Steve's Basic System for Retail Traders

[goodoboy 10]

We are fast approaching the end of my process here....I've already pointed out most of the significant elements of this system....the initial attempt to approximate the process of creating the distributions seems to be working, although after only two days I am still reserving my opinion...

 

I notice folks talking about lack of volatility and other issues that they believe are make trading markets more difficut...actually (speaking from several decades of experience) not much has changed...sure there is more automated execution, and the price behavior is a bit different but thats what we signed up for, in return for the opportunity to make a hell of a lot of money in a short time (an opportunity that in this economy, is very difficult to find anywhere else)....

 

I am experimenting with a small account to determine what the limits are for a retail trader trying to make some money..so far I have only confirmed what I thought would be true...that it takes the kind of discipline that most folks just don't have...especially when they are starting out....

 

What I will do is post tonight and perhaps another day or two and then call it quits....I'll trade using the approximated distributions for the next few months, and try to confirm that this simplifed method is consistent....for the folks who took my first class, I owe them a "first look" at how this system trades....depending on how that works out I'll make a decision as to where to go from there...

 

Although I haven't posted as many charts, the system is working equally well for the London open at Midnight PST....so I assume it can be traded in the overnight as well as RTH sessions.

 

Thank you alot for sharing your system and the additional daily comments on the markets. They are well read by the new trader!

 

It seems the system is working well for you. That's always a good thing when hard work equals good results. Keep me (or us) updated if/when you want to share how to calculate the distribution lines. Or just keep us updated how your system is working as you continue to trade your system.

 

Thanks,

[steve46 12]

Hey GOB, thanks for the kind words...

 

I have always like trading the Globex overnight market...for me its very simple and straightforward....and because it all takes place late at night (local time) I can have a life and do this in the evenings when eveyone is asleep...and finally as with all things, if you do it well, you make money on a pretty regular basis..

 

The prep is simple...I put my distribution lines in place and then go to Forex Factory and look at the schedule of economic reports...the two makets I like to trade are the DAX at 2300 hours local and London at Midnight....of the two London is by far the easiest and most profitable for me...

 

The plan is simple...I watch the open and enter on a pullback from the recent local trend...for the London open this usually occurs about 12:15 (about 15 minutes after the opening bell)...

 

The attached chart shows my screen...as can be seen there are three markets on the screen..at the far left we have the NQ....in the middle the DAX and on the right side the ES

 

I take my signals from the DAX & ES charts and enter on the NQ chart....this one occurred right at 12:15....lol, and if I had been more vigilant I might have noticed that on the reversal, on the ES chart price tested my distribution line, providing another sell signal (that I missed)....oh well...on to the next trade...

 

Although this one reversed on me, I like it because it is relatively low risk and even when it doesn't continue down, it still provides a nice little pop to begin the evening....

Edited October 5, 2012 by steve46

[steve46 12]

Hello

 

Here is a pattern that we characterize as an "RTH typical long entry pattern"....

 

It consists of an initial move down to probe for sellers & stops, followed by a countermove at 6:45am PST, that is usually a small scale response as "informed" buyers move in to take advantage of slightly better prices.....these are the folks to watch as they position themselves betting on the possibility that price will continue north to retest previous highs....

 

At or near 7am (usually just after) we see what is called "the turn" and that is characterized by a sustained move to retest either the local high or a previous high number..and it is the move that usually produces a signficant profit...

 

If we have time, we will also post yesterdays pattern, which was nearly identical....these are patterns worth taking the time to learn (from our thread on characterizing markets)

 

Good luck folks

[steve46 12]

LOL..okay so we missed this one, and we might as well post it now..it is a pattern that is called a "cap" reversal.... because the action of another market reaching a temporary termination point "caps" or stops (for the moment) a move up or down...

 

In this case the middle chart shows the DAX reaching (testing) a distribution line...as it does price on the other charts pauses..and ultimately rolls over...

 

This illustrates the utility of having a valid reference system like our distribution lines so that you can see where reversals (both to take profits and to initiate new entries)...

[steve46 12]

This is a follow up to our comment about the market rolling over

 

Referring to the attached chart, look at the ellipses and what you may see is that the DAX and the ES both display what we call "topping patterns"....with the DAX testing our distribution line (as mentioned in the previous post).....when this happens we have confluence...which is preferred for entry, (because it increase the odds of success in this trade)...

 

And a final note....at times like this....when price nears a local extreme (high/low) what we are likely to see in term of price action is chop...specifically we can anticipate quick spikes up and down followed by small choppy ranges as automation takes over and tries to generate the illusion of liquidity coming in off the sidelines to move the market...

