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Trading like a child

  • #1
  • First Post: Edited Apr 20, 2008 5:53pm Apr 18, 2008 11:32am | Edited Apr 20, 2008 5:53pm

An Idea


Let's say we're all starting from scratch in developing a daily chart system for Cable right now and we don't have any experience in trading proper price action, don't know (or want to know) how to use indicators, etc. How would a child do it? Who knows, but I'll assume they would think about it more visually - observing what happens in the pattern of bars when big trends have occurred and what happens when failures occur from observation of a picture on the screen. Maybe by looking at enough chart setups we could identify some things that seem to lead to high probability successful trades and take advantage of this.

The concept is based on an assumption (to be proved or discredited) that no matter how random or specific a market might be, impossible to predict or possible to trade with "proper" techniques, do we really require all of this to be successful? What if we could invent some sort of set of rules that when followed, lead to success overall? It could be as seemingly meaningless as only trading on Tuesdays and only ever taking Long trades on the break of Monday's high, it doesn't matter as long as in the long run the account balance is positive and growing.
"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #2
  • Apr 18, 2008 11:32am Apr 18, 2008 11:32am
Step 1 - Start making observations about the simplest setups in clean trends

Here's 6 examples of a trend either starting from a reversal or a continuation within the existing trend.

#1, 2 and 6 changed swiftly from one direction to the other. What observations can be made here? They are all valid reversals that could be traded yet they may differ from each other in some ways.

#3 took a few steps to reverse and start a new trend the other way. In hindsight the price action is very clear, why not trade the break of a peak in the opposite direction and get in on the trend? Well when you try to do this in other cases you end up taking false breaks and it turns out to be 3 weeks of sideways noise. This one being slightly more involved than the first 2, we will wait until we work out some sort of rules and then see if they apply to these more complex examples.

#4 is optional. It occurs during a trend and there isn't really a full pull back, the bar lows are all making higher highs, we just see a snag overall. Can it be traded? In the future just like #3, we can try to apply other simple rules and see.

#5 is a pullback within the trend that works out as a continuation, but just like #3 it could be a trap of consolidation, we don't know that the break out would have worked while trading it. But for the sake of simplicity let's say this example is a good one to work with for defining some rules because it is afterall a clean pullback and resumption.

So looking at #1 2 and 6 as ways to detect a trend reversal in its simplest form, and #5 for ways to detect a trend continuation in its simplest form (for cable's behaviour, other charts will vary)...it should be simple to create a few preliminary rules for getting in on a trend reversal or continuation. Being so simple and preliminary these rules may not hold up through full testing in non-ideal trading conditions but we have to start somewhere.

So what are the rules that would work for trading #1, 2, 6 and 5 setups?
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"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #3
  • Apr 18, 2008 11:33am Apr 18, 2008 11:33am
Here's a clue about what step one is asking for. In example 5 for the trade entry with the trend already in play, what's happening? We are told never to chase a trade. If a trend takes off we shouldn't blindly jump in hoping it will keep going. We wait for a pullback and see if there's an entry. In example 5 it looks like a pullback. So what criteria in that one allowed us to re-enter long?

In the trend reversal examples with no pullbacks and consolidations and re-breaking, just a sudden sharp trend change, what's common in examples 1, 2, 6? Well there isn't much to go on, example 1 and 2 give some sort of trend reversal warning with counter trend bar highs and lows forming just before the change (LH LL or HH HL) so we have time to say there is a sudden counter trend sentiment, get ready. But example 6 isn't like that - it's moving up, then there is an engulfing bar with a HH and LL. Traditonally this is a bearish sign in this example and is a successful trend reversal...if we waited for a bar with a perfect counter trend LH LL, it occurs at the bottom of the down trend reversal. The whole down move is only 2 bars before any type of pullback might threaten a stop or something else may go wrong. How can we get in near the top of that reversal?

So then we have three sharp reversals occurring in two different bar patterns. If we want to make this as simple as possible without having to memorize a bunch of bullish/bearish patterns of highs lows and engulfings etc, what is common between these 2 types of observed bar formations so far?

If our charts are pure, we have only a few things to evaluate directly and mechanically - bar high, low, open, close.
We are trying to develop a mechanical system so we aren't looking for implicit things like overall momentum appearances that could be misjudged...
"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #4
  • Apr 18, 2008 12:14pm Apr 18, 2008 12:14pm
For a little motivation and incentive, here's an example of a major trend I think we can learn to get in on at the bottom and get out at the top for +800 in a single trade. No fancy training or experience, just developing a fast system with a perspective like a child (and only suffering minor drawdowns overall).

