Never Catch a Falling Knife

[TopstepTrader 10]

Although it is not labeled as such, the chart below is a 10-minute chart of the S&P mini’s for Wednesday, September 5, 2012. Late in the day the market had a sell-off over a 20- to 30-minute period. Then, at the point marked “1.”, we see a black inside candle (an inside candle is one where the entire range of the candle is inside the range of the previous candle). Then we see higher lows and higher highs as the market carefully tests the reversal up, briefly dips back into the range, then climbs consistently up again.

 

Professional traders know not to arbitrarily jump in front of a trending market – that’s a great way to get slaughtered. The reason is simple: you never know how far the market will move before it reverses. It’s a lot like jumping on the train tracks and hoping the train stops before you get run over. Wait until the market shows it has stopped, then enter your position.

 

The correct way to play most reversals is to let the market show you the move is over. How? By watching the move stop, and then go sideways for a time before moving up again. That’s what the big players do – they have to (they are risking a lot more than we are).

 

 

The right place to enter a buy is the third candle after the candle marked “1”. The first two candles following the candle marked “1” show a possible end to the downward trend – meaning selling strength is over for the time being. But as the market climbs above the 140200 area where momentum has shifted, we get a new uptrend, by definition: higher highs and higher lows. And as confirmation, we have already seen an entry signal in our stochastics indicator. Also, the low was established and has not been broken for 20-30 minutes.

 

By buying at this point, you could risk 150-200 (6-8 ticks) to make 200-400 (8-16 ticks), not the best risk-to-reward ratio, but not bad for a trade with good odds for success.

 

 

Many Profitable Returns,

 

Trader Gregg

 

Mr. Killpack has been studying the markets since 1988. He has read over 40,000 pages about trading and investing strategies, fundamental and technical analysis, and related topics. He began day trading in 2001.

 

TopstepTrader http://www.topsteptrader.com seeks to find and develop undiscovered trading talent from around the world. While in our program, those who display a strong trading skill and aptitude will be backed as a fully-funded trader.

[BlueHorseshoe 10]

This is possibly the worst post that I have ever read on TL. It's just wrong through and through. A thoroughly depressing start to my weekend . . .

 

BlueHorseshoe

[DbPhoenix 42]

This is possibly the worst post that I have ever read on TL. It's just wrong through and through.

 

In what way, exactly?

 

Db

[BlueHorseshoe 10]

In what way, exactly?

 

This is all about understanding the characteristic behaviour of the market in question.

 

As I keep saying over and over, the ES 'never really goes anywhere'. It exhibits a very poor capacity for follow through. By the time Trader Gregg has waited for confirmation from price and his indicators, the move will usually be over. It's much better to catch the falling knife and get stopped on occassion than to sit and wait for a reversal.

 

In the ES, the 'reversal signal' is the move.

 

This is hardly suprising. Traders make money by facilitating the transfer of risk. Although many vendors would like to create the illusion that risk can be eliminated by awaiting quadruple confirmations, it will be the trader who catches the falling knife (within a broader structure of risk management and position sizing) who will come out ahead.

 

I read your excellent 'Trading in 90 Mins' thread every day, where you enter on thrusts back in the direction of the orignal trend like Trader Gregg suggests. If you were to look back through that thread you would see that one of my earliest questions was to ask whether you chose to demonstrate this in the NQ rather than the ES because the former displays a greater tendency for follow through, trending moves.

 

What Trader Gregg describes is perfectly plausible, and probably the best approach in fact, for trading a market such as crude, the euro, and possibly the nasdaq. But not the ES!

 

It's not depressing simply that Trader Gregg doesn't appear to know this (or fails to make this distinction); it's depressing that he's setting himself up as a role model for others to follow. If someone wents to be a 'vendor', then they should know what they're talking about.

 

BlueHorseshoe

[MightyMouse 12]

This is all about understanding the characteristic behaviour of the market in question.

