will be layed out, it is not rocket science, and there are no hidden indicators, EA's, or offers of "THE SECRET" for a bargain price of $97.99.

 

I am the first one to say, often times, I am as wrong as anyone can be. No market gurus here. The reason I am starting this thread is because I well know the feeling of despair, stupidity, worthlessness, <insert your word here> that trading can cause. I told myself a long time ago, if I could reach some level of success in this, I would pay it forward someday.

 

 

M

[Maelstrom 10]

I thought it would be worthwhile to go over the type of charts I use for trading.

 

All types of options out there for charting - time-based, tick, range, renko, P&F, etc. - pick your flavor. But for me, the most useful type of chart I have used has been range bars.

 

For me, price is what matters. Time really has very little impact on my trading, other than the obvious market close if I am day trading, and there are of course well known "reversal times" during the day (30 mins after open, lunchtime, etc).

 

With a range bar, if price is hesitating and chopping, the current bar simply stays just that - as the current bar. With time charts, a new bar will print regardless of the price action. Now, there is a tremendous amount of usefulness in seeing that chop in time-based bars for many traders and methods - it simply does not fit into what I see or do.

 

Where I think a time-based chart is useful in is showing momentum.... small range bars/chop, then a jump and long bars moving in a particular direction. Now that I am writing this, I guess the best way to describe what I look for is the market's directional "intention" versus the speed of the move in that direction. I will expand on this later.

 

YM 20 range chart and a 30 min chart attached to compare.

[Maelstrom 10]

Just thought I would show the clean look of another market with range bars. Trades are indicated with arrows, diamonds exit points. As a disclaimer, I DO NOT currently trade the ES, but I am considering using it as the instrument to focus on for this thread, since I have YM shown on my other thread.

[Maelstrom 10]

Ok, at the core of my trading is what I call market intention.

 

I guess it is similar to momentum, but it is more focused on directional movement/range versus the actual speed of the move.

 

What I am looking for is 3 or more consecutive bars closing in the direction of a move. For an upmove, as an example, I need 3 closed green bars. For a downward intention, 3 or more red bars. This is very similar to a candlestick formation known as "Three White Soldiers". More information on this formation is available at http://www.candlesticker.com/Cs63.asp

 

Attached is a chart of YM illustrating these....more to come.

 

M

[Maelstrom 10]

Ok, this is embarrassing, as I consider myself a pretty techie guy, but is there a way to embed images from a file into the body of a post versus it being an attachment?

 

Thanks!

[Maelstrom 10]

Ok, they say a picture is worth a thousand words....so here you go. This is the basic things I am looking for. There are a few more points for congestion times, support and resistance points, etc, but I will get to those.

 

Tried to make it as clear as possible, but, any questions, put them out there. I will expand more in coming posts.

 

M

[SIUYA 11]

no questions yet, but I am liking the simplicity of it all and at first look it would get you in at many of the same levels as anything else similar (breakouts etc) , but without too much complication....simple setup, alert and trigger.....I look forward to your expansion on it.

[pa18 10]

Hi M,

 

Thanks for sharing your ideas.

 

I love pure price and how it shows on renko, which I'm playing with now.

 

But I like to experiment with range bars again.

 

Do you (or anyone else) know of any reliable range bars indicator for MT4?

 

Thanks again,

Pete

[Maelstrom 10]

Siuya,

 

Thanks for the reply! Any feedback you have is appreciated.

 

Pa18,

 

I think I may have one somewhere - I know there is a free version that is so-so, and then a paid version for MT4 that is supposed to be much more reliable. I will see if I still have the free version somewhere.

 

 

M

[Maelstrom 10]

Slow as can be in the overnight, as expected before the holiday, so I will post a few more things today.

 

Just another quick chart showing the intention formation break points. Pretty good trends over the last few days, so of course, it looks incredibly easy. But I will post a few examples of congestion or small move days - the type of days that can kill an account quickly.

 

M

[Maelstrom 10]

Ok, 3+ bar formations are easy to spot - should be no problems there. But do I take every signal based of of those. Nope. I will try to explain why.

 

One of the most important things I have found is the most reliable signal is your FIRST signal. Meaning, the market has been in a steady downtrend for a couple of days, and then a long formation comes up, price breaks, pulls back, and we have an entry. That first signal is USUALLY the absolute best one to take.

 

Important to note here - we are talking about the first opposite signal after there has been a confirmed trend in the opposite direction. A confirmed trend to me is one where there was not just a 3+ bar formation, but the completion of an entry signal.

 

It sounds like top and bottom picking a bit, doesn't it? But actually, there is a whole lot of confirmation:

 

- The reversal intention pattern consists of 3+ bars. On YM with 20 range bars, that may be 30-60+ pts, certainly not an extreme top or bottom.

