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steve46

Steve's Basic System for Retail Traders

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Hi Dude,

 

Thanks for replying.

 

2. Thats just a complicated way of saying the market moves up and down.

 

Yes it is. Sorry I can't be more profound :)

 

Markets may have been more mean reverting 10-20 years ago before the information explosion, but these days ideas of value (mean) are changing more quickly, with different time frames considering different mean values.

 

I think that markets were less mean-reverting in the past. They tended to produce clean trends with less noise. The fact that markets have become more noisy is one of the reasons that trend following has become more difficult. The more information and more market participants, the less the likelihood of agreement between them. Participants in different time frames considering different mean values would tend to compound this - those in one timeframe may be driving the market one way, while those in another may be driving it in the opposite direction.

 

You may think the mean is at x. Mathematically, on your time frame, you may be correct. However if the herd disagrees and thinks it's at y (for them), you are probably toast.

 

How does mean reversion therefore help one make money?

 

As MightMouse points out, it doesn't "work" all the time. But you don't need to be correct all the time to make money. And you don't have to be toast if you can take a loss with a stop (of course, if you're LTCM and you can't take a stop or, worse still, start doubling down, then you may well end up toast).

 

Another thing to consider is this: higher timeframes tend to exhibit less noise. So while the markets may be noisy and mean reverting in the short term, in the long term sustained trends can and do persist. As a trader you can, therefore, enhance your edge by trading biased mean reversion systems - fading overextended short term moves back in the direction of the longer term trend. There are endless specific strategies and approaches built around this concept - anyone who talks about "buying pullbacks in trends" is doing just this.

 

BlueHorseshoe

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Expect it not to work from time to time and you will make money.

 

I get the impression that folks are in some way surprised that systems do not work perfectly.

 

I keep track of my batting average and as long as it doesn't dip below a certain point I am fine with it....the old saying is that "losses are part of the game"...what I find is that for retail traders the losses have to be small to be psychologically acceptable...as you get more experience and perhaps have a record of successful trading, you can accept a bit more downside on a periodic basis...as with many things in life it is a matter of knowing where to draw the line...

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I have observed your batting average regularly dip below a point you're comfortable with. It is also my observation that these drawdowns occur specifically because you don't know where to draw the line.

 

I keep track of my batting average and as long as it doesn't dip below a certain point I am fine with it....the old saying is that "losses are part of the game"...what I find is that for retail traders the losses have to be small to be psychologically acceptable...as you get more experience and perhaps have a record of successful trading, you can accept a bit more downside on a periodic basis...as with many things in life it is a matter of knowing where to draw the line...

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How does mean reversion therefore help one make money?

 

It is hard to say. Especially when the market can be so mean and revert right back after taking out your stop loss :)

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What you will see in the attached chart is this evening's most recent entry based on my "Algo Pattern"

 

The pattern is pretty simple....you generally have a wide up or down bar or candle that penetrates the BB's (if you use them)....then a reversal candle that is smaller....price then moves away from that local high and returns to retest...at least once depending on the time frame...in this instance for the 3 minute time frame you usually get one, maybe two retests..and then price should move favorably at least 4-6 ticks...

 

If you scan left, you can see that the initial signal lines up with a previous trend move...this is common

 

My distribution tells me that any price less than 1421 is a possible short....my Market Profile data shows me 1412 as Value Area High...so I have confluence....it either works or it doesnt and if comes back to the entry I have a choice to make....

 

 

Best of luck to you all

5aa711338427a_MostrecentGlobexEntry.thumb.PNG.35c9a4a84b136138b091ffbc787c3d62.PNG

Edited by steve46

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and here's the exit for that trade....my rule set says either scale out or go flat just prior to the DAX open...the target for the trade is inside the blue rectangle

5aa711338c755_TradeExit.thumb.PNG.825a06503a9fe1f08e8fbaa3349d993d.PNG

Edited by steve46

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It is hard to say. Especially when the market can be so mean and revert right back after taking out your stop loss :)

 

Mean reversion sytems and stop-losses certainly don't make easy bedmates.

 

You could . . . erm . . . no, I won't say it . . .

 

BlueHorseshoe

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What you will see in the attached chart is this evening's most recent entry based on my "Algo Pattern"

 

The pattern is pretty simple....you generally have a wide up or down bar or candle that penetrates the BB's (if you use them)....then a reversal candle that is smaller....price then moves away from that local high and returns to retest...at least once depending on the time frame...in this instance for the 3 minute time frame you usually get one, maybe two retests..and then price should move favorably at least 4-6 ticks...

 

If you scan left, you can see that the initial signal lines up with a previous trend move...this is common

 

My distribution tells me that any price less than 1421 is a possible short....my Market Profile data shows me 1412 as Value Area High...so I have confluence....it either works or it doesnt and if comes back to the entry I have a choice to make....