 

As I keep saying over and over, the ES 'never really goes anywhere'. It exhibits a very poor capacity for follow through. By the time Trader Gregg has waited for confirmation from price and his indicators, the move will usually be over. It's much better to catch the falling knife and get stopped on occassion than to sit and wait for a reversal.

 

In the ES, the 'reversal signal' is the move.

 

This is hardly suprising. Traders make money by facilitating the transfer of risk. Although many vendors would like to create the illusion that risk can be eliminated by awaiting quadruple confirmations, it will be the trader who catches the falling knife (within a broader structure of risk management and position sizing) who will come out ahead.

 

I read your excellent 'Trading in 90 Mins' thread every day, where you enter on thrusts back in the direction of the orignal trend like Trader Gregg suggests. If you were to look back through that thread you would see that one of my earliest questions was to ask whether you chose to demonstrate this in the NQ rather than the ES because the former displays a greater tendency for follow through, trending moves.

 

What Trader Gregg describes is perfectly plausible, and probably the best approach in fact, for trading a market such as crude, the euro, and possibly the nasdaq. But not the ES!

 

It's not depressing simply that Trader Gregg doesn't appear to know this (or fails to make this distinction); it's depressing that he's setting himself up as a role model for others to follow. If someone wents to be a 'vendor', then they should know what they're talking about.

 

BlueHorseshoe

 

I don't trade ES intraday on most days since it exhibits the qualities you describe. On the days that it does move intraday, other markets are exhibiting even better moves than es, so I focus on the others.

 

The phenomena you describe is true in the RTH not not true non RTH. For a trader who trades the way I do (I detest catching the knife), he is better off trading ES in the overnight and not trading the RTH if he has to trade ES at all.

[DbPhoenix 42]

This is all about understanding the characteristic behaviour of the market in question.

 

As I keep saying over and over, the ES 'never really goes anywhere'. It exhibits a very poor capacity for follow through. By the time Trader Gregg has waited for confirmation from price and his indicators, the move will usually be over. It's much better to catch the falling knife and get stopped on occassion than to sit and wait for a reversal.

 

In the ES, the 'reversal signal' is the move.

 

This is hardly suprising. Traders make money by facilitating the transfer of risk. Although many vendors would like to create the illusion that risk can be eliminated by awaiting quadruple confirmations, it will be the trader who catches the falling knife (within a broader structure of risk management and position sizing) who will come out ahead.

 

You make a number of unsupported statements here. One could also advance the case that catching falling knives, even on occasion, will lead to an emptied account . Ignoring the adverse excursion is fine if one is just playing at this, but not if one is trading real money in order to make a living.

 

As to the example itself, this guy uses a reasonably decent example but trades it poorly and explains the trade even worse. Your hyperbole about confirmation aside, the inst. hits the support level that's been tested repeatedly pre-market and buyers enthusiastically come rushing in. That's the first buying op, 1pt above the low on a 5m chart (less using a smaller interval). "Confirmation" comes a point later (also less using a smaller interval). Waiting for this small confirmation that sentiment has shifted and is being translated into transactions ameliorates the risk considerably.

 

Catching a falling knife is hardly responsible risk management for anyone, at least anyone trading his own money, and most definitely for a beginner, a class characteristically emotionally incapable of managing such a tactic. If that message alone gets through, well done.

 

Db

[BlueHorseshoe 10]

You make a number of unsupported statements here.

 

That is very true. But if I take the considerable time required to provide quantitative evidence for every assertion that I make here, I would never have time for anything else. Trader Gregg doesn't appear to be providing any evidence for his claims either, so let's say that I've done the same and anyone reading can be left to decide who to trust (or better still, go away and research both approaches, as I myself have done extensively).

 

One could also advance the case that catching falling knives, even on occasion, will lead to an emptied account . Ignoring the adverse excursion is fine if one is just playing at this, but not if one is trading real money in order to make a living.

 

I have never suggested that a trader should put themselves in a position that could result in the loss of their account on a single trade. This has nothing to do with risk management per se, and everything to do with entries (yes, I know - obsession with entry timing - the mark of the amateur trader!).

