Category Archives: theory

Captain’s chest and PA trading

Finished the Hopwood PA thread. Interesting read. I think it was personally beneficial to me because PA was one of the areas of trading that I never put too much screen time into, but I think is something that every new trader attempts early in their career and fail because of a lack of understanding of the proper context. All the numbers, statistics, models, are really just aimed at that: context. There’s nothing wrong with trading pinbars and breaks and the most obvious patterns that everyone knows, as long as one can tell where to expect it to occur, and how far it can be expected to travel.

The whole “market makers are out to get me” is another interesting corner of the trading world. I don’t like to believe in these things because it’s very difficult to prove to myself, however I think there’s a benefit to explaining things this way as it provides an easy way to offer a different perspective of what’s happening in decision spots. MMs, banks, institutions, the simple majority, does it really matter who is “moving” the market? At the end of the day, “their” direction is the correct direction, and nothing matters as long as you can predict what direction that is.

A few take away points I got from the thread:

  1. The complete cycle, or simple Elliot move, is made of: push-push-push-pause, push-push-push-pause, erratic movement, end of wave. Or, as it’s called in the thread, 123 L1, 123 L2, SH, 3. This “stop hunting” or weird movement at the end of the complete wave is probably why finding the end of the 3 leg proves to be so difficult. (*heh*)
  2. If you’re going to subscribe to the MM belief, I think the safest/easiest/most practical way to implement this in your trading is to believe that MMs control the beginning and the end of the wave. This means that if you’re lost in your count or wave leg, using the nearest high volume high range bar on the chart (most simple on 1hr I think) can be used as a guide.
  3. Making counter trend trades at extremes like this is actually not as risky as it may seem. The BARF pattern is a mean reverting trade and is pretty accurate. Using double tops or pairs of wicks, etc, turns out to be pretty good, even in a discretionary setting.

The thread is a large advocate of a lot of screen time on a lot of pairs, something that I think is very productive when you know what to look for. I think it’s worthwhile to go back and try to pair some of my wave move and timing concepts into these “obvious” counts and see if I can get them to mingle a little.


Ideas on profit and post-trade analysis

As I have been trading more and more, I have been doing less general research and now only really focus on the bits that I think I really need to work on (busy schedule has led me to not do much of that either though..). I spend most of my think time on random posts/topics that have stuck to my mind, as well as strategies and ideas that I think work and don’t work, and why. I try to juggle the thoughts of traders that have seem to have made it, ideologies that retail traders were taught to be true, as well as my constantly developing thoughts, and make sense of the whole thing and create a picture of how the market functions in a way that ‘upsets’ the fewest thoughts. One of these thoughts that I have spent more time thinking about lately is the idea of “cutting losses and letting winners run”.

There are actually so many ways to think about this idea. Cutting losses is one thing, getting big winners is another, and often traders face the issue of an expected or average yield of win/loss. Anytime you allow a “winner” (predefined by the system) to run, you risk it becoming a breakeven trade. Not bad, but when you rely on the winners to make the system a winning system, you really just need to win. Its tough analysis a lot of times to continue to section off winners into trades that may become big winners, because it may make the system worse, turning more winners into nulled (breakeven) or even small loss trades. After all, if the process to become a successful trader is losing trader->break even trader->winning trader, you’re really looking at the function of growing winning trades to further your equity growth.

One idea that I’ve enjoyed thinking about a lot lately is something I think TheRealThing from FF has said: that the breakdown of his trades is basically a lot of small winners, a lot of small losers, and a few, just a few, HUGE wins. It makes the grinding and focused aspect of trading more realistic, and it does make sense. In my study of transient bars, this is quite akin to catching a long right in the middle of a mid-transient bar. It’s not so much that you try to identify them as they occur, but you just kind of “luck out” (although I do think there may be something to be done in this area..). It also coincides with the Tsunami thread (now junked) that the goal is to move the stop to BE in a good place, and just wait for the black swan events to not be the things we fear and try to control as the risk factor of our trading, but rather accept and look forward to them, as they are the events that really make our account grow. In other words, if you can manage to get into a trade that just takes off, if you don’t “need” the trade, try to just sit on it stubbornly and not take 2, 4, or even 8% growth. Rather, sit and wait on it to grow into a 15 or 20% trade. I know I would be fine with catching one or two of these a month.

