Category Archives: blog

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.

likely likely

rip

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.

Roundabout thoughts

Capture

It’s certainly not perfect, but interesting to note.. How to make it more accurate, or rather, what filters to apply, is an interesting problem to tackle. I find it feasible to be very clever and aggressive with position sizing and entry points to make some great profit, but:

1) testing and
2) long term repetition

are my main concerns. It may be worth tackling now that I’m much more in tune with how things “work” (although still have plenty to learn), as opposed to what I think a lot of newbies try (and I did) when I was first introduced to trading. It’s very easy to get into the “what if I.., what if I..maybe I can..” mindset. The problem is that when one is unaware of their surroundings (close by S/R, unknown conditions/movements/unfoldings, the position is dead.

cap2

There are some interesting “gut” things that occurred in this trade I took. The trend is up and therefore you should only really be comfortable taking longs. As an aside, one of the random thoughts that I had is that from what I’ve done and “confirmed” with others, it’s actually quite hard to know where a continuation wave will end. This may have something to do with what is actually occurring in a (up) trend: people are buying, bandwagoning, adding on, etc and this makes it hard to know how high it will really go. On the other side, retracements of the larger range may be more likely to hold because the people who are currently in sync already have additional limit orders that are waiting. The aggregate of these may be enough to protect the levels. Kind of elementary theory, but thinking it through helps me a bit.

Anyhow, as price unfolded and moved up (and therefore meaning that me being sneaky peaky like was looking to go short) I only had a few spots short, given my current toolbox. The main one I’m using is the simple 5 bar fractal. I’ve considered doing a more rigorous test, but haven’t quite done so (writes in notepad). The trigger for this is just the break of the range. There is plenty of room for a fake break and a disastrous position. But it kinda works out nicely when you can mindfully get some other factors in your position, and it’s great when the range is not too big.

When you need 50-60 pips as a stop and the wave is only really expected to hit 150 or 200 (and often times 100-130), you only get a set up of 2:1 or 2.5:1. Ideally you want something like 4:1 I think. The only two windows for entry here are shown in the two yellow boxes. The more aggressive option is to take the position and then add somewhere in the blue box. To me, the stalling here means that the top is less likely to break higher. Now I am beginning to see that it also functions as a flat as well. Doubling up on risk – but does this new position present better odds than the previous? I’m wondering if the individual sizing of the bars during a move are important to take into account..

Small post, filter tool box

Yes I am still alive! Hah. I am planning on getting back to being able to post some stuff to share in maybe another month or so. The next project will take me a while to get to, and I haven’t been able to properly have time to work through it.

I worked on a small “mini-project” today and the idea popped into my head. I won’t really elaborate on the thought process behind it too much, but I do want to share it because it may be helpful to others. I also won’t explain what exactly the data is detailing, because it’s not necessary (nor ground breaking).

When testing a signal or set up, we have some options when trying to improve the result. For someone like me who isn’t quite there but it close, it really only does take 1 small thing to completely blow something up; to make it either the foundation for an edge or something not worth touching. The initial batch of re-works and filters, and their subsequent +/- %’s to the success rate are important. The first method is more or less working forwards. Taking the result, glancing over it, and say, “Let me try to add this, or subtract this, etc”. An example of this is to try to filter out certain time periods. Perhaps the original idea planned to trade in healthy and liquid market states, and potential triggers that occur in the dead zones could be hurting the trading win percentage. This is a bit like brute forcing it, which is something that I think should be avoided.

It seems much better to try to work backwards – to go back through all the failures and see which hours of the day the signal works better or worse. BUT, and the point of this post, is that we must not forget other small additions we can make to really make the difference between the two stand out.

accum

The left side shows the failures by hour of the day, and the right show the winners. Alone, or separated, there doesn’t seem to be much difference. As researchers, we need to find good ways to compare both aspects in a way that is as least bias as possible. In this case, I chose to use a ratio of failure/winner. The standard assumptions show to be true. Trading very early in the session (asian open) seem to cause a lot of losses, while trading during the LO and throughout the active periods during the day seem to be a good strategy.