 

If both myself and Trader Gregg were to trade the pattern he shows, with our respective entries, then we could both use, say, a three point stop. The same 'risk'.Over a large enough sample size, what you will find is that Trader Gregg would get stopped out more often than I would, and that the profit potential overhead (ie MFA) is, by definition, less for Trader Gregg than myself.

 

If we were both to apply our entries in a market such as Crude, then he would doubtless do a lot better than I. But then I wouldn't be rash enough to recommend catching falling knives in crude oil . . .

 

What I am saying is very simple: unless you can pick that short term bottom (within the context) in the ES with reasonable consistency, then the profit simply isn't there. The ES just doesn't move that much. Pick the "picture perfect" trade of this type in the ES, and you'll be lucky to get more than a retest of the prior high. In something like the Euro you could almost enter on the break of that high and still have room for the market to move.

 

If a trader acknowledges this they can either "catch the falling knives" as I suggest, or do as MightyMouse is suggesting, and trade other markets that behave differently.

 

If you're sure that what I am saying is incorrect, then you could simply cover the ES in your 'Trading in 90 Mins' thread. I don't think you will do this because I think that you're fully aware that the ES won't exhibit sufficient follow-through for your entries to be effective.

 

As to the example itself, this guy uses a reasonably decent example

 

Trader Gregg has used an example that illustrates his point very well. Unfortunately he has not chosen a very representative example for this instrument. See below.

 

Waiting for this small confirmation that sentiment has shifted and is being translated into transactions ameliorates the risk considerably.

 

Oops - you've entered two points from the low - that was your potential profit right there - and now it's gone! Ignoring the un-representative example that Trader Gregg has chosen, you're lucky to get a two point move most of the time in the ES, even if you catch the reversal to the tick.

 

I'll be interested to read your response if you post one, but beyond that I don't think it's a good use of either our time to continue this discussion.

 

Thanks,

 

BlueHorseshoe

Edited September 8, 2012 by BlueHorseshoe

[DbPhoenix 42]

That is very true. But if I take the considerable time required to provide quantitative evidence for every assertion that I make here, I would never have time for anything else. Trader Gregg doesn't appear to be providing any evidence for his claims either, so let's say that I've done the same and anyone reading can be left to decide who to trust (or better still, go away and research both approaches, as I myself have done extensively).

 

The evidence is in whatever chart one uses to illustrate a particular trade. As for research, that's all well and good, but the profits are in the trading.

 

I have never suggested that a trader should put themselves in a position that could result in the loss of their account on a single trade. This has nothing to do with risk management per se, and everything to do with entries (yes, I know - obsession with entry timing - the mark of the amateur trader!).

 

Just the opposite, actually. It has everything to do with risk management. One won't be in the game for long if he holds to the position that catching falling knives has nothing to do with risk management.

 

If both myself and Trader Gregg were to trade the pattern he shows, with our respective entries, then we could both use, say, a three point stop. The same 'risk'. Over a large enough sample size, what you will find is that Trader Gregg would get stopped out more often than I would, and that the profit potential overhead (ie MFA) is, by definition, less for Trader Gregg than myself.

 

Depends on your entry. If you're CAFK, the price first has to come back to your entry before you make any profit at all. Depending on the entry, the trader who waits for the shift will be in profit long before price ever gets to your entry level.

 

As for risk, that's not just a matter of points but of probability, i.e., the likelihood that one's stop level will be reached, as well as one's profit target.

 

As for what I will find "over a large enough sample size", that would depend entirely on the parameters of the strategy and tactics employed. I may find just the opposite.

 

What I am saying is very simple: unless you can pick that short term bottom (within the context) in the ES with reasonable consistency, then the profit simply isn't there.

 

OTOH, if you can, then it is. The profit, after all, is not in points but in size.

 

If you're sure that what I am saying is incorrect, then you could simply cover the ES in your 'Trading in 90 Mins' thread. I don't think you will do this because I think that you're fully aware that the ES won't exhibit sufficient follow-through for your entries to be effective.

