Steve's Basic System for Retail Traders

[steve46 12]

Here is an update on this trade...as can be seen I hit my initial profit target (2 ES

pts)....however I am not optimistic, in fact I think this one is going to stall out here and run sideways...at this point, it is a low risk trade, so I will keep it for the time being but I think the odds favor price coming back down to retest the lows and perhaps even take them out....if so I will simply close out with enough profit to cover costs...stops are in place so I will simply continue to monitor....

[steve46 12]

We all face the same problem in terms of reversals...it could go both ways...so you have to have a valid context in which to operate...mine is to use another correlated market to trigger trades...

 

In this instance we see the ES leading (in my opinion) the NQ up through a distiribution line for a nice entry....whether it will work out is not my concern...its a valid entry so I take it... and the chips fall where they may..as of this post, I am up two (2) NQ points on this one, and simply monitoring it...if it comes back I am out at B/E and my decide to go the other way....

 

This example really illustrates the utility of having a frame of reference like the distribution lines.....you could operate without them no question, but they provide the psychological comfort that new traders often need in order to pull the trigger....

 

The final question is "when do you pull the trigger to get in" and that is a matter of training and judgement....I will be talking about that later....now I have to babysit this position.

 

Hey onesmith, nice to see you....again. If you are writing a book or a movie script I would like George Clooney to play me.....

Edited October 12, 2012 by steve46

[steve46 12]

Here's a follow-up to the previous trade entry

 

As it happens I was able to get 2 NQ points initially....then 5 on my next scale out...however at that point the markets simply stalled out...and eventually came back to retest the blue rectangle which represents the previous range....at that point (for me) the risk doesn't justify staying in the trade, and although ultimately I think we will continue down, I don't see a valid short....so I am standing aside for the moment.....

 

BTW, I posted the chart without realizing that the green arrow showing my entry has been obscured the a big (relatively big) green candle....oh well...I will leave it. You can see the edges of the arrow around the candle body....

Edited October 12, 2012 by steve46

[steve46 12]

This might interest folks, especially you GOB....take a look at the previous chart using 10 min candles

 

Then look at this one, using 3 min candles

 

This illustrates differences that a traders has to resolve in terms of time frame....on the one hand the 10 min minimizes the chop....on the other, you sometimes (today for instance) miss valid entries, or as in this instance you might get shaken out because you're not getting the full detail showing where price is building support or resistance...

 

I guess you could simply put both side by side, but in the end, you do have to choose and accept that there are going to be good and not so good sides to this decision....in this case I missed a valid re-entry long after price came back down looking for sellers.

 

Oh and btw onesmith, I have changed my mind....I am thinking Tom Cruise would be a better choice to play me, in your movie script....what do you think?

[steve46 12]

I will sign off for today, with this chart....it is my 2-3 day prep chart with today's dist lines in place

 

As you can see there is alot to learn from that chart...and it provides a nice overview of how particpants are positioning themselves as we move to the end of the week...

 

Personally, I think tools like this are indispensible...using this approach I am able to accomplish three very important objectives...first, I can see where the big moves are likely to originate....and second I can determine where we are likely to go and establish more accurate profit targets...the last benefit (for me) is as regards trade selection...using this approach, I can make concious choices about how to manage risk/reward....I can take potentially small scalp trades if I want (I simply scale down my size) or I can wait for potentially bigger fish to swim by and set my position accordingly...

 

Best of luck to everyone

 

Steve

Edited October 12, 2012 by steve46

[steve46 12]

Another chart for GOB

 

This one shows a nice setup on the 10 & 3 min charts.....you can see price "take out" the blue rectangle....then come back to retest the boundary (our signal to enter long)....

 

As you can see (GOB) you get a couple of chances to get in on this one...up to the individual whether you use the shorter or longer time frame, the longer time frame tends to cancel out some of the chop, but you will miss some entries.....the shorter shows more granularity so you have a bit more accurate picture, but you are also exposed to more "chop" it you use it....

 

Either way the "drill" is the same....the system was designed for traders with small accounts (trading two contracts min)....the rules call for taking two (2) NQ points on the first scale-out, then five (5) NQ points on the balance. Two (2) point S/L....

 

I call this a "training wheels" setup...

 

Good luck tomorrow

Edited October 15, 2012 by steve46

[goodoboy 10]

Another chart for GOB

 

This one shows a nice setup on the 10 & 3 min charts.....you can see price "take out" the blue rectangle....then come back to retest the boundary (our signal to enter long)....

