Phantom of the Pits Rule 1 - Time Stop ?

[joshdance 10]

Short summary: Betting Rules by Phantom of the Pits

 

http://www.wisetrader1.com/?page_id=19

 

Basically, PoP says in rule 1 that we are not to let the market prove us wrong, but rather it must prove us right, or we get out ourselves. I have not read the whole book yet so perhaps I will get to it later, but the problem here is it's very vague as to what is "right" and "wrong."

 

There are three primary metrics (and probably other derivatives) I can see to be proven right or wrong in a trade: price, time, and possibly volume.

 

1) If price moves beyond price X, I am "right" and will stay in the trade, and consider to add. However, if it moves to price Y, I am wrong, and will exit the trade (stop loss).

 

2) If I am in the trade for more than T minutes, yet price is not beyond price X, then I will close the trade, even if price Y was not reached.

 

3) If the volume is below some certain volume V in a given time or range since entering the trade, close early, but again, only if price X has not been reached.

 

In all three cases, IMO, price must validate the trade. That's what a trade is anyway, right? Buying and selling based on the traded price. So I am ONLY proven right by price, but I may consider that I'm wrong by price, time, or possibly some other metric like volume. If you disagree with this please let me know why; the logical seems pretty sound to me but perhaps I'm missing something.

 

As an example: I briefly considered closing the trade that I took around 1:10, the 76.75 long, after it stayed there for a half hour. But the market still had not traded below 76.25 during the later part of that range, so why should I exit? There are times when I will fade a down move, for example, and on the retrace up in my favor I notice the volume lowering, and after about 3 minutes I realize that I better exit now, because this is only a pullback good for a point or so. So, the market has not traded to my stop, but I would expect that if it goes back to my entry that it will drop further. This is a time when using a time-based stop makes sense IMO.

 

There are different ways to view the market and I find value in different paradigms. Volume, that is, transactions, actually cause the market to exist and for price change to be possible. Time does not. However, time is inextricably linked to the markets as well, inasmuch that we as humans are ruled by and live in the context of time. When the market price changes by 4 points in 1 minute, we perceive this as different as when it changes by 4 points in 1 hour, and volume is not a factor in how much the market moves; perhaps it was more over the hour cumulatively, but we notice the changes in time. This causes emotions to get involved (or bots programmed to act based on typical human emotion), and can create momentum and panic buying or selling that otherwise would not happen except that it happened so quickly. So, time is important.

 

Elsewhere on this forum one trader wrote: "Stay in the trade until your target is reached, you have an exit signal, or the reason for your entry is no longer valid." This last part, "reason for your entry is no longer valid," is the primary reason for this thread. Does passage of time alone constitute a reason that an entry would no longer be valid?

[zdo 20]

This last part, "reason for your entry is no longer valid," is the primary reason for this thread. Does passage of time alone constitute a reason that an entry would no longer be valid?

It’s system dependent.

 

Without knowing either we can be pretty sure that the whole of PoP’s system is quite different from the “Stay in the trade until your target is reached” trader’s system. Very loosely, (and without really knowing ),it’s likely the first (PoP’s) guidance on exits is for ‘surprise side’ trades while the second guidance is about ‘surprise side trades NOT!’, etc etc.

 

Be careful of authors who, via ‘ass umptions’,etc., don’t bother to specify what the whole system is that justifies the exit criteria they are expousing. It does a huge disservice to many, if not all, readers.

 

Moving on ... re: “Does passage of time alone constitute a reason that an entry would no longer be valid?”

Again, it’s system specific! I have ‘breakout’ oriented systems where the passage of time alone literally strengthens a reason that an entry would be valid… and I have ‘reversion' based systems where the passage of time alone does constitute a reason that an entry would no longer be valid…

 

we always have to ask 'does this exit advice align with the essence of my whole system?'

hth

[MightyMouse 12]

Short summary: Betting Rules by Phantom of the Pits

 

Betting Rules by Phantom of the Pits | Welcome to Wisetrader1.com

 

Basically, PoP says in rule 1 that we are not to let the market prove us wrong, but rather it must prove us right, or we get out ourselves. I have not read the whole book yet so perhaps I will get to it later, but the problem here is it's very vague as to what is "right" and "wrong."

 

There are three primary metrics (and probably other derivatives) I can see to be proven right or wrong in a trade: price, time, and possibly volume.