 

Anyone who wants to do so is welcome to do so, but I won't be posting many more charts there, if any, not because I can't prove some point about the ES but because I've posted more than enough already. At this stage, it's up to the participants and the lurkers to develop plans and post charts and trades. If they don't, then the thread will more or less end.

 

In any case, the key word in what you've posted above is "effective". What is effective for one trader will be a waste of time for another. Scalping, for example, is a complete waste of time for me, but others just love it. Some may have strategies that don't call for much follow-through, much less range extension. They might just clutch the ES to their bosoms. I prefer something that moves quickly and decisively so that I can quit early and do something more interesting.

 

I'll be interested to read your response if you post one, but beyond that I don't think it's a good use of either our time to continue this discussion.

 

That's probably true. Message boards are practically defined by theory, with few plans and even fewer RT trades to provide the practice. Unfortunately, many beginners take these theories to represent fact, when more often than not they are little more than wishful thinking. Not that any of this will amount to a hill of beans in a week (or tomorrow), when everyone has forgotten about this thread and it's back to business as usual.

 

Db

[Colonel B 10]

Most of the original post is incorrect. First off the 5th wasn't even a trend day. If nothing else it was a normal day or rotational day. This is a day traders dream. Almost all of the entire day was held inside the IB. I am not sure why any one would think this is a trend day. It has NO signs of even remotely being a trend day. It opened in the previous days range and was even in the range a 5 day balance. The IB held with in 5 ticks and the opened got walked on all day. How is this a trend day???

I AGREE NEVER FADE A TREND DAY!!!!!! There is nothing on the 5th that says it trended what so ever.

 

Also your comments about what pros do is way off. First off pros dont use any stochastic or any other lagging indicator. They use market flow and order flow. At least the ones that get a paycheck do. Also pros don't wait for it to go sideways. This is indeed false.

 

The biggest thing thing a trader has to learn to do is to buy when the candle is red. The best trades fly in the face of what is going on. Figure out where the stops are and then trade the 10 year.

 

Pros manage risk they don't wait for conformation. Your trade is more risky then the pro guy that faded the IB on that day. But honestly that late in the day most prop guys are already gone. Any prop guy that had any worth in trading would of faded the previous days high when they saw it break above the IB. Seriously day traders buy the lows and sell the highs. Not sure what you mean about "the big guys" because on the 5th there was nothing but short term traders. NO OTF. Thats why it was in balance all day and why the IB held in every bracket the entire day.

 

Basing your odds on if a trade will work using a smaller stop loss vs potential profit isn't figuring out the odds. Your odds DECREASE the longer you wait and the further away from the turn around you are. If you would of just faded the IB and got in you would of had a trade that was 100% successful by the time you got in.

 

Also 1 more thing prop guys don't use 8 tick stops. Only retail guys trade 8 tick stops. NO way would a prop guy use that big of stop on either the ES or the ZB or the ZN . Pro guys use 2 tick stops. 8-6 means you are last, late, or just wrong on your entry. If you wait to take +16 on the ES before you take profit then there is a good chance you don't really trade. You are going to risk 8 thats great but where do you start to take profit? +16? Makes no sense. Pros don't trade that way. Also if you think its going to go +16 in the ES then why are you trading the ES. Every pro knows to trade the bonds.

 

I realize you are just trying to sell some sort of system or some sort of class or something else. Chances are I will get a response from one of the full time forum guys and not from the original poster because of the sales implication in the original post. According to the little blip at the bottom it says that some guy read over 40,000 pages of books. Hey reading is great but actually trading or doing is better. If it took over 10 years for that guy to figure out this then I have no real fear for him. You are way better off figuring out what works from some one who knows and actually done it then to read some 40,000 pages of stuff that leads you to this. Seriously go back to B school.

[SwingTrade 10]

This would have been a great time for value range trading. I have attached a copy of the same chart using valuebars (created by MicroQuant) that show when a market is reaching into over and under valued price zones. I used the same 10 minute chart that the OP was using and put blue arrows on the undervalued buy zones and red arrows on the overvalued sell zones. This is one of the only indicators I have ever used that is this effective in trading sideways trending markets.