 

When this happens if you are a retail trader with limited capital....jumping in and out each time you think you see a move happening will bleed your account down to nothing.....some of you have first hand experience with that....what you need to do instead is

 

A. Learn to identify the range characteristics.....to "frame" the range boundaries and decide whether it is worth is to take that risk......or

B. Stay out of it completely....either wait for price to "move clear" of an area...so that you can see a credible resumption of trend and re-enter on pullbacks or retracements....or

C. Identify the extremes in terms of price AND time.....and position yourself prior to all this chop....either in the pre-market or early on during the opening hour....(what Market Profile adherents refer to as the opening balance)...

 

Believe me when I say you have to make some kind of adaptation to this market or it WILL take you out....and if you find that you are able to execute one or more of these strategies, the reward is that not only wil you have learned how to extract money from the market in very challenging circumstances.....BUT you will have learned how to make similar adaptation to the market in the future.....

 

I hope this helps

 

Good luck

[steve46 12]

Today's distribution (this one for you GOB)...wanted to point out a simple change made in the composition of the distribution as follows

 

1. The blue rectangle now represents the previous day's hi to low range....convenience of seeing it on the screen instead of referring to my worksheet.....works for me....

 

Finally in regard to actually trading it....we have made a change in the entry and exit protocol rules as follows

 

Minimum 2 contracts (of multiples of 2)...with the first exit at 2 NQ points ("buying a stop"), then exit at minimum of 5 NQ points (if trading with 2 contracts)...

 

We believe this will work well for amateurs, many of whom have trouble staying in the trade long enough to make money...given those constraints, we see most of these trades taking the first scale within 5 minutes and exiting within 20 minutes....about the length of time that a newbie can withstand the tension of holding a position before getting shaken out....

 

Good luck

Edited October 8, 2012 by steve46

[steve46 12]

and these are the entries that an amateur trading a small account would have taken today...

 

Notice that they would have stayed off the open, waiting instead for a test of the dist lines later in the session....

 

Also notice that the chart time frame is 3 minutes...this is to try to minimize the periodic chop that occurs in these markets...

 

Still working on an approximation math for the dist lines....and it is taking a while because when price forms a top (as we see it doing now) the dist doesn't change much, so for my work to be valid I have to go back to the historical data...all of which takes time...

 

What I will do if time permits this evening is to post a (relatively) simple method of calculating a distribution...so that folks with basic math skills can start to experiment with it themselvses. At that point I will be done...

 

Best of luck to everyone..

Edited October 8, 2012 by steve46

[steve46 12]

So here we are again, different day, same crap....missed this entry because I was posting...lol

 

Here is one of my entry screens....notice that there are three markets displayed.....ES/NQ/DAX

 

For my entries to be valid (for newbies) I want to see confluence of two markets (prefer DAX & NQ until close of European cash at 8:30am PST)....Notice that the DAX comes down to test the Dist Line just a few minutes ahead of the NQ....this lead/lag relationship is what we want to exploit...

 

Then price takes off north and we have 2 points initial scale out....and from that point on it is all mechanical....either we get 5 points on the next scale out or it comes back to the entry and we are out...

[steve46 12]

and here is the completion of trade entry #3....as can be seen a retail trader trading 2 contracts and following our protocol would have got their 5 NQ points just now for a final profit of $40 on the initial scale and $100 on the final....$140 minus commission...risk at about $80 plus commission for this trade...

 

This one took about 30 minutes from entry to close out...so it might have been a stressful experience for the newbie...on the other hand it would have been the perfect opportunity to practice the pattern breathing technique I try to teach folks and the result (if they held to completion) would have reinforced the process of learning to modulate emotions successfully..

 

Good luck

Edited October 8, 2012 by steve46

[steve46 12]

and here is the most recent entry as price tests the dist line yet again....this one provided the initial profit of 2 NQ points, then came back to press the entry...obviously we don't yet know what the result will be....I have posted my general rule for his situation several times....."keep taking the trades until they make you pay"...(because by that time, you have already made a profit....) provided your system has an real edge, the rule has served us well for many years.

[steve46 12]

and apparently this is going to be another winner today...as price moves up to +5 yet again...

 

We are done for the day...

 

Oh hello Onesmith.....still taking notes....? hmmmm...well we are, 40 pages later still trading those "catchy phrase" entries....and still making money.....since I will be closing the thread soon, I want to take this opportunity to thank you and that used car salesman (Predicktor) for your astute comments on page 1. While we are at it....couldn't close the thread without mentioning Bluehorseshoe and his penetrating wit......"grrrrr".....