I don't have 100% of the answers but I think I have enough to work with successfully. So I will guide the discussion up to the level I'm currently at and then I'll be learning with you to refine a few details.
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"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #5
  • Apr 18, 2008 12:47pm Apr 18, 2008 12:47pm
Excellent job .i believe its a continuation of your system with the training wheels?keep on your efforts
  • #6
  • Apr 18, 2008 2:30pm Apr 18, 2008 2:30pm
Quoting Thexder
For a little motivation and incentive, here's an example of a major trend I think we can learn to get in on at the bottom and get out at the top for +800 in a single trade. No fancy training or experience, just developing a fast system with a perspective like a child (and only suffering minor drawdowns overall).

I don't have 100% of the answers but I think I have enough to work with successfully. So I will guide the discussion up to the level I'm currently at and then I'll be learning with you to refine a few details.

  • #7
  • Apr 18, 2008 2:52pm Apr 18, 2008 2:52pm
Quoting Thexder
So I will guide the discussion up to the level I'm currently at and then I'll be learning with you to refine a few details.
Very nice idea!
Here is my version: to trade later mechanical and not visual, I take for trend identification the slopes of the three strikes. (The Close average is replaced with the pivot average.)
The signals seems to be very good for most of the pairs.
.
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  • #8
  • Apr 18, 2008 7:54pm Apr 18, 2008 7:54pm
For example 5 with getting in the existing trend on a pullback, in that setup the obvious thing that is occurring is the bars pull back and when they are broken again with the trend, it is a good time to enter generally. We all know that, so let's make it the first trading system rule:

Rule 1: Getting in a trade with the trend. Wait for some sort of pullback in the bars and trade the break (of something?) in the trend direction.

To keep in mind while going over more setup examples, what exactly are we trading the break of, the most extreme price prior to this pullback, or what if the pullback lasts for a 5 day consolidation with all kinds of blips - what do we trade then?

And what IS a pullback - is it a counter trend high and low bar price, or just the trend side of the bar pulling back while the other side of the bar just looks like it's still moving with the main trend (like an inside bar)?

So it's time to dig out some examples of trades where there is a trend, a pullback/stall, and a break in the trend direction again. Let's see what we can discover. Rule 2 will be the counter trend trading situation after that.
"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #9
  • Apr 18, 2008 8:10pm Apr 18, 2008 8:10pm
Here's 3 more trend continuations to analyze.

#7 is a pullback in a down trend where the pullback bar converges as an inside bar so there wasn't a HH HL ideal pullback bar. It might just be the start of a consolidation, the tops of these bars are all lower lows during this down move (the tops being the counter trend side of the bars this time) while the trending side (bottom) of the bars are doing the pullback and then continuing. Might be something to take advantage of.

#8 is a more textbook pullback, both bar ends pull back for a counter trend HH and HL, then the bottom peak is broken and the trend continues.

#9 is a mess, there was an up trend, a pullback that started out looking textbook with a counter trend LH LL, but no break out came. Let's save this and work on it when we get some observations made.


So looking at #7 and #8 as the most straightforward types of pullbacks, what is in common with those 2 examples that could help harden rule #1? Obviously we don't need a full pullback of both sides of the bar. In those 2 examples the only thing that is in common that allows an entry in the trade is the trend side of the bars (the bottoms in these down trends) pull back and are then broken. It doesn't seem to matter what the counter trend side is doing here.

So rule 1 looks like it can be refined to only watch for a "pullback" in the side of the bars that is trending. If the pullback occurs, trade the break of the original peak prior to pullback.

Rule 1: Getting in a trade with the trend. Wait for a pullback in the trending side of the bars and trade the break of the extreme price reached prior to the pullback. Eg. In an up trend, look for a LH and trade the break if it comes. In a down trend look for a HL and trade the break of that if it comes in the trend direction.

But what about those non ideal pullbacks like #9? I don't think we have enough rules defined yet to handle this. We need to figure out how to handle counter trend setups first, then try to evaluate these types of pullbacks where a break could occur in either direction.

On that thought, look at those trend continuations again, #7 and 8, we know in hindsight that these were just pullbacks and trend continuations but what if they turned out to be sharp trend reversals that just started going up? How could we have gotten in on that? We still need to define rule #2 for counter trend setups like example 1, 2, 6.