 

As you can see (GOB) you get a couple of chances to get in on this one...up to the individual whether you use the shorter or longer time frame, the longer time frame tends to cancel out some of the chop, but you will miss some entries.....the shorter shows more granularity so you have a bit more accurate picture, but you are also exposed to more "chop" it you use it....

 

Either way the "drill" is the same....the system was designed for traders with small accounts (trading two contracts min)....the rules call for taking two (2) NQ points on the first scale-out, then five (5) NQ points on the balance. Two (2) point S/L....

 

I call this a "training wheels" setup...

 

Good luck tomorrow

 

Thanks for the example Steve,

 

I having been using the 3 min chart and having good success with it. I also like the test and retest entry method. This works well for me. I also, us the 2 point stop method and bring to break-even once 3 points in the money, then wait for the target to be met. Patience this last week has really help me. I still struggle with less patience, but working on it.

 

Thanks for sharing.

[steve46 12]

Thanks for the example Steve,

 

I having been using the 3 min chart and having good success with it. I also like the test and retest entry method. This works well for me. I also, us the 2 point stop method and bring to break-even once 3 points in the money, then wait for the target to be met. Patience this last week has really help me. I still struggle with less patience, but working on it.

 

Thanks for sharing.

 

You're welcome.....and here is a follow up chart for that entry earlier tonight...as you can see

this one came back to "press" our original entry.....when I say press what I mean is that most retail traders would have been "shaken out" by now....in fact the only way I stay with this one is because I trade multiple contracts....remember the scale out rule, 2 pts off the open....then 5 pts (if you are trading 2 contracts, you're done).....now for those who can add just one contract, I suggest you wait for either 7 or 10 NQ points...I am thinking you do this "incrementally" that is to say, you start by learning to hold until you get to seven (7) and as you become more comfortable holding your ground, you try to extend yourself out to ten (10) NQ pts. What you are doing here is learning to tolerate the tension (the uncertainty) of not knowing how an individual trade is going to work out....as as you progress and learn to trust your system....what you find is A.) if you have a good system, the longer you can hold, the more you profit over the longer time frame...psychologists call this is learning to tolerate "delayed gratification"..... I would argue that this is how a trader learns to translate theory into real success (one trade at a time)....and if it appeals to you, it is a lesson that you can "teach yourself" without paying a vendor to show you.....just add one contract at a time.....and keep good records....got it...?

 

Edit.....ultimately the goal is to learn to hold one(1) contract from one side of the distribution boundary to the other extreme.....

Edited October 15, 2012 by steve46

[steve46 12]

This chart fits nicely with the previous post, especially the edit at the bottom....

 

The short entry isn't particularly unusual...the retest seals the deal for me...its a valid short although I think most folks would have found it difficult to pull the trigger..

 

What is important (again refer to the previous post "edit") is whether once you were in, you had the guts to hold, scale out properly (thus giving you "breathing room") and wait for the economic report to clear, and wait we see (I think we will see anyway) price travel down to the boundary of the blue rectangle...(test of previous range boundary)...

 

On this one, if you took the short, you got 2 off the initial scale, 5 off the move down.....7-10 if you had three (3) contracts to trade...and the rest depends on your account size and your skill level..

[steve46 12]

and here is the follow up and conclusion to today's short entry off the open

 

I've posted this type of trade several times before here in this thread (test/entry on retest)....so this isn't new at all...the goal (for folks who are well trained and have a decent account to trade...is to A) identify the levels that might serve as entries (Anticipate)......B.) Pull the trigger promptly (ACT).....C.) Manage risk and take profits according to plan....

 

I will talk about the preparation that allow us to get this one later...right now I am going to get some sleep..

[steve46 12]

Here we are at the end of session

 

I wanted to post this 10 min chart showing the location of potential entries...and say a few words about the system and how it trades

 

Item 1....the goal is to produce a system that trades just a few times a day...but provides high quality entries....if you go back in this thread and look at the charts, what I hope readers will notice is that the system provides a framework that is pretty reliable. Notice for instance that there are multiple posts where price bounces from one extreme of the distribution to the other. This is by design...and that design is meant to provide retail traders with the psychological comfort that they need to cope with the stresses of trading...

 

Item 2....if you see how this works, one benefit is that you can trade it using relatively tight stops....the system provides two basic alternatives for entry.....a 10 minute chart or a 3 minute chart...and there are tradeoffs or compromises that have to be made...if for example a trader stays with the 3 minute time frame, there will be times when they get chopped a bit as price moves near to a distribution boundary...this is less of a problem if one uses the 10 minute chart for entry...