Intro to Momentum

Drafting drafting drafting…. After a lot of contemplation, reading, organizing, reflection, etc, I decided the main theme I want to start the new year with is the idea of momentum. I’d like to explain the reasoning and logic behind the direction as I think it will be helpful to a lot of “stuck” traders (me frequently being one of them!) The previous post “Zoom in Zoom out” is also helpful to get a better understanding of what my head is telling me.

1. I’m overall quite happy with how my work in transient waves turned out. I ended up with a “statistic of the market”; something that occurs in one time frame that seems to be true in all of them and has the benefit of actually saying something about the state of price and where it is likely to go and not go. The main focus of waves is to predict where price will go, aka, TP levels and future resistance levels. This leads me to try to do more of the other kind of analysis. That is, where price will not go.

2. My “interview” with Relativity made a lot of sense to me and I want to be able to build on it. I won’t end up doing the same thing, but if something works, I want to find a way to either incorporate it or understand it’s use and use that knowledge in future design http://www.forexfactory.com/showthread.php?p=7962033#post7962033

3. I believe that due to the market having some sort of chaotic variable, using a fixed h value or fixed anything value is difficult. To overcome this, everything must be made as dynamic and flexible as possible. For h waves this means completing them on multiple time frames and multiple (or minimum/maximum) h values. For support and resistance I think it must mean to use varying or “zone” levels. (that is, one that continuously changes or one that contains multiple price points, not just the current high/low) .

4. I have been and would like to explore the concept of point of no return more in detail. Is there a certain point where a trade is doomed? This is a very tall order, but I’d like to try to find out more about it if I can. Previously I most of the work was simply done with the level of retracement. In light of “Evaluation” I want to try to build another, better pivot indicator(compared to the traditional one and compared to the one I worked on previously).

5. I’d like to try to take advantage of the fact that went you enter on the correct side of the trend, you kind of win no matter what. My momentum work will try to focus on SL points to allow me to just go for it, but know where I’m dead. I’d rather manage winning positions than losing positions. Correctly implementing this will also allow me to “tsunami trade”.

The goal is simple, but can be easily forgotten when rummaging through research and numbers:

  • Establish baseline(s) for momentum
  • improve!

Zoom in, zoom out

As a trader and researcher, I think it’s important to do housekeeping every so often. I write up one of these “update where to now?” posts every now and then, and I’ve found them helpful for keeping everything in perspective. The main questions that should be asked are:

1. What do I know now that I didn’t know before?
2. What do I still want to know?
3. What do I think/know with some degree of certainty that works?
4. What do I think doesn’t work?
5. What do I think I still need to solve?

Most of these have 2 sides: Statistically founded and theory founded.

For example, I think now that some candle patterns can actually be quite useful. To recall a previous statistic, when an extreme is made, 3 particular patterns will appear at such an extreme 80%+ of the time. This is of course different from ‘when pattern x occurs, an extreme will follow’ but it is still beneficial to know. If pattern x has NOT occurred, the chances that the extreme has occurred are lower. At worst, you miss a winning trade. At best, you prevent yourself from taking a bad trade. Worth it.

(point 3) I think that wave patterns exist and are strong enough to produce a “fact” of the market that stands alone. Emphasis on the last 2 words. (statistically based)

(point 3) I think the idea of Transience bars can be expanded to view momentum, as well as potentially support and resistance areas. (theory based)

(point 5) I think Support and Resistance lines are still important, in the sense that they just make sense. How to quantify and trade from them is difficult.

It’s okay to think that something works, even if I have no (scientific) reason for doing so. What is important however, (and where most losing traders go wrong not doing)  is to strive and create experiments to discover if such a premise is true or not. When I began my research, I thought that “waves work” because Relativity said so. I worked hundreds of hours to make that theory become a statistical reality.  The above are simple and perhaps even vague questions. But when I think and answer them seriously, I often end up having conversations with myself that lead me to answer the real important question which is “What now?”