Edited October 8, 2012 by steve46

[steve46 12]

Had to post this one.....finished my computations late this evening so I missed the DAX and the London open....

 

Shortly after the open, as we finished creating the distrbutions, it became clear (watching on Bloomberg TV) that the news out of Europe continues to disappoint....so we were looking for a short entry....

 

The attached chart is our Globex screen for the evening...we use it because it allows us to watch the three most important markets (for our trades)....For the London open we watch the DAX and NQ (because currently we are trading NQ Futures)....

 

As can be seen the NQ screen is in the middle...shortly after the London open, price tests our distribution line, and the setup is perfect as price "takes out" the dist line, retests and fails...we get our initial scale out (2 NQ points) and then price spikes down to provide our 5 point winner....all in less than 10 minutes....

 

We continue to use (and accumulate test data) our approximation calcs to create the distribution lines, and as you can imagine, this is very encouraging...another "catchy phrase" winner for the books...

[steve46 12]

And just a few minutes later, we get a reversal setup....

 

This one appears on both the DAX and ES (both the left & right side of the screen) as each market tests their respective distribution lines and (for the moment at least) show signs of a possible reversal...unfortunately we missed this one...lol

 

Well one day we hope to "learn our lesson" and just trade instead of trying to trade and post....its just not in the cards for us to do both...anyway, MM and onesmith, nice to see you looking in again this evening...and now back to work....

 

Best of luck to you

[goodoboy 10]

 

When this happens if you are a retail trader with limited capital....jumping in and out each time you think you see a move happening will bleed your account down to nothing.....some of you have first hand experience with that....what you need to do instead is

 

Good luck

 

You are right about that. Many times, I find myself entering before the setup I want, only to ask for a few tick loss cause I know I am rushing. The patient thing is an ongoing problem.

 

To combat this problem I have limited trades to 2-3 per day and 2 in the morning and one in the evening is one is there.

[goodoboy 10]

Had to post this one.....finished my computations late this evening so I missed the DAX and the London open....

 

Shortly after the open, as we finished creating the distrbutions, it became clear (watching on Bloomberg TV) that the news out of Europe continues to disappoint....so we were looking for a short entry....

 

The attached chart is our Globex screen for the evening...we use it because it allows us to watch the three most important markets (for our trades)....For the London open we watch the DAX and NQ (because currently we are trading NQ Futures)....

 

As can be seen the NQ screen is in the middle...shortly after the London open, price tests our distribution line, and the setup is perfect as price "takes out" the dist line, retests and fails...we get our initial scale out (2 NQ points) and then price spikes down to provide our 5 point winner....all in less than 10 minutes....

 

We continue to use (and accumulate test data) our approximation calcs to create the distribution lines, and as you can imagine, this is very encouraging...another "catchy phrase" winner for the books...

 

Thanks for posting Steve,

 

I just caught up on all the posts from the past two days, I been having to work some extra hours at work.

 

For the case of the ES in your example. How do you handle this case on on entry? Price closed below the line, but never came back to retest for short entry consideration.

 

Now do you let this trade go cause it does not meet entry criteria?

 

Thanks,

[steve46 12]

Well, this is part of the complexity of trading.....you have to acknowledge that no matter what system you put in place, price is not going to setup "to the tick" all the time....it isn't going to happen....so what do you do...well, one thing that can help is to use a display like mine...where I can look at three time frames...10, 3, and 1 minute....

 

As you can see from the attached example, price did the same thing you point out on my screen (I am trading the NQ futures)....now if you scan to the right (to the 1 minute time frame) you can see that price comes close to hitting the line, but doesnt actually touch it.....do you pass on that potentially profitable trade because of 1 or 2 ticks....? I think you have to understand that the success of any single trade isn't dependent on whether price tests a line on your screen...that line is simply a point of reference....your success on a particular trade depends on a lot of other things coming together....you see what I am saying?

 

Now if you are inclined to do this, here is another alternative that can be used. You pass on the trade but you keep records of how these kinds of setups "work out".....and by that I mean you keep DETAILED records...how was this setup different...what was it that was not quite right?....and how did the trade progress...after you have enough data, you can make some observations and decide for yourself whether these kinds of setups are worth the risk...

 

Remember, if you have tested your system and it is profitable, it will "take care of you" IF you trade it with discipline (if you take the trades) and manage risk properly....if you do those things, then the result of any single trade isn't going to impact you very much....

 

I hope this helps

 

Best Regards

Steve

Edited October 9, 2012 by steve46

[steve46 12]

Hey GOB, this one's for you

 

I have talked about the value of getting in position prior to the open...I call it "pre-positioning" and to review quickly, it simply means getting up early (sometimes very early) and looking for an opportunity to get in front of most folks....in effect getting a free ride (up or down) to the next level...