 

Item 3...trading with small accounts....this is problematic....I tried to design the system so that a small account could be used (less then $3,000) but there are obvious obstacles to overcome....for one, it is going to be difficult for newbies to have the discipline to stay out when conditions aren't right....and that does happen....even trading small size, if you lose your discipline on a given day and start to "revenge trade" because you took an early loss.....you are at risk of having a string of several losers....its called "free lancing" and it is the primary problem that we see with amateur traders....staying within the rules seems to be very challenging for retail traders.......the general rule is "don't trade with money you can't afford to lose...." and based on what we see...we suggest amateurs wait until they have at least four to five thousand dollars in an account before trying to trade futures markets....absent that, we suggest they trade simulated while saving up the money, and use that time to learn to gather and maintain historical data so that you have a track record showing how the system performs

 

The approximation process isn't complete yet, so we can't publish it, but we can put out an alternative method that allows the trader to produce distribution bands that are near to what we use...based on a method first published by Kevin Haggerty. We have simplified it (we hope) so that a person with basic math skills can make use of it...

 

Good luck folks

Edited October 15, 2012 by steve46

[steve46 12]

Here is our primary pre-market preparation screen....as can be seen it is a 30 minute chart and we divide the chart into sections with vertical lines at 1300 hours....this allows us to see the how the rest of the world "votes" starting with Asian Markets (Japan & Hong Kong) moving through the DAX and London open (Midnight) and on into the US open at 6:30am PST...

 

We use charts like these (both ES & NQ) to find four (4) potential entries.....two (2) long & two (2) short, to use at the open...

Edited October 15, 2012 by steve46

[steve46 12]

Here is a look at today's open

 

As posted so many times before, price takes out a distribution line, then comes back to retest

for a nice clean long entry and an easy 10 NQ pts (looking for 20)

 

Edit...thats what I get for posting instead of managing the trade....hit the 20 while I was posting

[steve46 12]

and here is the follow-up for today's trade

 

As can be seen at the top left hand corner, this is a 3 min chart...we have our dist lines in place and the blue rectangle represents the previous day's range....prior to the open, price was bumping along just above the top of the previous range...this of itself is often indicative of possible "continuation" move (long if above the range, short if below)...

 

The vertical lines show the pre-market prep area....this is the area where we prepare for the open by identifying potential long and short entry points..today the entries were obvious

 

In the overnight market, Europe stayed positive despite continued problems with Spain and Greece...this to us signals an uptrend. The left most vertical line occurs at 5am PST....and the next line at just after 6am PST....during this time period we see exactly what we expected based on experience...and that is a probe down to find sellers.....that probe terminated at the top of the previous day's range....confirming that we were going to see a counter move to the upside..

 

On the open we saw the expected initial move up until 6:36, followed by the counter move back down to retest the top of yesterday's range....at that point institutional buyers came in and the buy orders overwhelmed the sellers....our preferred "time-based entry" at 6:45 served as the launch pad for the longs to take it north...

 

This time based scenario occurs often and while we rely on it for valid entries we never take them blindly, instead we watch the tape to confirm our bet....and if we are wrong (like everyone else occasionally we ARE wrong) the tape lets us know early enough that we can minimize the damage...

[robster970 10]

I've got to say Steve that this is very interesting for me with how you are ascertaining value and associated extremes of value to effect mean reversion for both the short and long term participants.

[steve46 12]

I've got to say Steve that this is very interesting for me with how you are ascertaining value and associated extremes of value to effect mean reversion for both the short and long term participants.

 

Thank you sir

 

As with many things in life, I was trying to construct a simple system that amateurs could use to get a little cash flow going...what I found was unexpected....

 

I don't want to get into the differences between this system and MP (market profile) but I can say that I found a way to determine value fairly accurately and it isn't at all related to traditional Market Profile (although it "works" within that framework pretty well).

 

In the process of doing research I found (unexpectedly) a systematic approach that seems to be "in synch" with what a lot of my institutional colleagues are doing...that in my opinion is why when I publish my distribution, you see how accurately price frames the action...I think this is because I lot of other participants are seeing the same thing I am, and reacting to it in the same way I was taught to....

 

Finally, I worked out a method of preparing to trade the open...and although this is a separate issue, one that you haven't commented on..this is one thing that I am very proud of...because in my opinion, preparation (and having the discipline to ACT on the information you obtain during that process) is what makes all the difference between winning and losing on a daily basis....