Of course, how do we really do this?

Currently I’m thinking about:

-Further analyzing price movement post break
-Analyzing the time component for a trade to exhaust
-Average/middle leg lengths for 5M-H4 breakout waves
-Classic (my version) ABC waves in 1Hr-W1 swings (1 mo scale)
-Taking a look at mid-transient bars and return probability (BE) for 15m-1hr bars
-Possible “Speed” of breakout waves on 5m-1hr waves

Lots to think about, many ways to design them…

Possible next steps

I haven’t been doing much work recently because I’ve been trading! It’s a bit shocking for me, as it’s something I haven’t been this active about it in over a year. I’ve done my best to recall all the little things I’ve done since I started this blog and put them to use as I enter the market. My original plan when I started was to have a core probability for price to reach specific points at any point in time. Surprisingly, what I have now isn’t that far off! Although, given the nature of modeling, we can never be too sure that our probabilities are accurately forecasting the next move. I’ve put together what use I have been able to gather from SB (not much unfortunately, still working on that..), transient bars, transient waves, common daily and weekly play outs, weekly gaps, etc. I’ve been pretty satisfied with out the trades turned out, although I’m only on my 3rd week so I will have to wait and see.

Moving on, there are a few major hurdles I’d still like to solve, and I’ve begun pondering something that I never thought I would: Elliott waves. I absolutely loathed the damn hindsight painting, but I thinking understanding where it is wrong and right can provide clues for improving my own wave work. I had the pleasure of having some correspondence with an elliottician, and I must say it is interesting to see the way people have made it work. It’s currently in theory phase so I may not get the project off the ground (like many before it) but I think it would be quite a unique idea that I don’t think many have thought of.


Another post on filters, stacking indicators

I keep talking about it because I like reminding myself about what’s important and what my focus is.

Here’s a snapshot of E/U 30m from today. I took a long at a pretty good spot last night and made a winner.


However, looking at this chart, I really see no reason to long. In fact shorts look quite good, due to the logic of trend following principles and probabilities. I took the trade due to some stats and figures that I had on the H1 frame, where the long looks more appealing. The difference between having the “winning” information and not is simply the difference between filters. If I gathered information about 30m stats and wave patterns I think I would end up with slight bias towards a short here. But, the important take-away here is that the cause of failure in the 30m is due to a successful follow through of the 1hr, or some model that is not known to someone purely looking at this 30m chart. 

If a patterns success rate is 50%, we say there is no edge. However, if 20% of those failures are explained by another indicator, then we have a pretty good edge actually. This is the premise of why new traders stack indicators like stoch, macd, ma, etc in hopes that they can combine them to make a winning system. What I do now is really the same thing, except the success lies in creating indicators that “talk” to each other well, in a way that it can be shown.




MTF Everything and pivots

I really want everything I do to be within an MTF context, although sometimes I don’t know if that’s a good thing or a bad thing. On one hand, it makes perfect sense. On the other hand, maybe it’s not necessary when all you need is 10 or 20 pips. How can you tell anyhow?

A theory I’m trying to work on as a background for what I do in the future is for things to “make sense”. I may have posted about this before, but transient bars have made this internal battle really difficult. Logic states that to trade just pure probabilities and PTZ bars as they were defined in the scope of the thread is slightly misleading. I feel like it’s trying to brute force an edge out of the market. If you can get an edge, than great! But if it’s not grounded in something deeper, the edge may fade away. What I mean by this is that if there isn’t some additional theory to back it up, there’s no explanation for why future stats should continue as they have. Something grounded in support and resistance will continue to function because support and resistance (interest levels) is how the market fundamentally works. For time based highs and lows.. I can’t be so sure. This goes back to a discussion I had over a year ago about pips and time (long run). If your edge gives you 5 hard pips, that’s good, but is 5 pips now the same as it was 10 years ago? Will it be the same 10 more years from now? This is one of the core reasons why I have a hard time testing for k values that are fixed at 5, 10, or any other constant number. BUT! Even this point has it’s argument. 5 pips may not always be 5 pips, but what if it’s close enough for our needs? For example, the euro could disappear completely! But if that won’t happen in the next 100 years, do I even care? Further, it’s always possible that what is seen as brute force by one person actually has sound theory behind it but it simply isn’t understood. What a dilemma!