 

- The wait for the reversal bar at the end of the pattern, then a break through the top or bottom of the pattern is solidifying the markets intention.

 

- Waiting on a pull back for entry is simply trying to get in at the best point possible.

 

Chart attached with notes to (hopefully) clarify. There are small range/congestion periods where you can take a second signal, as well as continuations. I will get to those soon.

 

M

[Maelstrom 10]

Congestion - small range - no trend

 

Call it what you like, but they happen all the time, more often than most of us would like. Here is how I deal with these times.

 

My previous post stated that the first signal/trigger after a confirmed opposite trend is the most reliable. But what happens when you get multiple, opposing signals - ie, chop. Two situations I would like to go over, and the first is inside formations.

 

Basically, if you have a signal, let's say for a short after a confirmed long trend, market chops around and doesn't complete the trigger/signal, and then forms another signal inside the first, that second signal is valid.

 

The key word is inside. For shorts, you have a formation, then another one forms above that one before the first triggered. For longs, the opposite - 2nd formation forms below the first.

 

Chart attached that will hopefully make things as clear as mud

 

M

[Maelstrom 10]

Quick chart showing a possible downward intention move forming after this great uptrend in YM.... will try to post the steps with charts as "live" as possible if it all materializes.

 

M

 

** Update ** Did not form, third bar turned green - will keep watching

Edited July 1, 2011 by Maelstrom

[Maelstrom 10]

Or saving myself from the chop monster.......

 

An invalid signal is an intention formation that does not trigger a trade, and then another formation occurs that terminates outside the first, with neither actually signalling a trade. This invalidates both setups.

 

The next setup after these can be valid IF there is a bar that completely clears both formations.

 

As always, chart attached.....

 

M

[Maelstrom 10]

Let me start by saying, when it comes to re-entries in a trend, in the traditional sense, I don't like them.

 

Let me clarify - If I have a valid signal at the beginning of an uptrend, and there is another long setup, I don't like taking them at all. Not for adding to a position, not because I got shaken out too early - I would rather wait for a trend change, and go from there.

 

I am not saying they don't work, or that adding to a position is necessarily bad.... I guess it is just a prejudice from past experience. Too many times, I see a trend, looks strong as hell, get in at what looks like a good spot, and then of course, trend's over.

 

The chart I have attached is a great example. I took the trade at 12180 indicated on the chart, and got out for +38. Reasons for my exit I will get into later, but overall, could I have (and should have) held? Yes.

 

But I am a daytrader....how do I do that if I dont re-enter?

 

Disclaimer here - this is riskier than a lot of people will be comfortable with, and I DO NOT advocate this for everyone.

 

If you look at the chart, as far as intention formations, there is nothing but upward motion. So, here is how it is done very simply. My entry was at 12180. At the end of the day, as close to 3:15 CST as possible, close the position. There is a 15 min break in trading, and as soon as the market opens again, re-enter.

 

No analyzing chart formations, no bias, simply get back in. Now, if there was a clear reversal setting up, you probably would not want to re-enter. But otherwise, continue the trade.

 

Liquidity is verrrry thin afterhours, and trading large size, this would probably not work well, especially on the YM. A lot of people are nervous about trading overnight, and understandably so, but personally, I got tired a while back having a huge chunk of the days move occur while I was snoozing and be left with nothing but chop for the rest of the day.

 

Important - on a re-entry like this, your stop is where it was before the ended. And for those who may think I am a huge risk-taker, discussion on stops and exits will be coming soon.

 

Look at the chart....with after-close re-entries, 3 trades, totaling about 300 pts over the last few days, with virtually no sign of weakness.

 

M

[Maelstrom 10]

Ok,

 

Gone over a few things so far, so I thought I would recap to keep myself straight:

 

- Range bars vs. time bars - allow (me) to stay focused on price direction

- Market intention patterns - is the market serious about a direction, or not

- Entries - Intention pattern, bar close/break of pattern, pullback, entry bar in direction of move

- Confirmed trends - I consider a trend or direction confirmed only when there has been an entry signal in that direction (not just an intention pattern)

- Valid signals (reversal of trend) - first signal is the one to take

- Valid signals (inside formations) - used in congestion/chop areas, concurrent signals must occur inside the previous

- Invalid signal - a second signal that forms outside the first with no trigger for a trade. Subsequent signals must clear the previous formations by one complete bar to be valid.

- Continuation of big trends - for daytraders, re-entering at the resumption of trading at the end of the trading day ONLY if there was no valid reason to exit.

 

Additional things I will go over will be stop placement, several options for profit targets, risk:reward issues, and eventually defining valid support and resistance levels.