I think I will be laying off the statistics for the next couple weeks to do some New Years organizing. I plan to add another page to this site (similar to the Statistics tab) for my thoughts of how I view the market which were previously kept under the blog and journal categories but which I don’t think were well organized enough.

Trend is your friend?

Is this scientific proof to follow the trend and it’s strength? (pt 2)

Continuation complete

I’m cautious to make more additions to this. I think at this point I want to be veryy critical and precise with improving at the core components. I’m kind of viewing this as “gen 1” of 1 part of a system of x number of components if we’re speaking about the SB metabrain style of trading.

The picture is pretty self explanatory given one is aware of what h values are. What’s interesting is the difference in strength between the low and high extreme h values.
For context:

Goal:
Capture

Currently (after nearly 18 months LOL):
com

The journey continues.

Random note and lesson on research design

Sometimes I wonder where the point will be when I stop sharing my research. I find it easy to follow of course, because I made it all! However, the proper guidelines followed correctly can be true holy grails that should not be open to the public. I think… o_O

That being said I will make the following note about the previous stat and my thoughts in general.

 

There’s a difference between “if x occurs, what’s the chance that y will follow?” vs “If y occurs, what is the chance that x came before it?”. Often times in fx we look for the first one. “If this candle pattern occurs, what’s the chance that price will reverse?” To me it’s the obvious question, and as such, the market hides it quite cleverly. Initially I wondered what was the use in doing the second type of research. However, doing it in a sort of backwards manners in some fashion forces the market to reveal it’s secrets if done correctly. It’s a bit like philosophy: you start with basic premises that MUST be true (or are taken to be true) and you build on those and go from there. It seems a little silly but if framed right and is further executed right, it works.

ex. I have always wondered “at what point can I know when the market is turning?”

the answer? It turns. Silly right?

To further improve on this: at every swing top, a higher high MUST be made, and lower low MUST follow. A fractal pattern. for h=24 to be transient, h=1 through 23 must also be transient. There is a statistical bound where if h=x is transient, h=24 is now likely to be transient as well. Well above 50%, and saving much waiting time. This led to wondering if there was a pattern that occurred at tops and bottoms. Traditional candle stick patterns are bogus, or at least without proper context. What is proper context? When it’s contained within the proper wave framework or trend. (I’ve thought that when using too big of a frame, it requires a more significant pattern btw. This is something to look into..) So I ask the question: At the swing points, what kind of pattern occurs? This is type 2 question (If swing occurs, what’s the chance that x pattern came before it?) I get a distribution, which may or may not be helpful. However after this, I can still ask the type 1 question. Or, even better, I can now ask the type 1 question in an even better way (since often times, asking question 1 first will lead to 50-50 or 33-33-33 etc. distributions )! If the distribution from the type 2 question is favorable, I can now hunt specifically for those in question 1. It’s a filter on top of a filter.

Lets say I have 10 candidates for a pattern that is possible in the type 2 question. If I get a rough distribution of 10% on each of them, it’s useless. However, if I get that 4 of those patterns have a combined frequency of 70 or 80% of the possibilities, I’m in business. What I can do now is check the patterns against themselves. If a swing top occurred and Pattern A came before it 20% of the time, then what’s the probability that a swing top occurs after Pattern A? See the difference? Now I have found the exact pattern that still, may or may not prove to be useful, but it certainly will stand a better chance of turning something up compared to trying every pattern from the get-go.

I consider the “candle patterns before transient points” to be already filtered. They’re not true candles, but rather modded to be more accurate, and I think I could do some work to further improve it. What’s shown in the stat is the type 2 framed question, however I have gone on to flip it, and acquire the stats for that. (not shown because i’m still working on it). However, if filtered correctly, even if you can predict that a swing will occur after pattern A with 25% accuracy, that’s the chance of predicting a swing top/bottom. If the average wave length is 200 pips and the required stop is 20 pips, then well, 25% accuracy doesn’t look to shabby when the R:R is 9:1.

 

Also, thanks to NorthTrader for the vouch in the similarity thread to get me unbanned, although it was kind of nice not responding to anything because I couldn’t :p