 

1) If price moves beyond price X, I am "right" and will stay in the trade, and consider to add. However, if it moves to price Y, I am wrong, and will exit the trade (stop loss).

 

2) If I am in the trade for more than T minutes, yet price is not beyond price X, then I will close the trade, even if price Y was not reached.

 

3) If the volume is below some certain volume V in a given time or range since entering the trade, close early, but again, only if price X has not been reached.

 

In all three cases, IMO, price must validate the trade. That's what a trade is anyway, right? Buying and selling based on the traded price. So I am ONLY proven right by price, but I may consider that I'm wrong by price, time, or possibly some other metric like volume. If you disagree with this please let me know why; the logical seems pretty sound to me but perhaps I'm missing something.

 

As an example: I briefly considered closing the trade that I took around 1:10, the 76.75 long, after it stayed there for a half hour. But the market still had not traded below 76.25 during the later part of that range, so why should I exit? There are times when I will fade a down move, for example, and on the retrace up in my favor I notice the volume lowering, and after about 3 minutes I realize that I better exit now, because this is only a pullback good for a point or so. So, the market has not traded to my stop, but I would expect that if it goes back to my entry that it will drop further. This is a time when using a time-based stop makes sense IMO.

 

There are different ways to view the market and I find value in different paradigms. Volume, that is, transactions, actually cause the market to exist and for price change to be possible. Time does not. However, time is inextricably linked to the markets as well, inasmuch that we as humans are ruled by and live in the context of time. When the market price changes by 4 points in 1 minute, we perceive this as different as when it changes by 4 points in 1 hour, and volume is not a factor in how much the market moves; perhaps it was more over the hour cumulatively, but we notice the changes in time. This causes emotions to get involved (or bots programmed to act based on typical human emotion), and can create momentum and panic buying or selling that otherwise would not happen except that it happened so quickly. So, time is important.

 

Elsewhere on this forum one trader wrote: "Stay in the trade until your target is reached, you have an exit signal, or the reason for your entry is no longer valid." This last part, "reason for your entry is no longer valid," is the primary reason for this thread. Does passage of time alone constitute a reason that an entry would no longer be valid?

 

Josh,

 

First, His description of rule 1 is vague.

Second, his rules are not for day trading. He is not a day trader.

 

My translation of his first rule is that your trade is wrong until it is proven right. if you are not right, volatility will eventually take price to your stop and since we measure volatility over a period of time, when that time is up, if price has not moved far enough away from your stop, then you should get out.

 

So if price was plus a few ticks and say the 15 minute true range was 10 ticks, and my stop was 10 ticks, i would get out if price had not moved far enough away from my stop to warrant staying in another 15 minutes. Price would have to be the 30 minute true range distance from price for me to stay in.

 

I have no idea if this was the right interpretation or not or not but it is how I traded my interpretation of it. Needless to say I moved on but implemented aspects of his ideas; such as, scaling contracts off my initial position before getting stopped out to get stopped with a smaller size than my entry when it was negative and adding to winners when my trade seems to be working. I suppose I go give POP credit for that.

 

I read it a few times and began to doubt whether this guy was a real trader or not. I suspected that the author and the POP were the same person and the rules were what this individual thought would be good rules. It was weird the way he then decided to have a third rule because the forum sort of demanded it.

 

 

MM

[TheNegotiator 13]

Time absolutely matters. The reason for this is that if you put on a trade, believing that the price and timing of your trade within certain error limits are going to ellicit a profitable response from the market and yet it doesn't happen this way, all bets are effectively off. Anything can potentially then happen, but what does happen is going to be outside the remit of your specific trade plan. Of course, there's also the scenario that the day is much slower than you felt it might be originally. In this case, time then needs to be adjusted as a volatility variable just as ATR is. Here, the trade is likely valid for a much longer period of time. The key factor might also end up being how close it is to close as then if it hasn't gone in your favour, there may well be other similarly positioned participants who want to exit their trades. So like most things in trading, viewed with context, time is important imho as a gauge of potential success in an individual trade.

[fxdummie 10]

 

I read it a few times and began to doubt whether this guy was a real trader or not. I suspected that the author and the POP were the same person and the rules were what this individual thought would be good rules. It was weird the way he then decided to have a third rule because the forum sort of demanded it.