 

Not sure if anyone out there is finding any of my ramblings useful, but since I will be babysitting my sick great dane this weekend, no doubt I will ramble on.

 

M

[Maelstrom 10]

This one is easy.

 

My initial stop is a tick below the entry bar. For YM, that means a 21 pt stop if I nail the entry right at the close of the entry bar, 22 if it slips a point.

 

I also set a second stop market order 50 points below my entry as a precaution against a catastrophic move and having my stop loss jumped. Will that save me in a flash crash? Not sure, but it makes me feel better if something weird happens.

 

Next, profit targets..... this will get a bit more complicated now

[Maelstrom 10]

I have to throw this out there.....sometimes simple is best.

 

I personally do not (usually) like using fixed profit targets, but..... with the way I trade, a 1:2 R:R ratio would work just fine. Use a 22 point stop, set a 44 point target, and go fix yourself a latte. The win/loss ratio with my trades is pretty high, so a profit taking scenario like this would work.

 

I will not go into one of those endless discussions of how you can get rich with a R:R like that, don't be greedy, have patience, blah blah blah. I DO believe in patience, preserving capital, being emotionally comfortable with your trading, and above all, being realistic. BUT.....I am absolutely not one of those traders that needs $50k in their account to trade one emini contract and make $100 a day off of that. Not saying there is anything wrong with that, but that's not just me.

 

A little aggressiveness, or more appropriately, conviction in trading is not a bad thing at all. I like to kick the market square in the ass when I have the opportunity, because I have the scars from when it has kicked back.

 

On to the ass kicking...... :fight:

[Maelstrom 10]

Going on a brief tangent here on something I should have touched on earlier, and that is time frame/range size of charts.

 

I have traded for a while now, and been through what most of us have - trying this, tweaking that. One thing that I had a very hard time with was trading a "slower chart, but I can tell you, when I did, things changed dramatically for the good.

 

I laugh now sometimes looking back and trading (or trying to) 10,20,50 tick charts, or 5 second bars or whatever, because I wanted every little piece of the market. Well, I got every little piece all right - every piece of pain and heartache the market had to give me.

 

In my opinion, a bigger chart will let you get some perspective. Using the YM as an example, 20R bars is approx 1/8 to 1/10 of the daily range. For ES, a 2 - 2.5 pt range works pretty well, NQ, maybe around 5R. That is a decent size bar chart. But it does something for me that the faster charts could not - let me think, to see the bigger picture of the trading day or week, and most importantly, give me a sense of structure or flow, or at least my delusion of that.

 

Yes, a bigger chart means bigger stops, but for me, I would rather lose $100 on a failed trade every once in a while versus dying a death of a thousand cuts with $10, $20+ over and over.

 

I know traders who successfully trade insanely fast charts, and I have a tremendous amount of respect for them because they do something that I have yet been able to do. But, if anyone is reading this and having that feeling of "wtf is going on" when they are looking at the market, double up your normal chart and take another look. Still looks like crap? Double it again. Bigger charts won't fix everything, but it will allow you to think things through with a lot more time.

 

M

[Ingot54 13]

But I like to experiment with range bars again.

 

Do you (or anyone else) know of any reliable range bars indicator for MT4?

Hi PA18

 

Here is something that may be of assistance to you.

 

If it fails to upload, you can download it yourself here at post #11:

 

http://www.traderslaboratory.com/forums/trading-indicators/9336-mt4-indicators.html

 

Kind regards

 

Ingot

range_bars_wlas_v09.zip

[Maelstrom 10]

This is so completely obvious, but I would be negligent if I didn't post it - if a trade is on, no other exit conditions occur, and an opposite signal occurs - take the signal and reverse.

 

There, now my conscience is clear :\

 

M

[optiontimer 10]

Ok, this is embarrassing, as I consider myself a pretty techie guy, but is there a way to embed images from a file into the body of a post versus it being an attachment?

 

Thanks!

 

After you upload your file, right click on the hyperlink in the manage attachments window, and click on "copy link address".

 

Then click on the "insert image" ikon above. It looks like this:

 

 

An address bar will open. Then right click and paste link address into the address bar that opens, and click "ok".

 

That should do it.

 

-optiontimer

[tinyboy 10]

Maelstrom-

 

Nice thread, but I have NO idea how to follow your charts. I thought I understood what you were doing in the beginning but you lost me at about the 6th or 7th post

 

Mike

[Maelstrom 10]

After you upload your file, right click on the hyperlink in the manage attachments window, and click on "copy link address".

 

 

You're a good man Optiontimer - thank you! I will try that.

 

M

[Maelstrom 10]

Test post