 

I will tell you honestly it has made me a better trader....I have always been able to anticipate where opportunity lies in markets, but now that I have seen how the system works over a period of time, I feel confident entering trades because I know that as long as I am consistent, the system is going to "take care of me"...it has been a real pleasure trading the NQ for example....very little stress....and quite often I am done for the day within the first hour...

Edited October 17, 2012 by steve46

[robster970 10]

Personally, I think you have managed to model something that is very difficult and I understand why it is not MP based. MP is useful in the sense that it tells you where cheap liquidity can be found but in itself it does not adequately represent where value is, nor does it facilitate how value moves over time through the influence of the short and long term participants,

 

Just out of curiosity, I drew on 5 and 10 day mid points, low and high value extremes on the daily chart of ES. Interestingly (well at least for me) from the close of the yesterday's US session I can see how the 5d extreme high was tested in Asian session and I wouldn't be surprised for it to mean revert back to 41 on ES (the 10day midpoint). Ordinarily I would have had this down as just a test of yesterday's session high but it is the creation of the value area between 34 and 41 (using my ham fisted mid point) which lies at the heart of it, ostensibly having something to mean revert to.

 

Anyway Steve, it might not be anywhere near as refined as your distributions but it certainly has shone some light on how to derive a transient value area.

 

Keep up the good work and all the best.

[steve46 12]

For this and future posts the focus is on pre-market preparation

 

We start by looking briefly at the Daily chart....on the attached chart to the left we see that there was support for a test and continuation move up (NQ market) at 2755

 

The next attachment is a 10 min chart....understand that we start with a "30 min" and work our way down to find two (2) valid long and two (2) valid short entries....these entries are determined by scanning left and looking for recent previous trend moves...depending on what we see, we either locate those long and short entries using the 30 minute time frame or of we cannot see valid entries on that chart, we move to the next lower time frame (because it provides more detail)

 

In this instance we found what we needed on the 10 minute time frame, validating the daily which shows possible entry at 2755....transferring to the 3 min, as the market opened we let the market "show us" (confirm) our entry at a "preferred" time....

 

We look for price to open and show us an initial move in one direction followed by a "countermove" that provides our entry.....and (hopefully) is the ride we are looking to get on board (a signficant move)....that move is often 10 and sometimes 20 NQ points.

 

Notice also that once price starts to move, the trader is encouraged to hold until price reaches the opposite distribution boundary...today its the top of the blue rectangle...

 

Once again (just like yesterday) we are done for the day....

 

(Preferred times are 6:36, 6:39, 6:45 and 7am PST)

Edited October 17, 2012 by steve46

[steve46 12]

Went to get something to eat, came back to my screen and noticed this....

 

Its one of the "unintended" benefits of this approach that I really like

 

One of the big problems for amateurs is that they miss entries and then spend the rest of the day watching, or even worse, they poke around trying to find an entry and get chopped to death...bleeding their accounts down to nothing..

 

What you see is the ES (left side of the screen) signaling a "continuation entry" in the NQ market (lower right side)....as the trend resumes a bit after 8am PST....today

 

Nice move (about 10 NQ points) as the NQ revisits its morning high at the top of the previous range...

[steve46 12]

Here we are at the tail end of the lunch hour

 

Price has been trending....

 

In the NQ, we saw price trend up into the lunch hour then go sideways (predictable)

 

now as price tests the top of a previous range.....the question is "up, sideways, or down"

 

further one might ask, what usually happens in the afternoon, when folks (in NY) come back from lunch...

 

Does the morning trend resume.....do we go sideways as traders stand aside to wait for news or some event overseas? or will participants decide to take profits here and mark it down into the close....? and by the way, there is plenty of time, so we could see any combination of the three possibilities....

 

This illustrates the benefit of learning to trade the open....if you do that successfully, at this point in time, there is no hurry to come to a conclusion....no need to take risk unless you see a clear opportunity to act...remember each time you pull the trigger there's an cost involved as well as the risk(s) that you will lose money.....

 

One of the things I like to do is to read the tape.....meaning you "read" (monitor) the $tick, $VOLD, $ADD AND the "Time & Sales" Strip.......

 

If you look at mine (see the attached chart) what you see is all thoughout the morning session the Tick stayed above zero.....until this last few minutes....(note the red down candle) however price was not "responsive" to that down candle....interesting...

 

for me, this behavior means that participants are waiting for some event and I immediately start scanning for news, I look at the econ calendar to make sure I know when the next pending report is coming.....and then I start to look at other markets.....

 

If we get to noon hour PST, and no change, then my view starts to change, and I look for price to retrace down....as participants take profit into the close...