 

 

MM

 

If PoP ever existed he was a pit trader - they don't usually use charts and indicators but only price levels and how the price reacts around them influenced by supply/demand and/or news/rumors. You need diff set of tools and skills for pit trading. The book is more useful for giving you an idea of the herd psychology of the pit traders. And how to follow your "gut" feeling against the rumors and the pear pressure.

 

Another problem with this apocrypha is that whoever wrote it doesn't appear to be a professional trader. A lot of the interpretations are hard to understand and somewhat naive.

[fxdummie 10]

Of course, there's also the scenario that the day is much slower than you felt it might be originally. In this case, time then needs to be adjusted as a volatility variable just as ATR is. Here, the trade is likely valid for a much longer period of time.

 

One way of assessing a slow day besides the volatility variable is volume. When no range and light volume = the big guys are out golfing = take off or use modest targets. Different case is when narrow range but heavy volume - market is pressure cooking the next big move = volatility expansion. In this case either stay on the sidelines until clear direction or keep probing the market "until proven right".

 

For me "right" and "wrong" is about direction. Time, volatility and price proves you right or wrong. And it is not important to be right but to follow the market _which is always right.

[MightyMouse 12]

One way of assessing a slow day besides the volatility variable is volume. When no range and light volume = the big guys are out golfing = take off or use modest targets. Different case is when narrow range but heavy volume - market is pressure cooking the next big move = volatility expansion. In this case either stay on the sidelines until clear direction or keep probing the market "until proven right".

 

For me "right" and "wrong" is about direction. Time, volatility and price proves you right or wrong. And it is not important to be right but to follow the market _which is always right.

 

Right = green = you are aligned with market direction/orderflow.

 

Wrong = red = hopefully out quickly.

[efficiency 10]

It was implied from the series of of Phantom of the Pits articles that he scratched a LOT of trades.

 

RULE 1 : Remove positions before the market tells you to.

 

Only hold those that prove correct. Yesterday's data (midpoint) is critical to knowing PROOF.

 

Must be at least reduced if not produciing within 3 hours.

 

There must be a profit at the END of the entry day's close.

They must CONTINUE to prove.

 

RULE 2 Have a larger positon when you are correct.

 

Don't take profits when proven correct. You wait too long and too hard to abandon them.

 

Markets go to extremes. Press your advantage.

 

Add once trending in a 3-2-1 unit ratio.

 

RULE 3 Remove entire position with an early indication of topping.

 

BIG money is on the surprise side and big losers are on the popular/expected side.

 

Removing postions: YOUR exit is a better exit than the market proving you wrong.

 

If traders aren't aware of what the market can do to them, they will head in that direction.

 

Huge volume is a prelude to correction possibilities. Extreme volume is both high and low.

[joshdance 10]

efficiency, thank you for your reply.

 

RULE 1 : Remove positions before the market tells you to.

 

Only hold those that prove correct. Yesterday's data (midpoint) is critical to knowing PROOF.

 

Sounds like you are talking about a swing trade, yes?

 

Don't take profits when proven correct. You wait too long and too hard to abandon them. ...Markets go to extremes. Press your advantage.

Add once trending in a 3-2-1 unit ratio.

 

RULE 3 Remove entire position with an early indication of topping.

Removing postions: YOUR exit is a better exit than the market proving you wrong.

 

Your prior two quotes seem contradictory, and this is part of my question regarding PoP.

 

Taking the entire position off with because of "early indications of topping" would seem to contradict rule 2. Tops can't be predicted, and while I agree that volume and other indications may give us indications, the market is going in our favor, and you're suggesting on the one hand to press the advantage, and "once trending" to add. But you don't know when the trend is over until it's over. That's the nature of trend following--namely, that you will ALWAYS miss a top and a bottom.

 

Huge volume is a prelude to correction possibilities. Extreme volume is both high and low.

 

As we have seen since late December, a market can move up 12% on about as low volume as a market can have. Anyone who was long and took profits too early, may have seen early signs of topping, but they would have not let the market dictate their actions, thus they took themselves out early.

 

That's part of my question/problem with PoP. "Take yourself out before the market proves you wrong" -- well, in the right context, for an established, successful, intuitive trader in the pit, that's possible. But otherwise, it can be dangerous I think. Yet, I see the practical wisdom of this at the same time--I was long today and added on the way up, only to find myself with a loser after adding too high; intuitively I saw that the push was not strong enough to continue, but I have been burned too many times trying to guess, so I held on and should have dumped it sooner.