 

 

Have you guys heard of/used valuecharts? If so, have you had good success with them? I have been using them now for a few months and they seem to be working really well.

 

I think they were originally designed in the book "Dynamic Trading Indicators" from 2002. The website where I got valuecharts indicators from is ValueCharts®, The Next Generation of Technical Analysis.

[SwingTrade 10]

Better image of chart. Upper yellow means moderately overvalued upper red means significantly overvalued. Green means fair value. Lower yellow and lower red mean moderately under and significantly undervalued.

 

[SunTrader 10]

Yet again another after the fact chart pic which helps (I guess?) the newbs but once they start to trade they won't be trading what did happen.

 

Monday morning quarterbacking shows the 1401 level had many candles stop at or close to it. But I agree it is a lousy example to choose to illustrate much of anything. Minor point, I am not fond of 10 minute timeframe either.

[SunTrader 10]

That is not the "original" value chart.

 

This is - indicator at the bottom:

[4EverMaAT 10]

.........

The correct way to play most reversals is to let the market show you the move is over. How? By watching the move stop, and then go sideways for a time before moving up again. That’s what the big players do – they have to (they are risking a lot more than we are).

 

........

 

The only way to see that the move in one direction is over is to actually see the move turn the other way. Irony of that strategy is that after the fact, the market has already moved and trying to trade 'counter-trend' at that point would be 'pointless'. The market going "sideways" does not guarantee anything; you are merely predicting, betting on the market not continuing to trend in the same direction. Unfortunately, the trader does not have the benefit of hindsight.

[Patuca 13]

Most of the original post is incorrect. First off the 5th wasn't even a trend day. If nothing else it was a normal day or rotational day

The biggest thing thing a trader has to learn to do is to buy when the candle is red.

 

I would suspect he means a micro trend within the larger range. The sideways range for 40 or so bars before the reversal bar he indicates had several micro trends. Buy when the candle is red? That is true if trading the range and the red candle is near the bottom of the range. . Obviousley the reversal bar was at the bottom of the range. I would have place a limit buy order at the bottom of this range before the reversal bar showed up. So as mr horseshoes says I would be catchng a falling knife. However markets tend to keep doing what they have been doing. We have at least 40 bars of sideways. Since most breakouts fail the odds of a few more bars of sideways movement especially that late in the day were good. If the knife kept falling and a breakout south from the range took place i would be out on a stoploss. However by taking the risks and buying near the bottom of the range I would be in the money while others are still waiting for confirmation.

 

If price were at the top of the range I would be shorting a green bar before I get a reversal bar.

[BlueHorseshoe 10]

That is not the "original" value chart.

 

This is - indicator at the bottom:

 

This is interesting . . . Please could you have a look at the EL code? Is it credited to Mark Helweg? If so, then it's not the "original". Not that it matters in the slightest, of course - I'm just curious.

 

Do you use Value Charts a lot in your trading? I'd be really interested to hear your experiences with them, as I've never used them in live trading (though I've done lots of sim testing with them).

 

Thanks,

 

BlueHorseshoe

[SunTrader 10]

This is interesting . . . Please could you have a look at the EL code? Is it credited to Mark Helweg? If so, then it's not the "original". Not that it matters in the slightest, of course - I'm just curious.

 

Do you use Value Charts a lot in your trading? I'd be really interested to hear your experiences with them, as I've never used them in live trading (though I've done lots of sim testing with them).

 

Thanks,

 

BlueHorseshoe

It is original code, off of TS forum authored David C Stendahl, except I have added a ShowMe dot for occasions when there is a 21bar high/low close.

 

I use them but predominately on a daily basis as a headsup.

[SwingTrade 10]

The picture I posted is not the "Original" it is made by MicroQuant, Mark Helweg's company. He is the creator of ValueCharts, the other guy was just a co author. The algos are now patented I believe, the only place you can get them is from valuecharts.com.

 

The picture I showed is "ValueBars" or a version of valuecharts that displays over top of a traditional OHLC chart.