Ideas on that?
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"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #10
  • Apr 18, 2008 8:25pm Apr 18, 2008 8:25pm
Quoting SwingMan
I take for trend identification the slopes of the three strikes. (The Close average is replaced with the pivot average.)
When we get a set of rules defined we could consider trend filtering ideas like those and see if it helps avoid bad or aim toward better ones. If we had a general trend indicator that seems to work for many things and then we could learn to fine tune our observation of specific charts as we're doing here, we might get an advantage somewhere. For example there might be a cable setup that shows to go long from some method but after spending the time in here to analyze everything cable is capable of doing we might see that due to a certain pullback condition in play it's not very likely a break in one direction will go far, or that it may go far so we can trade with more confidence.
"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #11
  • Apr 18, 2008 9:05pm Apr 18, 2008 9:05pm
An idea why not look at the time to enter trades and exit, for example you might only enter trades during london hours and close positions during asian sessions.
Also consider closing the trade at a certain point to lock away some profits then let the rest run.
  • #12
  • Apr 18, 2008 9:13pm Apr 18, 2008 9:13pm
Quoting DannyW
An idea why not look at the time to enter trades and exit, for example you might only enter trades during london hours and close positions during asian sessions.
Also consider closing the trade at a certain point to lock away some profits then let the rest run.
Well there's 2 main reasons. First the objective is a low maintenance set and forget plan that only needs to be looked at once a day when the daily bar begins. In my case waiting for London open means I have to be up in the middle of the night.

Also there's times where in the middle of the Asian session you'll see a big surge of activity and it could be a missed trade, while likewise during the volatile hours there could be lots of false breaks most of the day and failed entries...same old story

That's why I'm looking for a blind robust system without discretions.
"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #13
  • Apr 19, 2008 6:13am Apr 19, 2008 6:13am
c'e' qualche fratello italiano che puo' spiegarmi questa strategia?
non riesco a seguirla...

Be some brother italian that I better explain this strategy?



eagle
  • #14
  • Apr 19, 2008 6:17am Apr 19, 2008 6:17am
Quoting SwingMan
Very nice idea!
Here is my version: to trade later mechanical and not visual, I take for trend identification the slopes of the three strikes. (The Close average is replaced with the pivot average.)
The signals seems to be very good for most of the pairs.
.
brother that I better explain this strategy?

thank you

eagle
  • #15
  • Apr 19, 2008 6:58am Apr 19, 2008 6:58am
Quoting eagle
brother that I better explain this strategy?
I think that Thexder disagree to discuss a different strategie in his thread.
  • #16
  • Apr 19, 2008 2:41pm Apr 19, 2008 2:41pm
Quoting SwingMan
I think that Thexder disagree to discuss a different strategie in his thread.
I don't mind, and I'm curious too. Afterall if a thread can't survive with enough of its own main discussion then it's time for the focus to change anyway. The goal is to learn to trade from the ground up, maybe taking ideas from another source is one way to get some momentum.
"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #17
  • Apr 19, 2008 3:10pm Apr 19, 2008 3:10pm
THexter, you've done a great job. Trading on the pull back is a great strategy. I don/t just jump into atrade becaouse I've seen movement in that direction. I do normally wait for a pullback, and once the market picks up again in that same direction, gbam I jump in.

Quoting Thexder
Well there's 2 main reasons. First the objective is a low maintenance set and forget plan that only needs to be looked at once a day when the daily bar begins. In my case waiting for London open means I have to be up in the middle of the night.

Also there's times where in the middle of the Asian session you'll see a big surge of activity and it could be a missed trade, while likewise during the volatile hours there could be lots of false breaks most of the day and failed entries...same old story

That's why I'm looking for a blind robust system without discretions.
  • #18
  • Apr 19, 2008 4:00pm Apr 19, 2008 4:00pm
Quoting toprankeze
I don/t just jump into atrade becaouse I've seen movement in that direction. I do normally wait for a pullback, and once the market picks up again in that same direction, gbam I jump in.
In future observations of pullbacks in this developing strategy we'll investigate when it is still ok to jump in, when it's time to forfeit, get in the other way, or if getting in with the trend after some time in a pullback, then at what price (original peak from pulling back or is that now obsolete after so much time?)
"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
  • #19
  • Apr 19, 2008 4:39pm Apr 19, 2008 4:39pm
Random pullbacks happen as often as continuations.... you've done a marvelous job of showing where the strategy works, not where it doesn't. Entering on those will give as many losers as wins, because the market is random.
  • #20
  • Apr 19, 2008 5:06pm Apr 19, 2008 5:06pm
Quoting tdion
Random pullbacks happen as often as continuations.... Entering on those will give as many losers as wins, because the market is random.
That's why after the prelimiary 'rules' for entering on a pullback are defined, more observations will be made to differentiate the successful trades from the unsuccessful ones and something might once again stand out that can refine the rules for higher probability.
"Support and Resistance either holds or it doesn't." -Anonymous hillbilly
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