The Market as a 2-factor model

Generally I characterize the market with two properties:
1) Trend or range
2) Timeframe corresponding to (1)

For example, a 100 pips upward move followed by a 100 pips downward move might seem like a range bound market for 4hr timeframe, but it can also be seen as 2 short trends for 1min timeframe.

In order to be right, you have to make both correct guesses. This means that statistically speaking, you have 25% chance of profit and 75% chance of losing. In the long term, speculation will always lose.

Any idea how to solve this problem? I have been thinking about it for a long time but still couldn't find a solution. The conventional Reward:Risk of larger than 1 is useless since higher reward simply means lesser chance of reaching TP.

Its far from useless catching those 1:4, 1:5 etc R:R. Tell me another juicy way of compounding your account ? A lesser chance doesn't share a correlation with less profitable.

I do not understand your calculations either but don't bother explaining it further because messing around with those numbers all day will only give you grey hair

That's what I am having now. Profitable trades where I cannot find a precise explanation other than luck. I'm still scratching my head for the sake of consistency

It can be explained logically but not evidentially. You can say otherwise and come up with another logic. At the end it's just trader's preference, which sadly has nothing to do with consistency.

G'day Jiryan,

Here is an idea that I have been using now that has worked out well. But it requires some explanation. Grab a cup of coffee... and while your doing that consider these age old axioms (1) "The trend is your friend", (2) "you'll never go broke taking profits", (3) "cut your losers off, and let your winners run", (4) "take the safe part out of the middle" (of the trend).

As much as we like to quote these axioms it is extrememly difficult to apply them on a practical level. Your observation of the 100 pips range is a valid one. a potential for 200 pips on a smaller time frame or a 200 pip loser that is languishing in a range on a larger time frame. Thus the obvious answer is trade a smaller time frame...right?

Then we get into the question, "when does one trend end an the other begin?" or "when does a retracement become a new trend?" I'm sure there will be a "wiseman" that comes into this thread with an extrememly intelligent answer but until then I say HOGWASH!...No one knows when the next trend starts or the current trend ends (assuming a trend). Whats worse is the realization that if you dial it down far enough, that "trend" had to start on a small time frame...right?

So how can the "trend be your friend" if you don't know when it starts or stops. So if we don't know where the trend starts or stops, how can we "take the safe part out of the middle"? It can all be extrememly frustrating.

My solution: (1) Trade with some form of trend indicator. Most systems have one, Moving average, MACD, Tenkan Sin, etc. (2) Find entry signals using some kind of oscillator on a small time frame. Personally I like the Schaff Trend cycles indicator but the Stochastic set at %k = 14, %d = 5, works well too. (3) Use PRICE to confirm an entry signal. Personally I draw a threshold line at the extreme price of the candle corresponding to the entry signal. The price must CLOSE beyond that extreme to be considered "triggered". However you chose to craft you entry doesn't make too much difference....there are many simple and easy to use entry methods just make sure you are using a small time frame TO ENTER.

So using your example of a 1oo pip range. If you looked only at the 1 min chart, you would've no doubt seen many exit signals within this range. The question comes which one should I take? Or how do I "let my winner's run" and when is the best time to "cut my losers off"?

THIS is when your trend following indicator becomes useful. Clearly if you enter a trade on a small time frame, and you have a winner, the trend indicator on that time frame will agree with the direction. However, if your oscillator is beginning to show waning signs, move the trade up to the next higher time frame. If this trend is now agreeing with your trade, continue from this time frame. If not...take the exit on the lower time frame and (hopefully) your profits. Then start over or stop for the day...your choice.

If you trade continues its path, continue to use progressively higher and higher time frames, until you find one that disagrees with your trade. Then go back one, and trade the next lower time frame until you get either (1) an exit signal or (2) the higher time frame turns in your favor.

This is how we "let our winners run". This is how the trend CAN be our friend. If the trade doesn't go your way from the start you close it when your exit signal comes along on the lowest time frame, "cutting your losers off" quickly.

The only other thing I might add is that somewhere along this line you might want to consider predetermined take profit levels and take a portion of your trade off at these points. This makes you profitable faster, and then if you move your stop up to break even, at these points, you will have a risk-free trade on your hands.

The issue then becomes how to manage the trade and where to place stops so as to maintain profitability or maximize profits. As we move out to progressively higher time frames the stop should be a bit wider with each time frame according to its average true range. I like to "hang" the stops from the swing high (or low) using some multiple of the ATR reading for the time frame the trade is currently one. But that is not perfect either.

The bottom line is that in trading everything is a balancing act between profit and risk. MY axiom is: "First balance the profit vs risk, then tip the scales toward profit".

As with all postings this is just my opinion and worth only what you've paid for it....nothing.

Agreed. However there may be some truth in this axiom 'Buy low sell high'. It involves a paradigm shift and I am testing it now. So far it looks good this week, but it is too soon to tell.

I pretty much agree with your 'let the winners run' concept. The only drawbacks are:

1. In reality, you can only work your way up two time frames and you will need to close your trade ultimately. Even then this happens occasionally. The alignment of indicators on all time frames occur so rarely it will make you crazy waiting for it.
2. You have to monitor the market 24/5.
3. Technical analysis fallacy.

Personally I trade with a clean chart

This is correct and the reason why I don't care about that Risk/Reward stuff. In my opinion it's completely useless (at least for me).

Gaining > 1 RR does not necessarily having higher TP vs SL. You can average up, trail SL, and maybe some other trade management method that can shift your payrate up.