Market Summary 2015

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.
Market theory:

1. The market is more or less most efficient when viewed in the 30m 7bar wave length (“The” chart)
2. Retracements are much more common than rejections or trends.
3. Markets do not often contract continuously (retrace->retrace->retrace) nor continually expand (trend->trend->trend). Happens, but not often.
4. 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.
5. 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.
6. 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.
7. 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)
8. 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:

1. 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.
2. 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.
3. 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.

Statistical backings:
Currently I am using two types of edges.

1. 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.
2. 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.

My Final Post.. for now

If you can’t tell from the lack of posts I’ve been making, I haven’t done research in a while. And for the first time since I started this blog, and for the first time since I started my journey as an aspiring trader, I don’t plan to do any research for the foreseeable future. I want to structure this final post in 3 parts: The personal side, the analytical side, and the future.

On the personal side, having to quit sucks. It really sucks. Having to admit to all the people who told me I would never make it that they were right hurts. Having to invest literally thousands of hours (I would estimate 4500-5000) and get practically nothing out of it is depressing. Trading for a career was THE career as I saw it years ago – full time, hours a day watching the charts like Morse code, seeing things 99%+ of people couldn’t see, acting on part gut, part knowledge, seeking the dream of being an elite at something. I could go on and on, but the short answer is it didn’t happen. Perhaps the focus should really just be on one word: why?

Per usual I’d like to think that there were 3 main reasons:

First: Lack of useful screen time

I’m big on visual learning and learn by doing, and trading is no different. I’ve learned over the years (in a lot of aspects of life) that to learn things well, I take them and break them apart into as many different parts as possible and analyze them to death until they make sense to me. Seeing the actual process of getting into and out of a trade was something that I never quite got the hang of. Sure, testing in the lab I got a good sense of what structure I want to trade being given the candles, but I’d argue that there’s a difference between trading OHLC candles in and of themselves (really only trading the open and close) and trading the candles AS they are forming. Getting an idea of what “live flow” looks like isn’t something I’m familiar with. I felt that not being able to actively trade the London and NY sessions hurt my ability to learn this feature of the market greatly. Additionally, not being able to piggyback another person’s trades (understandable) or viewing someone’s past trades (also understandable) added on to this. Let me explain. In so many other trades (pun not intended) or elite skills, such as poker, chess, strategy games in general, there are replay features, streams, etc. It allows a user to passively absorb the “correct” trading environment. Junior pit traders and the like get mentored in this aspect, and it was one I think would have been very helpful to me.

Second: inability to network effectively

This is an area that while I wish it could have happened; I think it was simply a goal and not an expectation. Many people make it without it. To be specific, I was unable to find another person, or group of persons, to share ideas with on a peer-to-peer level. I’ve found in my numerous encounters with people that as aspiring traders get closer and closer to a working system, they guard it closer and closer. New traders happily share all their ideas about how they think the market works (unfortunately generally disproved statistics) but more seasoned traders either a) speak very vaguely about how they trade or b) trade a specific way or have a certain understanding of the market and are adamant about not straying from it. Again, I don’t wish that I could have someone spill all their secrets to me, but having someone who could both test their own theories and challenge/offer input in my theories would have been the ultimate “2 heads are better than 1” situation. I met a lot of “thanks but I think this instead” which isn’t very useful given the scope of the availability of forums already. Not a requirement, but another “nice to have”. I’ve shared all the relevant findings in my career, but I don’t expect the same of everyone else.

Lastly: Inefficient use of time and incorrect initial analysis.

I think this might be my biggest reason, and this one is my fault completely. I think I picked the wrong approach to the market. I spent so much time analyzing waves and movements in micro frames (30m/1hr) and not enough on the big frames (d1/w1). Looking at micro frames absolutely requires one to trade full time to effectively make use of it. As stated with screen time, I never had time to actually trade what I was studying. IF I found a big enough edge, I would have had to go straight into full time trading and hope that it was enough to make a career out of it. Wrong wrong wrong. So wrong. In hindsight, my thought process was simply: have no knowledge->acquire edge to trade full time ->trade full time. However, I should have taken an extra step or three and done something more like the following:

have no knowledge->acquire edge to swing /position trade(1-4 trades a month) ->earn some extra income (5-10k/year)-> continue to acquire knowledge to swing trade smaller frame (1-6 trades a week) -> earn substantial income(10k+ a year) ->gain enough knowledge to trade intraday = trading full time.

Aren’t time frames just reflexive of themselves and they’re all the same? No, not really. Trading on a larger frame grants a lot more wiggle room to be wrong (since position sizes are so small). You can be saved in a position trade in so many ways. Unexpected news, expected news, interest rates (carry trading), light weight martingale strategies, random chance, etc. The probability that a specific point will be revisited is obviously much larger when you allow weeks rather than hours/days. You can afford to miss your entry by 50, 60, 100 pips and it’s not that big of a deal. In a live environment, it’s different.

When I think about scalp and intraday traders versus swing and position traders, I think of this comparison: precision vs. prediction. I think scalpers are extremely niche in their knowledge. They know a few things and they know them damn well. They’re reactive and quick. Swing traders on the other hand are more about preparation. They have to continually adjust their outlooks based on news, and rather than react, they anticipate. That’s how I see it anyway.

If I could offer one last point as to why I failed to go fulltime, I’d simply say that I was missing “it”. Not seeing the things that other people couldn’t see.  Not being creative enough. Not thinking outside the box enough. Not thinking inside the box enough. Not enough coding power. Not enough preperation. In my opinion of trading, the ends does justify the means. If you failed, you have no one to blame but yourself. There’s no rigging. There’s no luck. It simply is. While I still have thoughts that I could do it one day, I couldn’t do it in the prescribed timeline.