 

I suppose my point is this: what PoP says is absolutely the way to go: add to winners, and get out while you're ahead. However, the way he's able to do that is sheer experience. He talks about his uncanny ability to get out on the 3rd wave, just at the right time. That's because he's a good trader. I just don't think that that can be codified into a rule; as he intuitively knows WHEN to add, and WHEN to take his money and run. Reading about this will not help those trying to learn. It's like reading about a quarterback talking about being calm in a big game, and expecting to be able to do that from just reading it. Experience and innate ability are the keys. Don't you think so?

[efficiency 10]

I relayed the Phantom of the Pits "words" via my own interpretation..

 

Swing trade is a label. Call it a multi-day position. Riding profits and modest pyramiding until one deems the risk/reward becomes unattractive and responding by either getting smaller or booking the entire profit.

 

It appears his threshold was 3 hours hence a lot of scratching.

 

I neglected to mention he used point & figure charts.

 

I personally give little credence to volume. However, when it's extraorinarily high, there are a lot of decisions being made and what I term the "all in" concept.

[Predictor 11]

I use time stops extensively. They work very well but can't be set TOO restrictive. I've found price to be dominant over time, primarily. However, time stops are very effective. Time-based stops are really just a variation of a hypothesis based stop.

 

A hypothesis based stop has a rule and an implicit time-based function.

 

In general time-based stops or any method of making the market a series of discreet events will be helpful psychologically. This is the real benefit and helps to provide balance.

 

-Curtis

The Market Predictor

[jd585 10]

For those of you that have not read the entire document, I strongly suggest you do that. Follow that with a manual editing of the document as this reveals more into the thinking. This manual editing forces you to think of what point he was trying to make in context of the overall knowledge he shared.

 

Without this editing it is difficult to understand his thoughts and statements. The markets that he was referring to do not exist anymore, but his rules still could hold some relevance.

 

TIME EXIT: this simple point we all have a specific amount of time a trade should require to reach its objective. POP makes the point that time is as important as price, and he used it to cut his losses short. Or if a trade was going in the correct direction, but was taking too long, then it was probably going to reverse and take your profits AND cause a loss.

[kuokam 10]

Where did I see a phantom around here? Or was that a phantom of the keyboards? Lol...

I fail to understand the role of time in proving a trade wrong. You never know what will happen after you enter a trade, be it 10 seconds or 10 hours later. My experience is that it is a 50-50 proposition each way.

[SIUYA 11]

Where did I see a phantom around here? Or was that a phantom of the keyboards? Lol...

I fail to understand the role of time in proving a trade wrong. You never know what will happen after you enter a trade, be it 10 seconds or 10 hours later. My experience is that it is a 50-50 proposition each way.

 

its just another 'if...then...secenario

If you expect something to occur immediately and it does not exit.

if you expect something to occur by X time as you expect it to and it does not exit.

 

Strategy dependent ....some strategies require immediate gratification and if its not achieved then you are generally wasting time and mental effort is waiting for it.

 

....and yet in that similar point why is it so often people will sit about on a trade that goes no where and yet get out of a trade before they should that is going their way....

[tradingwizzard 10]

I simply get uncomfortable when I hear the word "betting" or "gambling" as a matter or fact.....

[kuokam 10]

Hope I hear you loud : If you must be flat at 3:15 NY time, okay: if rollover is imminent, okay.

But as for jobs numbers, it is still a 50/50 proposition. It can add to your profits if already in a trade, or stop you out. In that circumstance, I always readjust my stop, but never close a trade I am in because job no or Bernanke or Draghi speech.

Anything can happen at any time.

 

Time as a factor for trading decisions is.........system dependent.

If you're strictly a day trader time is a consideration.

If you only trade at certain times of the day time is a consideration.

If there is only so much time left in the contract.....

If there is only so much time before a jobs no comes out.....

 

If you consistently trade with the odds in your favour then it is not 50/50 overall.

However,specifically you say "you never know what will happen after you enter a trade"..

 

Only 2 things can really happen,stop or target is hit.If your stop and target is hit 50% of the time (50% of trades hit the stop/50% hit the target) then the edge is not in entries/exits but hopefully something else.

 

Since the H/L's are often made within the first hour or so,if the trade does not move your way after that you have probably misread the market.Time in this case is possibly a factor here in proving a trade wrong.