Summary of trading issues

A bit more of a practical approach to trading, I wanted to document my experience and how I think about trading and research in chart, and how noticing issues can spur additional research ideas.

At the end of the day, there are plenty of times when an outcome is expected to occur with a better than random chance, in the 60-80% range. However if there are 4 or 5 situations that have an expected outcome with that kind of probability, it’s actually not all that likely that all 5 of those scenarios will turn out as expected. Because of this, it’s important to be aware of the MAIN triggers to enter/exit, and keep the other scenarios in mind for when the situation arises.

The primary edge for me as a wave trader has to be the continuation probability. It’s not amazing, but combined with other info can be a good starting point.

Things I considered here:

• Should I be aiming for the break of low? Should I just take a couple of pips and leave?
• Should I make multiple entries? So wins would be clean, and if the retracement goes deeper I can average up and get a better net entry?
• Should I just take losses when swing high is broken? Should I attempt a recovery trade?
• Should I make additional consideration that consecutive breaks has a falling probability? TST is the most common 3 leg wave, but what about TSTST or TSTST?
• How can I look into recovery trades?
• etc.

Each of these questions leads to different research and different potential outcomes. For examples sake I’ll go over the recovery trade area, as I think it can be clear how complex and how much work can go into this area. Additional questions for recovery trade exploration:

I found a couple of interesting results here. The first being that with some alignment and digging, I can create scenarios which are almost very profitable. Consider the following situation:
1. When a trading opportunity occurs, the probability that price will hit TP in expected time allotment is 70% (there is no SL here).
1b. This 30% of failure wipes the profit from the 70% of wins.
2. In the 30% of the “failures”, assuming doubling down in some sort of martingale style, 80% of them can be turned into either wins or break evens.
3. What’s left then is 20% of the 30%, or roughly 6% of all trading opportunities, that are problematic. Problematic in the sense that these trades move considerably both in size and speed in the adverse direction, and can cause huge setbacks or margin calls.
4. Solving this problem, or finding a way to turn these 6% of situations into small or medium losses, is a holy grail. However, it’s also a rabbit hole. After talking with Rel this seems to not be the best course of action. Rather, there exists a trading system that doesn’t rely on solving this issue.

Trading constraints

When I head back to the drawing board, I always try to keep in mind my constraints and my trading style:
1. I don’t have the ability to test an EA using tick data, although I have some flexibility using an API and python
2. I can’t manually trade most of the London-NY session, where a lot of the volatility is
3. I prefer a mostly automated or longer term trading since I have a full-time job and intend to keep it that way

Some observations of these criteria:
1. The longer a trade is kept on, or the larger the TP/SL distance, the more likely other things like news and macro shifts can have an effect
2. Trading a larger frame (and thus larger SL) lowers the probability of hitting home runs where the RR is enormously in my favor
3. It feels like larger frames have more randomness as shorter time frames are more recurrent

My thought here is that the best approach for me would be a tsunami style of trading, similar to how it seems TheRealThing trades: a lot of small losses, a lot of small wins, and a small fraction of huge wins. It would involve trying to get in high probability situations with a tight stop and holding on for a huge pay out. Historically, this kind of trading has always been somewhat appealing, but I think, like shorter time frame scalping, deceptively very difficult to master. The main issue is that mentally it can be hard to handle lots of small losses and holding on to a trade for weeks that eventually dings out at break even. The technical challenge is finding a way to add on to trades that don’t bring the average price too close to current price. In a long term trend up, there are still plenty of down waves. It’s at least easy to understand, but like scalping, I think I could easily come up short. Knowing where price will not reach is of similar difficulty to knowing where price will reach.