 

Edit

 

And so readers understand my tactical approach here....I watch as price fades off the top of the distribution boundary....I have choices....but what I continue to do, in order to manage risk is the following

 

1. Instead of simply "making a bet" long or short I watch the tape....

2. I am confident, that the odds favor a move one way or the other, and that the market will display its intention by moving directionally then RETESTING the distribution boundary..

3. Because I have already got paid this morning I can wait patiently and see if I am right (or not)..either way I don't have to be "at risk" unless I see my "preferred" setup.

 

I hope this helps folks to put things in perspective...

 

Best to all

Edited October 17, 2012 by steve46

[steve46 12]

LOL....if I could kick myself in the butt I would

 

Once again I miss an entry while posting and I should know better

 

So lets see if I can redeem myself a bit..

 

first of all take a look at the attached chart

 

I have posted this before....particularly for GOB...but this is relevant for several reasons...first choice of time frame....I have tried them all believe me, and what seems to work best is either the 10 min (my preference) or the 3 min....either way you have to accept the compromises. Taking signals off the 10 min chart means you WILL miss some trades....however it minimizes the chop....while using the 3 min gives you the added detail that some traders like to see, but you WILL get chopped around periodically because these are noisy markets..

 

Item 2.....its "time & price"...."time & price" I can't stress that enough....I prefer to have both elements in place before taking a trade....I posted on the open what my "preferred" entry times were....now at the end of lunch hour, can you imagine what the primary preferred entry time is.......yep......10am PST (or as near to it as we can get)....

 

now look at the attached chart and the red arrow, right at 10 we see price open below the distribution boundary, and then retest up to that line....test & fail....and down they go...without me....lol

 

I am a little bit pissed at myself but thats a type A personality for you....

 

Thats it for me today.

 

Best of luck folks

[robster970 10]

So let met get this right Steve using my own levels for ES:

 

I had a marker around 51.75 today as the high for 5d.

 

On open at 14:30GMT (I'm just outside of London) it probed down advertising for buyers to a low of about 1448.50 and buyers responded with 51.50 being cleared by 14:45GMT, closing on 51.75

 

Had I taken the long at 51.75, I could have ridden it up to about 56 where it was tested twice, giving me the opportunity to exit with 5.25pts.

 

Essentially this strat is looking for whether the probes out of the open when advertising for buyers or sellers to come in, line up with the levels you think the short and long term traders will participate at. These are then framed by reversion to mean, where mean is calculated daily.

Edited October 17, 2012 by robster970
Got some numbers wrong

[steve46 12]

Good one Rob...you are one of the few...

 

who took the time to really understand what I am doing...you went that extra step

 

So here is my additional comment

 

I'll go candle by candle so you can see what (some) my preparation would have been (I wasn't trading this market today)...I can't go through the whole thing in one post, it took me several years to figure it out...I am sure you can understand..but here it is in an oversimplified nutshell

 

Ahead of the market open, I look for recent previous up and down trend moves...I isolate the origins of those moves and I look back to see what the market response was at those points (there is some "art" to this part)

 

Then I come back to the most recent part of the chart and put in my levels (you can see them as blue bars...and I have characterized this market as probing both ways to find responsive buyers and/or sellers (this has to do with automated execution programs)

 

So my levels are in....If I am thinking "long" (and I certainly am in this environment)...then I want to see price probe down to one of my two levels AND I want them to be tested at or very near to my "preferred" times.....if that happens, I read the tape, and if conditions look right I enter looking for reversal (in this case a continuation long move back to the top of one of my distribution lines....

 

I'll show the charts one bar/candle at a time....here is the first...my long and short targets are in place and I am simply watch to see which side gets hit first...The arrow is placed above the opening candle....

[steve46 12]

and here is the next candle...as you can see price touches/tests one of my targets

 

and that happens at/near 6:36 (one of my "preferred" entry times)....now the question is

 

do you enter at this touch of the blue rectangle....and my answer is (in hindsight) yes....but if I were trading this market, I would be watching the tape...to confirm that this was the place, because obviously price could do any number of things.....right...it could continue down to touch the lower blue rectange....hell, it could simply continue straight down...and take me out at a big loss...(low odds of that, but it could happen)...my thought is that I would have take it long either here or on the open of the next candle (as you will see)

Edited October 17, 2012 by steve46

[steve46 12]

and here we have the 6:39 candle (again one of my preferred entry times)

 

I believe this is probably the place where I would have said to myself...OK then lets give this a shot....reading the tape, watching the DOW and looking at other markets on my screens (like the DAX for additional confirmation)