And with that, I’m off for now. If you were looking for the happy ending, so was I. It’s not all doom and gloom however. I have learned a LOT in the past 3-4 years. I’ve surprised myself with how well I can work data in excel, how easily I can manipulate raw data into swings for analysis. I could probably be more efficient in anotehr language like R, but perhaps that’s for another time. A reboot of sorts. I know so many FACTS about the fx market. Not opinions, not thoughts, not theories about the “market marker” that is out to get us. Statistical, raw, empirical evidence about how price moves. And that’s kind of cool. Maybe I do have the edge. Maybe I just need to work it over time and play my spots that I know. There’s always tomorrow, another trade, and I WILL trade.

With that, I’ll be on vacation until the end of the month, and hopefully by the time I get back I can upload one last live account to myfxbook. Until then, remember: Question, Research, Profit.

-LiquidGenius

RHS # 2.9 Ratios separated by type

one line for down waves, 1 line for up waves, filtered by smaller ratio. A nice idea, which is why I’m posting it, but atm i think it might be a bit too choppy to trade with.

RHS #2.8 Swing ratios as predictors

As it turns out, using the current swing ratio to determine if the swing should continue or not doesn’t have the support I thought it did. visually it still looks strong, but I’ll need to find another metric to measure it against the normal ratios to get it to shine.
Another idea I have is using the end swing point to predict the type of wave that will occur next. This is a bit easier to test if it works in the A/B structure because 3 swing stats are pretty easy to get. I normally wouldn’t have thought there would be any edge in this, but I thought I noticed something interesting about swings that has extreme ratios and the swing that came 2 legs after.

Following 3rd swing based on first swing, regardless of middle swing:

This is just the regular data set.

Found some differences on down swings that aren’t there on up swings, which is kind of unfortunate.. Differences in rejection swings doesn’t matter too much, mostly because they’re rare to begin with, which makes the trading opportunities that come with them even more rare. There’s a small edge in DT swings leading to another DT/DJ swing (broken level) rather than DR by about 10%. Not too large..

 

RHS #2.7 Swing Ratios

Each type leads to one of 3 other types. Total of 6 types, plus dom/non-dom, makes this one set out of 12.
These ratios still don’t tell me about the reversal probability, but rather about the continuation probability and when price may not have to continue. I think I definitely need a new TCD completely to try to capture reversal moves. Distinct Vega or Vega prime maybe? hmm..

The way I’ve been using this is pretty simple; if the current wave ratio is in an extreme in terms of the histogram, then price should make a new extreme on the chart.

I find the 0-140 ratios to work much better than the 100-500 ratios, and since the dom and non-dom are roughly flipped, I pretty much always have a ratio that is in the favorable range that I can use. The histogram for the 100-500 range is much more spread out, and harder to be accurate.

I still need to look at how these ratios play out in the charts, but my gut hypothesis is that ~.84 ratio suggests that price is a bit over-extended (being in a ~5% extreme), but needs to “fix” the ratio to be in an acceptable range. These numbers are averaged over the length of the wave, so this would mean that if price wanted to create a “correct” ratio, it would need to make a new extreme to print a new number, but only after some time, in order to drag the average down. In other words, the expectation is pullback or pause, followed by new extreme.

We’ll see how this one plays out. If these ratios really work like this it would be awesome. Not quite what I was originally aiming for, but still big.
Edit:

Not quite there. Some good opportunity for profits if I wait for a good R:R probability which I did get. but the map did not complete..

Edit2: I’ve been studying the ratios over wave time. Oh boy does the rabbit hole go deep.

RHS # 2.5 More pictures!

I think taking the time to dig through visuals is one of the things that’s improved my research mind a lot these past few months. Dig through the data, find a relationship, and go back to the chart and observe it. Cycle. I can picture the statistics in my mind, but sometimes the charts show interesting relationships that are otherwise very easy to miss.

RHS #2.5 Fill bars as R/S

The number is referring to the timing of the fill bar – 1 is the first fill bar that appears, 2 is the second fill bar that appears, etc. Probability that fill bar holds as support/resistance.

Kind of interesting to note that the 3rd-5th bars have a higher probability to hold than the first two.

Number of bars it takes for the fill bar to be broken:

This one was kind of a bummer, I hoped that it would be much more clustered towards the lower count because it would map the overall map much more clear. As it stands though, I take it as a sign of no edge. Remember that markets have to move in order, so a completely uniform distribution is a very rare event. If they were more clustered, it would mean I could take this approach to the market:
-New wave occurs (still have to distinguish between the starting point of the new wave vs mini retracement in bigger wave)
-Wait for over/under fill
-If overfilling, wait for high of bar to be taken out, likely in next or 2 bars later (note: not the case here)
-Short
The probability to break is decent, but if I want to have an accurate measure of when it will break, I’d like to to wait until at least an 80% probability, which is 5 bars. To me it’s just too late, because 5 bars vastly increases the probability that the wave has already ended because if price is not going down (breaking the bar) then it’s going up and extending the wave.

Overall, there is a 86% (233/271) that the first over/under filled bar will be a continuation bar. In up moves, an underfilled bar will lead to at least 1 more higher high before the termination of the wave and vice versa for shorts. aka, there is a 14% chance that the first bar that is extreme filled is actually the extreme itself (done this before). It continues that there is a 66% chance that this bar is broken on the other wise (further pullback). So the most likely flow of price in these structures is to make an extreme, pullback, and continue, sort of like a mini-swing within the swing. These are more tradeable points, rather than the map given by the overall swing.

These are kinda cool to look at, may be some extra things to pick up and test.