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Building a system based on price action

  • Post #1
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  • First Post: Mar 19, 2006 8:43pm Mar 19, 2006 8:43pm
Hey everyone, something I've been wondering about here: I don't really like using indicators, I find they lag. What I am interested in is price action and chart formations, but how exactly can you incorporate that into a system with rules and whatnot, since it is more discretionary than a mechanical system with indicators. Any thoughts on this? Thanks.
Quoting ScottH
Hey everyone, something I've been wondering about here: I don't really like using indicators, I find they lag. What I am interested in is price action and chart formations, but how exactly can you incorporate that into a system with rules and whatnot, since it is more discretionary than a mechanical system with indicators. Any thoughts on this? Thanks.
This is a great question. I could probably write a few pages on this, but I'll try to be short as possible.

Computers now can do just about everything your imagination can come up with. If you have the time patients and skill (which can be learned) to tell it what you want.

There is really no discretion in a price pattern. Their only how loosely you follow the rules, which you can tell the computer to do.

An example of this would be tweezers tops, a popular candlestick formation I could tell the computer to follow exact rules. Or I could tell it within a certain parameter considered it tweezer tops.

The same thing can be done with bear flags, triangles, wages and a list can go on and on.

You can even tell the computer to learn from its mistakes, or predict what's coming or to discover new price patterns.

And this is without using neural networks, generic algorithms and fuzzy logic.

They can all be hardcoded into a system. Just use your imagination. And read.
Read a lot.

Let's say you want your system to sell at resistance when a certain candlestick pattern occurs.

First you would define the resistance area, let's go with Fibonacci.

So price arrives at the 61.8 {first you can't tell it one specific price. Very rarely will price hits the exact mark and turns. So what you want is 61.8 zone. I find the most effective way to create this zone is simply by expanding the area using average true range.}

Now price has arrived in the 61.8 zone you can now tell the computer to start looking for a price pattern or hundreds of price patterns. Or even tell the computer to come up with a price pattern that works best.

I know I haven't been very specific, but if you have more questions. All try to answer them.

I just don't want to make this 20 pages long.
A truly wise man, always has more questions than answers.
Quoting ScottH
I don't really like using indicators, I find they lag. What I am interested in is price action and chart formations, but how exactly can you incorporate that into a system with rules and whatnot, since it is more discretionary than a mechanical system with indicators.
Most price action-based systems like Vegas' or Jim16's are centered around finding areas of significant support/resistance, wait for the price to retrace to those levels and then follow closely price action in order to decide whether to enter or not.

The question is what do you consider as a significant area of support/resistance. For example, Jim16 monitors fibonacci clusters, 365 and 150 MAs and trendlines. Vegas monitors fibonacci bands. Etc.
You could also use trendlines to filter price action, as well as the methods mentioned below.

Quoting WTB
Most price action-based systems like Vegas' or Jim16's are centered around finding areas of significant support/resistance, wait for the price to retrace to those levels and then follow closely price action in order to decide whether to enter or not.

The question is what do you consider as a significant area of support/resistance. For example, Jim16 monitors fibonacci clusters, 365 and 150 MAs and trendlines. Vegas monitors fibonacci bands. Etc.
  • Post #5
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  • Edited Mar 22, 2006 9:18pm Mar 20, 2006 11:53am | Edited Mar 22, 2006 9:18pm
Quoting ScottH
Hey everyone, something I've been wondering about here: I don't really like using indicators, I find they lag. What I am interested in is price action and chart formations, but how exactly can you incorporate that into a system with rules and whatnot, since it is more discretionary than a mechanical system with indicators. Any thoughts on this? Thanks.
You can make it easy, or complicated. I like easy. One of the reasons that I developed my framework was because, as you rightly say, just about all indicators are historical. My framework gives you a way to see how far a currencies are likely to go in any particular direction. Also, it shows you when the characteristics of movements are changing, which is where most systems fall down at some point or other.

Personally, I wouldn't get stuck on developing too many technical rules, because we are in a fluid situation here, where the environment changes, so trading by too many fixed rules can reduce your profit potential because they can't work all of the time. There is no absolute security in trading that can be supplied by anyone else or their systems. The best security is to build your own skills and not rely on others.
The framework is there; we just have to work on our frame of mind.
  • Post #6
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  • Last Post: Mar 22, 2006 8:34pm Mar 22, 2006 8:34pm
Quoting ScottH
Hey everyone, something I've been wondering about here: I don't really like using indicators, I find they lag. What I am interested in is price action and chart formations, but how exactly can you incorporate that into a system with rules and whatnot, since it is more discretionary than a mechanical system with indicators. Any thoughts on this? Thanks.
Check out MuddBudda's thread on Dow therory trading. It is the oldest, tried and true style I know of. He talks about MACD, But I do not think the use of MACD is necessary, just a crutch. The price holds all the information there is to be gleened from the market. After all, every indicator out there is at it's core based on price and volume, and as the FOREX does not use volume figures, all the information is in the price.

At least, that's my thoughts on it. thanks SMJ
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