Here’s a bit of a summary of where I’m at and what I’ve been thinking about lately, to help me re-focus where I should be putting in the hours for the next year.
- The market is more or less most efficient when viewed in the 30m 7bar wave length (“The” chart)
- Retracements are much more common than rejections or trends.
- Markets do not often contract continuously (retrace->retrace->retrace) nor continually expand (trend->trend->trend). Happens, but not often.
- It is much easier to predict where a retracement will end as opposed to where a trend will end. This is pretty easily backed by theory that retracements are occurring in previously interacted zones (S/R) as opposed to trends that may be operating in “air” space where market participants are unsure of what the correct reference point is.
- Retracement moves occur with a minimum of 25-30% of the previous move. This may be have something to do with “minimum” profit taking at certain levels.
- The 40-80% range is where most retracements end. There are many “seen” levels at this point (50% half point, 61.8 fib), so it will give reason for a lot of people to jump in. If it’s enough, price will hold in this range.
- The 80-100% is the “danger” zone. If the level is being protected, it will usually happen here in the form of a large wick. The highs/lows may occur in this region, but closes (I think) are likely to be somewhere in the 60-80% range if it holds.
-I think candles who’s high pops just a little over 100% but close under tend to then make a 30% retracement (need to check)
- 100%-120% is sort of a limbo between a breakout and a major rejection zone. Prices that reject this level tend to be similar to the level before this, often forming large wicks before shooting the other way.
-It seems that the 80-120% range is where price is most unsure. I don’t really know of a good way to measure this, but it might be worth clearing up how price moves in these areas.
Following from the above, here’s what I’ve been thinking about in terms of how to apply this.
Trading Strategy Theory:
- Since price is limited in what it can do within the soft zone of 40%-80%, it makes the most sense to try to pinpoint a price within this area and trade it.
-Doing so will set a hard stop at the break of the level, setting a max risk point.
- Pinpointing a single bar within the range will help minimize risk further and create a more ideal risk: reward ratio. This will reduce accuracy and result in taking multiple small losses, but open up the potential to ride out trend moves when they occur.
-There are two methods to do this: either predicting that the current level will hold or waiting for the completion of a signal (3 bar fractal).
-Alternatively, one can start small and continue to build positions behind (averaging losses) and maintain the “max risk point” from above. Doing so will allow more opportunity to get out of failed trades with minimal losses, but will reduce profit in trades that work out on the first attempt.
-Trading with an absolute stop (at the 100% break) would require holding trades longer than what is normally the minimum expectation. This basically creates a fixed risk, variable reward. This may not be desirable because one wants to play as close to the “safe numbers” as possible and as frequently as possible.
-A possible way to improve profits in this area would be to then stack trades in favor of the move (averaging up)
-Since there is a roughly predictable number of bars that can occur within the soft zone, filtering out even half of them should allow for a very finite, crisp window of opportunity.Doing so will eliminate trades that do not occur within the soft zone (where no signal is possible, <30% retracement), as well as trades that do not provide a signal, while taking failed trades (where a signal appears but price continues to reverse past the 100% level). Trading this kind of style would require a lot of patience to stomach losing trades, since one would lose out on trading 2 potential winning areas while maintaining the losing area (since it is unknown), as well as the necessity to capture the winning trades to make up for losses and then some.
-One must be very careful when filtering out trades in the soft zone. Since retracement moves are the most common, inaccuracy will lead to losing out on what is a likely opportunity.
- Since trend ends are much more difficult to anticipate, it is probably best to play into them rather than out of them. That is, hold trades and get out when a warning sign appears, rather than getting into a reversal trade at that point.
Currently I am using two types of edges.
- Histogram and curve distributions – taking all the data available, and matching the points of interest against them. If 90% of interest points occur between the values of 0 and 1, then if the current point is not in that range, it is likely not a point of interest.
- Max counts – Counting the frequency that a specific pattern or “signal” will appear within a set (range, wave, etc). If 90% of waves contain 3 or less patterns, then betting once the count is 2 or 3 is a good spot to be in.
My favorite histogram stat might be this one. The fill bars are okay, but the frequency of these bars isn’t high enough in my opinion to rely on them as an active trading tool. The left side range reference isn’t the strongest, but it is clean and simple to understand. My favorite count stat is probably this one from FF. The skew is there, the timing is implied, and the occurrence is decent. Trading after the first one shows means losing out on 30% of the trades, and there is a remaining ~60-65% edge.
It may be worth trying the above two figures out and seeing what issues I come up with, since my work in the rabbit hole is, well, a deep deep journey. If I try to follow the little pieces of gold from the more experienced, perhaps my aim should just be to continue to reduce risk and just sit on winners. It might be better suited for my lifestyle too.