 

 

Best of luck to you all

 

Thanks Steve.

 

There's another entry marked earlier on this same chart. I'm much more interested in this - please could you tell us a bit about it?

 

Cheers,

 

BlueHorseshoe

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There were only two ellipses on the chart, the one on the far left marked the origin of a down trending move. It was a point of reference confirming the entry signal on the right....

 

From my point of view the important message to convey is that successful entries are often aligned with the origins of previous trending moves. That is why in my classes I often tell students to "scan left" to try to find that previous trending move before taking the trade.

 

I have reposted the chart showing the entry (inside the ellipse) and the line pointing to the origin of the previous trending move down...

 

I hope this helps, it may not be what you are looking for but it is an important part of how I make the decision to enter trades..

5aa71133ade8e_RepostofEntryChart.thumb.PNG.589b9a146668f2067f744425cee3dd20.PNG

Edited by steve46

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There were only two ellipses on the chart, the one on the far left marked the origin of a down trending move. It was a point of reference confirming the entry signal over on the right....

 

That's what I meant - I didn't know whether this indicated a seperate entry. Thanks for clarifying!

 

BlueHorseshoe

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Thank you Steve for sharing your system and basis of trade.

 

I haven't time to completely read the posts for understanding, but I sure will sometime today. Thanks for time and effort.

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Appreciate the kind words...thanks much

 

The attached chart shows today's open and the first trade.

 

The logic the important part...I create a distribution the evening prior to the open and use it to direct my entries....in this case the distribution says to take any valid long above 1402.375

rounding up I can take any valid entry ABOVE 1402.50...

 

Got the opportunity to do just at 7am today...because entries are time dependent I will always look to obtain confluence of "time & price"....that is to say I want a good price AND I want to enter at the right time....price created the right pattern, and 7am or near to that is one of the preferred times.

 

Today I had some folks following along with me, so I had the opportunity to see how others reacted to the logic...interestingly some of the observers chose to trade "in & out" of their positions during this time....feeling at one point as though the market would turn south on them

 

This is one of the very important issues for retail traders to resolve and get behind them....first

plan your entry and stick to it...if your plan is right you will obtain favorable position and if not you take a loss in accordance with your trading plan...then you move on to the next trade...

 

If instead you trade "in & out" especially in this market you are going to pay fees and take small losses that quickly add up and put you in the hole....I saw this happen today to one of my guests...

 

If your position causes you psychological stress, I advise you to put your stop limit in place, take your hands off the keyboard and practice any of several types of stress reduction (my recommended technique is a breathing exercise).....I do this myself and I know it works to keep your physical reactions in check while the market does what it is going to do anyway...with or without you "tick watching"....

 

Good luck in the markets folks

5aa711348e6da_TodaysOpeningTradeEntry.thumb.PNG.88833705f9ade7f91209fe3fe1e24448.PNG

Time Based Pivots Tuesday August 28 2012.docx

Edited by steve46

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and here is the second entry for the day

 

As price comes back off the highs, we look for a test of one of our "time based pivots"

 

In this case we get a test of the daily & weekly RTH low at 1407...when that happens we look for our pattern (penetrating the BB then going back inside and retesting 1407)

 

When that occurs, it means its a viable trade entry and should go up to test 1409.75...if price moves through that area we would expect a test of the previous highs

5aa71134a0e46_2ndentry.thumb.PNG.03c1745950258ac9b7aa43297b9df18d.PNG

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.... First, Bollinger Bands are really just standard deviation bands. I'm not really sure how John Bollinger got credited for such a trivial concept......
And candlesticks in Japan were around long before Steve Nison popularized them. So?

 

Bollinger brought standard deviation bands to the attention of the masses.

 

Actually a wikipedia gives him credit for inventing them and he got a trademark issued as well in 2011. Probably for being the first to use stdev bands on securities? Don't know.

 

But he is not alone, by any means, in naming a trading technique after himself.

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and for those interested in the NQ

 

Although I haven't tested for every market I see that the general concept works well for the NQ....I am not surprised since the correlation between the two is still pretty significant.

 

As you can see price is respecting the distribution boundaries pretty well.

 

At this point I am still trying to simplify the process of creating the distributions...oh well

 

Here are today's charts

5aa71134a9a76_NQchartsfortoday.thumb.PNG.969efb100aab54be97b0dd6ef3cfaa75.PNG

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and here is a third valid entry pattern today

 

As can be seen price penetrates the BB then moves back out, then retests

 

Generally speaking I am always watching the tick, the VOLD and the ADD so that I can see if

the pattern is "supported" by the broader market....what this means is that I am trying to judge whether the broader market (the Dow) is set up to move in my direction once I get on board...