 

This strategy works best when the market has just made a signficant correction....and the reason it works at all, is because professionals know that this is the best time to buy (or sell) at a discount (at "wholesale" value)...

 

Today's example is pretty straight forward.....I will put it in simple terms so you can see what is real....I got up at about 3:30am...because I figured there might be some interest in moving the market back up from the previous close...(that would be the discounted or "wholesale" pricing)....if you check out your charts for that time period you can see that during the Asian session and later during the European session, "participants" tried to take it down even further looking for sellers...but just after 3:30am buyers began to step in....taking it up above my distribution level at 2730....

 

A lot of this is experience, and I don't expect folks to "get it" right away, but this move back up above the dist line is (for me) a signal that the selling is over (for the moment) and we could see a reversal back up into the previous range.....as you can see, long entry at that point is already worth almost 7 points...(it would be about the same no matter whether you trade the ES or the NQ)...the only remaining questions are....do you take the profit now, or bet that it might go further as the regular session kicks in...? for me the answer is simple....you do both, taking partial profit now and holding a small position (even 1 or 2 contracts would work fine)....hoping for a continuation move up the ladder....

 

The important lesson here is....(if you really want to make money in this business) are you willing to do what other folks won't do....(do the research, get up earlier than most, take the chance by putting on a position, and finally...managing that position while everyone else is asleep)....

 

Good luck

[steve46 12]

Doing better with my own discipline (not posting when I should be trading)

 

Got the open on the retest of 2730

 

Then the question is "how do you manage the trade?" and the answer (for me) is you hold profitable positions as long as you can, expecting price to test the next higher/lower distribution line....and that is just what happened (again) today.

 

As price tests the higher distribution line, we look for signs of "failure" and reversal (this is mostly tape reading using the $tick, $vold & $add) then we wait for what we call at "timed entry"...(at or very near to the hour, quarter and/or half hour). Today that timed entry occurred at 7:30 am PST on the dot....

 

Finally, and this is especially important for success, we look at the top of our display screen to verify that this reversal entry puts us in agreement with the DOW (look at the red display at the top of the screen showing the DOW down for the day)

[steve46 12]

Purusing threads I saw reference to a move charactertized as "WTF"......because of its sudden nature....apparently (for these folks) the move down appears "out of nowhere" surprising them (one assumes that most folks miss this kind of opportunity).....the gentleman's strategy is to wait for the first pullback and get on there hoping for a continuation down.....nothing wrong with that...

 

For me the preferable method is to "see it developing" (because actually these kinds of move DON"T come "out of nowhere") and get on board at the beginning...so here is my chart and explanation of what traders need to be watching in order to participate in these moves...(its trading folks, this is what you're here for)

 

First the context...we've been in a range since Sept....this is the backdrop against which we plan our general approach....and that means we look to get short at or near the highs of that range, conversely we look to get long at or near the top of that range...this is the "big picture"

 

On a given day we review the previous 2-3 days action and try to develop a sense of "where we stand" and by that we mean....are participants worldwide, coming to a consensus that motivates them to act (to generate a trend move up or down).....if so we should be able to see and identify it by reviewing price action over previous couple of days...and so the principle question to ask ourselves is...over the last several days, have we started a new trend or are we still moving sideways...

 

Focusing more closely on the previous Globex session we see Asia AND Europe moving in synch to generate a trend move up, buyers coming into the market.....thats one data point, and if we look at a 30 minute chart, one sees that markets have simply oversold and are now correcting back up to the previous range...a positive sign, but still characteristic of range bound action....

 

So when the US market opens, what happens...in the critical half hour prior to the open buyers try to pre-position themselves on the long side hoping to generate a trend move up...based primarily on the positive employment news...unfortunately this news is only mildly positive and is offset by continuing negative news about Spain and the Euro situation....with pending earnings from banks coming tomorrow, how likely is it that participants especially the banks themselves, will come in to buy until they see the results....not very......

 

and so we see the market drift up, then roll over and on our 3 minute chart this is characterized by the three (3) weak spikes up into positive territory (green arrows) followed by what we know to be an "algo pattern" (sorry about that "catchy phrase" onesmith)....and then if you knew what to do...here is the time to do it....those who have the training and the experience, go through the following checklist...

 

Based on our analysis, we 1.) ANTICIPATE price probing up unsuccessfully to find buyers

followed by a failure setup (characterized by an "algo pattern") that we 2.)RECOGNIZE as an opportunity to get short....either right at the top or on the retest of the distribution line...so we

3.) ACT and get short, then we 4.) MANAGE OUR RISK....and hold on to this profitable position looking for a minimum move (at least 10, and hopefully 20 NQ points).