As for the actual theory, I’ve recently been thinking that transient bars and pure probabilities favor trend following tactics. Wonderful. The issue has been time and time again, where to put the stop? I think Pivots are a way to solve this, and I’ve been putting in some time into thinking of what an MTF pivot looks like and how it plays out (and how I can see it play out in a way that’s quantifiable). The point of no return as I’ve studied it seems to be better studied under not the context of “launch bar”, but rather more like a “decision node”. These are better referred to as simple Support/Resistance areas. But In real life, I think these must be zones, not actual prices. I think to maintain flexibility, purely using a single price point for S/R is incorrect (using single price points still has its uses though). The reason I say “real life” is because the theory that I have is that true market makers (banks) aren’t stalking specific prices. They’re looking to get in and out at various prices, and often at whatever they can get. Unless True movers are staring at screens like we are, they’re more likely doing other things and make their entries based on “good enough”. That’s not to say they’re willy nilly about it, but I do think they’re more “discretionary” as we would say. Thus, to create a mechanical system for an occurrence that is truly discretionary is a bit tough to do (though I maintain the stance that it works).

So! For pivots to “work”, I think that in a MTF context, it should end up displaying a zone of prices that should be recognized as Support and Resistance zones. I should actually expect then that the percentage of pass through/no pass through to be okay or decent (not great) and for an additional filter to bring out the value in it. I will say though that often times I feel like I create goals and plans for things that I don’t actually have the resources or capabilities to accomplish. I still think they’re good to think about though hah.

The current pivot work and stats I’ve done look not too great as a start (the ones shared), but after playing with them a little, there’s actually quite an initial edge in them. Very interesting!

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

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!

In search of Edge #2

Some day, at some point, every great trader gets to the point where the forums just don’t provide very much new or interesting information (ahem). Today, I am not at that point. =p

The “Tsunami Method” thread popped up in my feed (I really do love that aspect of ForexFactory) so I took a browse through it. It’s premise and idea isn’t a particularly new or profound, but if taken to be true it does spawn some new ideas. The gist of the thread is: take a lot of small positions, and hold on to the winners for as long as you can. Aim to have a few winners that are SO large you can double or triple your account in one trade. Obvious pros, with the cons being that:

1. Must be comfortable taking A LOT of losses
2. Must be comfortable holding onto to positions for long periods of times with varying floating P&L
3. Arguably requires a strategy that has a very tight SL

I like it because it’s a lot “safer” then martingale in the regard that you don’t have a ton of floating negative gain. However you’re still taking a bunch of losing trades. I’ve always found these types of strategies more “fun” though for whatever reason. Your entry doesn’t have to be that accurate but it does need to be clean and I’d like to argue that to employ this correctly, you DO need a tight SL. I think somewhere around 15 being max, preferably 10 or 5 (like the OP) if you can manage it. The reasoning is this: If you have a 30 pip SL, then even if you catch a 600 pip move you’re only making (600/30) 20x return. Sounds great but to counteract how many times you’re likely to lose, you should be risking no more than .5% (roughly). The 20x return becomes 10x, and you’ve waited (likely) 2 to 3 months for 10% gain. Realistically, if you’re adding on a bunch of positions, you’ll get maybe 20 or 30% over the course of holding multiple winners. Better, but not HG status. With a small SL, you give yourself more room for error, and require fewer pips to make more gain.  Smaller sniping strategies have a lot more strength with their ability to compound quickly so for a longer time frame strategy to work the gains really need to be big and worth it.

Hence, to trade this ‘style’ correctly, we require a balance of:
1. Small SL (entering extremes)
2. Accurate entry (semi accurate)
3. Ability to hold a trade for a lot of pips (accurately mark and trade HTF swings)

I mean it kinda looks like we just want the farm here but realistically, only a few parts are needed. The accuracy only needs to be decent, the SL is somewhat fixed because we need it to make good R:R, so the ability to actually know when a big move will occur is really one of the bigger parts. The good thing is that we don’t necessarily need to know what direction it will occur in order to trade it. What does this mean? Magnitude.

Again, it has taken some random thread on the internet for me understand and conceptualize a Signal Bender theory in a way that makes sense to me. First the Similarity thread, now the Tsunami thread. However unlike the Similarity thread, the Tsunami thread provides no clues on how to find the answer, only how to manage it.