 

Its called reading the tape

 

As can be seen this entry has moved favorably about 6 ticks...which is all I need initially...once I take a small profit, I have in effect "bought a stop"...meaning that if it comes back to my entry point, (and I think the market is going against me) I can exit without taking a loss. It becomes a "reduced risk" transaction.

 

Good luck folks

5aa71134b2648_3rdentry.thumb.PNG.a216a5ee62cbc80310d34a558c58344d.PNG

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Excellent example of what happens when it goes against you

 

If you trade.... eventually you see this happen...you put the trade on.... it goes your way for a few ticks and then reverses...

 

As mentioned previously, if you take a small profit up front, you can scratch the trade with little or no damage to your account....then you go on to the next opportunity.

5aa71134c3837_Exampleofalosingtrade.thumb.PNG.cef36adb1a1030add192af02b6f3cd9e.PNG

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and this is my final trade for the day

 

Again I am focused on a couple of things, first general drift of the market is up, though not strongly...so I am trading small...

Second, I am looking for a pullback and then a nice entry pattern as before

Third, my initial goal is to get a point or two, and reduce my risk, then ride the rest for 5 points.

 

The chart tells the story...the entry signal occurs near to an important time based pivot at 1407 and today's distribution tells me to look for longs above 1402.375...so rounding up I am looking to get long ABOVE 1402.50 whenever I see a valid entry pattern.....The pattern occurs right before 11am (near enough that I consider it to be a "preferred" entry)....The $tick spikes down to neg 600 and that gives me the confluence I need to pull the trigger...

 

This is a difficult one to trade because I can't get my first point right away and retraces quite a bit....but eventually it does move enough to book that important first point. Once we get there you can see that it turns into a nice trade...

 

This by the way is typical of summertime low volume trading...at any other time of the year my first scale out would be at a minimum 2 points.

5aa71134cbf7a_finaltradefortheday.thumb.PNG.c0d810dd4cf85a915d055c582101b9f6.PNG

Edited by steve46

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Few observations... not trying to compete but just stating the obvious.

 

1. What is the "specific" pattern? Steve, you mention "specific algo pattern". But you don't even describe a general pattern to any degree -- let alone a specific set of rules for identifying the pattern algorithmic-ally.

..

he already high-light it, price was maxed out at 2 sd.

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Not anywhere near the same results, but something simple to play around with. I don't have any idea if the calculations are the same or similar. Easylanguage.

 

var: MidPnt5Bar(0), MidPnt10Bar(0);

MidPnt5Bar = (Highest(H[1], 5) + Lowest(L[1], 5))/2;
MidPnt10Bar = (Highest(H[1], 10) + Lowest(L[1], 10))/2;

plot1(MidPnt5Bar, "Mid 5");
plot2(MidPnt10Bar, "Mid 10");

plot3(Highest(H[1], 5), "High 5");
plot4(Lowest(L[1], 5), "Low 5");

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http://www.traderslaboratory.com/forums/e-mini-futures-trading-laboratory/14045-steves-basic-system-retail-traders-4.html ....post #30

 

As for Predictor, he just posted a request for a "quant" to help him do what he can't do himself..

 

and finally.......early in this thread, when I wrote that I used Bollinger Bands as "training wheels" only, apparently you two "rocket scientists" never got the memo.....

 

So my comment for both of you is as follows....if you can't stay on the subject...if you can't contribute something positive (and that seems a very distant possibility)....point & click yourselves somewhere (anywhere) else...

 

Thank you

 

and Goodbye

Edited by steve46

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I don't have time to post all this twice...I actually trade this market...lol

 

http://www.traderslaboratory.com/forums/e-mini-futures-trading-laboratory/9773-day-trading-e-mini-futures-681.html

 

Look for post 5447

 

Notice the entry screen design...I think retail traders should try this out since it provides all the data on the three time frames (10,3,1 min charts) that are important to me right there in front of you....

 

Whats important here aren't the trades....look past that and get to the part that provides strugging traders with value....its the pre-market preparation (I will go into it in more detail in this thread), that will 1.) put you on the right side of the market, and 2. keep you out if you can't see a high quality entry...

 

Good luck folks

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Not anywhere near the same results, but something simple to play around with. I don't have any idea if the calculations are the same or similar. Easylanguage.

 

var: MidPnt5Bar(0), MidPnt10Bar(0);

MidPnt5Bar = (Highest(H[1], 5) + Lowest(L[1], 5))/2;
MidPnt10Bar = (Highest(H[1], 10) + Lowest(L[1], 10))/2;

plot1(MidPnt5Bar, "Mid 5");
plot2(MidPnt10Bar, "Mid 10");

plot3(Highest(H[1], 5), "High 5");
plot4(Lowest(L[1], 5), "Low 5");

 

Wouldn't this give two donchian channels with mid lines?

 

BlueHorseshoe

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