 

We have posted this before....

 

1.)Anticipate the opportunity

2.)Recognize the setup

3.)Act Promptly

4.)Manage Risk

 

So in summary, there's nothing mysterious about this kind of "WTF" move....in fact its telegraphed to us long before it happens...but you have to be paying attention...

 

Best of luck folks

Edited October 11, 2012 by steve46

[steve46 12]

It is taking a bit longer than expected to wrap things up here....but we want to accomplish something significantly different than most....what you ask...well, for one...we want to provide the reader with a more comprehensive view of what it takes to win this game....and by that we mean (at least in part) the following;

 

First....having spent a few years here posting, one notices that many if not most, come looking for "setups"..."indicators"....magic incantations and mentors who can lead them to the promised land...and in just about every case, if one looks behind the veil, what you begin to see is that everyone wants (with a few variations) the same thing....a way to make money in the markets without having to think, without having to obtain skills, and most importantly, without having to take the risk (or the responsibility) of losing money....in most cases what people come looking for is a method that if followed blindly from A to Z will produce winning trades...and for the majority, thats all that matters....name your price, prove it works, and we're in business....

 

For those few folks interested in American History, I am reminded of the California "Gold Rush" era when so many came from around the world to Northern California, looking to make a fortune. As we know from the history books, very few of those original miners found fortunes, however those who sold them shovels, sieves, and pick axes, made out pretty well....human nature it seems changes slowly (if at all....).

 

At the end of this process, my hope is that folks will understand that success in this arena, is all about learning something that is in front of us every day....it is the last "true" secret that they will ever need....because it is about learning how our fellow human beings react to the world around them....and to figure that "secret" out, they will need to be willing to do what others won't.....to go that "one step further" than the next guy...

Edited October 12, 2012 by steve46

[steve46 12]

The importance of preparation

 

From our point of view, this is one of the most important elements of trading...in fact properly done, preparation is what separates professionals from amateurs..

 

We start by reviewing daily charts...and what we are looking for are the following data points

 

1. Indications of trend

2. Identification of possible reversal points

3. Identification of possible reversal or continuation patterns

 

In the attached chart we see three highly correllated markets....ES, NQ and DAX

 

Each chart displays range bound price action

 

On each chart we mark potential reversal prices (and price ranges)

 

Based on our observations it is often possible to generate a "primary" bias for the next day

[steve46 12]

Moving to the 30 minute chart, we get a closer look at price action, and in the process we can identify the features that allow us to find possible entries (red arrows) off the prior range bound action (the numbers indicate the creation of an upper & lower range or congestion)

Edited October 12, 2012 by steve46

[steve46 12]

and these are my 10 and 3 min entry screens....we can make money using either, however there are also compromises to be made with both...for example

 

Using the 10 min, we see fewer examples of traders getting "chopped" as price moves above, then below our distribution lines (part of our entry system)...however it is possible, even likely that using a 10 min chart a trader will miss some trades

 

Using the 3 minute chart, as was mentioned previously, we get to see more detail and with that detail, traders have the ability to wait for price to display exactly the behavior that they are looking for (tests of the distribution lines for example). Unfortunately traders also see price test back & forth more often creating congestions and "choppy" conditions that can cause the newbie to be shaken out of what would otherwise be a profitable trade....

 

The blue areas represent the previous day's range..

 

Hey onesmith, here you are as usual....I tried not to make reference to any "catchy phrases"...HOWEVER...the three (3) minute chart does show an "algo pattern" (shown in the ellipse) that I have referred to many times in Negotiator's day trading chart.....sorry...just couldn't resist....lol

 

Both charts attached below

Edited October 12, 2012 by steve46

[steve46 12]

Summary of Charts

 

Daily Time Frame...............Trend & Primary Bias

130 Min Time Frame..........Distribution Lines

30 Min Time Frame............Basic Entries, Reversal & Continuation Patterns

10 & 3 Min Time Frame.....Basic Entries, Reversal & Continuation Patterns

 

Daily, 130, and 30 min charts are used for prep only.....10 & 3 min charts for entry/exit

[steve46 12]

This is unusual, in that it is an entry pattern repeats through three (3) markets....usually at least one market "disagrees" or lags....I took this entry (with small size) because the time 2:38am PST is not what I would prefer....normally I look for entry based on the quarter hour, half hour or "on" the hour....I am willing to take this risk however, and we will see how it turns out...

 

Tonight incidentally I am trading the ES market, whereas usually I am trading the NQ...