[SwingTrade 10]

Also, David Stendhal was the co-author of Mark's book, he was not the creator of the valuecharts indicators.

[BlueHorseshoe 10]

It is original code, off of TS forum authored David C Stendahl, except I have added a ShowMe dot for occasions when there is a 21bar high/low close.

 

I use them but predominately on a daily basis as a headsup.

 

Hi SunTrader,

 

Wow - you really do have the original Stendahl code!

 

Please could you direct me to where I can get hold of it? I only have the Helweg version which, from what I can figure out, was the version 'gifted' to TTM (and then subsequently de-credited by them). I'm curious to compare the two. I have an interview with Stendahl somewhere, but he doesn't give explicit directions for programming the indicator.

 

Also, you say that you have added a "show me" dot to the indicator. Is this an indicator plot, as I didn't think it was possible to add a "show me" directly to another study rather than the main pane data?

 

Sorry for all the questions!

 

Thanks,

 

BlueHorseshoe

[zdo 20]

BHS

This is as close to the original code made available during that TS interview as I could find

 

Inputs: 
Length(x), 
OBLine(y.5), 
OSLine(-y.5)
; 

Vars: 
RFA(0),
VU(0)
;

RFA = Average(MedianPrice, Length);
VU = Average(Range, Length)*0.2;

if VU = 0 then
VU = 1;

Plot1 ((High-RFA)/VU, "VCHigh");
Plot2 ((Low-RFA)/VU, "VCLow");
Plot3 (OBLine, "OBLine");
Plot4 (OSLine, "OSLine");

 

I use it in some automation... but this base above not so useful as is...

Substitute (h+l+c+c+c) * .2 for MedianPrice

Use deviation bands instead of fixed OB OS lines

Use adaptive central tendencies instead of Average

Layer one VC on top of another (via diff (and dynamic) lengths)

Only refer to it certain conditions

etc

etc.

then

:rofl: "We don't need no stinkin prices" :har har:

;););)

hth

[BlueHorseshoe 10]

Also, David Stendhal was the co-author of Mark's book, he was not the creator of the valuecharts indicators.

 

Well we won't get into an argument about it because I don't really know or care - the point is that I have Helweg's code, and I was under the assumption that different code had been made available by Stendahl - is this correct, or did they co-author the same piece of code?

 

Cheers for the clarification.

 

BlueHorseshoe

[SwingTrade 10]

Mark Helweg created the code. Stendahl co-authored the book. Therefore, the code that Stendahl used to make his ValueCharts indicator is really Mark's code. That is why it is not available anywhere else because Mark patented the code to create MicroQuant, a company designed to bring the ValueCharts and MQ indicators to the market.

 

(I recently met Mark at a traders expo in Dallas, that is how I know this)

[BlueHorseshoe 10]

Mark Helweg created the code. Stendahl co-authored the book. Therefore, the code that Stendahl used to make his ValueCharts indicator is really Mark's code. That is why it is not available anywhere else because Mark patented the code to create MicroQuant, a company designed to bring the ValueCharts and MQ indicators to the market.

 

(I recently met Mark at a traders expo in Dallas, that is how I know this)

 

Thanks for the explanation. If the code is patented, how come so many others are selling it, pressumably unchallenged by MicroQuant?

 

BlueHorseshoe

[Adrian 10]

Ignore those Value charts. They look good at first glance, but once you take a closer look, they fall over badly. I studied them years ago, and concluded they are largely a waste of time. Why? Because they don't represent the points where you want to enter or exit a market. They often represent momentum extremes, but trends do NOT end at momentum extremes. Virtually ANY oscillator will work in a perfectly formed sideways market. But unless you can RELIABLY tell when a market is in one and not in one (and due to complex cycle interaction you rarely can), then you end up wasting your time. Value charts will encourage you to behave like one of the earlier 'pro' posters LOL. You will end up trading against the trends all the time and lose a ton of money despite what he says professionals do...THEY DON'T. Beginner and even experienced traders should largely avoid reading this thread altogether as it is full of absolutely appalling information.