Trade Anatomy - ramblings of an old-timer

Hello everyone.

(The forum has changed structure a little since I frequented it last so I will post this thread in the Rookie Discussion forum but, moderators, please place it elsewhere if you deem fit).

I have made the decision to begin a thread here at FF. I will do my best to keep it lively and updated but please bear in mind that I am old, easily distracted and prone to continent-hopping

My previous visit to FF saw me finally register as a forum user as I was heartily encouraged by the work of Feb in his 'The System' thread. I then briefly contributed some examples of how I trade and this seemed to be well received. In accordance with my character traits I warned you about a moment ago, I then forgot to log in for another year or more!

Anyway, I returned the other day and found I had a few messages waiting in my inbox from some time ago. I tried to answer the queries raised as helpfully as I could but it struck me that it was highly likely that others here would benefit from asking the very same questions and discussing similar scenarios. I have therefore sought permission from one of the people who messaged me to re-create our discussion here in public. I am pleased to say he has agreed.

This is Introductory Ramble #1 ... please indulge me by reading Introductory Ramble #2 (next post) before I get down to business.

Happy and profitable trading to all

Kind regards,

O N D

Before I start looking at some trades, I want to set out some ground rules if I may. I can probably best do this by clarifying what this thread will be and what it will NOT be. Apologies for being so formal but I have seen too many threads derailed by straying from their intended purpose.

What The Thread Aims Are:

1. The thread aims to provide the personal trading views of, shall we say, a rather mature trader.
2. The thread aims to demonstrate a pragmatic and reasoned form of trading that remains independent of indicators.
3. The thread aims to facilitate learning, reflection and discussion.

What will NOT be found here:

1. I have no interest in providing live trade calls or signals or managing funds. I am semi-retired and fortunate enough to be financially secure enough to trade merely for the intellectual stimulation. Trading is a pleasure for me now; I have done my years at the coalface.
2. Nothing is being marketed or sold here. I am not here to profit from others and any assistance I provide is voluntary and free.
3. I will not indulge any 'penis comparisons'. I am too long in the tooth to care about who is the best trader or who has the best methods. I will present some of my approaches on a 'take it or leave it' basis. Hopefully it will stimulate discussion and reflection but I am not here for an ego-boost or to force my trading methodologies down the throat of anyone else.
4. Do not ask me to 'prove' my wealth/success or to provide live trading records. As per above, I have no interest in proving anything to anyone.

That's my Stern Headmaster part over with, promise It might seem rather unnecessary but I have seen how people with good intentions have been doubted and vilified before on trading forums and I want to be upfront from the beginning about what I will indulge.

OK. Next post I will provide links to the Feb's thread I mentioned and try to reference the points where I posted some information that is relevant to the forthcoming discussion here.

Kind regards,

O N D

Looking forward to Introductory Ramble #3...

This is the excellent thread I mentioned that was started and lovingly maintained by Feb:

http://www.forexfactory.com/showthread.php?t=54528

As you might expect, no two traders will have exactly the same methodology (even if they appear to on the surface) so I am sure what I post here will not be an exact replica of Feb's teachings. However, I cannot recommend his wisdom highly enough and the thread is well worth the effort of a full read.

Within that thread, I set out some general thoughts and tried to provide a comprehensive overview of the lifecycle of a trade of mine. Please don't think I am being arrogant in referring again to these posts but it will save me repeating the same information. My contribution was between November 20th and 27th 2007 and there are charts etc posted by myself, Shreem and Trader V. I think it is page 46 of the thread.

http://www.forexfactory.com/showthre...=54528&page=46

In the next post(s) I will set out details of a private message I replied to yesterday as I think it is highly relevant to our discussions here.

Kind regards,

O N D

OK. Here is the email I received after I agreed to offer my thoughts on his trade. I will also attempt to get over my lack of technical abilities by posting the chart he attached!

____

Hi OND

Attached is my annotated Euro chart on the 4 hour timeframe. The PA seen is for late April 2010. Please let me know if you have any difficulties opening or viewing the chart, or if my commentary below is not clear.

I am bearish the Euro and that view is confirmed when I see the lower low take out the previous double-bottom (highlighted in pink). So now I am looking for a retrace, and a short entry.

My aim is to get into the longer-term downtrend, and take whatever the market will give me.

Looking at the 4 hour chart I notice an Inside Bar (shaded gray) after a rejection of a previous support/resistance area (in shaded blue), and place a Sell Short order below it at 1.3360. My initial stop is above the blue shaded area at 1.3425.

The order fires on the next bar, and price takes a sharp turn down over the next few bars to make a new low. This gives me a great deal of confidence in the trade.

Once I see the large bearish bar (highlighted in blue) which rejects off the level of the previous double-bottom, I feel confident in moving my stop-loss to 1.3310 (red cross). This puts my stop above the previous double-bottom support (now resistance), the round number of 1.3300, and the 61.8% fib of the last 4 hour swing (fib not shown).

Over the next 10 bars price gradually works it way up until my stop is hit during the bar highlighted in green. I am now out of the trade with a small profit. A few bars later and you can see what happens next.

Would you have played this trade ?
If you had been in it, how would you have managed it ?
Would you have used correlations in other markets to aid in your decision making ?

And yes, I would be most interested in your explanation of when and why you got short the Euro.

And here is my rather lengthy response to that email:

Firstly, your entry was logical. You saw something happening within the bigger picture and you drilled down and correctly identified a good entry point. Almost always, the trades you place based upon 'I will enter long if price does X' or 'I will short this market if price fails at Y' will do much better than looking at a chart and saying 'chart looks bullish, I'm opening a long right now!'.


Before I pick apart the anatomy of the trade, take another look at the chart you provided. If you've ever worked with statistics this will make immediate sense. Imagine the close of each candlestick is a point on a scatter graph. Draw an imaginary line from circa 10th April to 3rd May. See how the decline has been orderly for around 80% of the time period? That tells you that you have called the direction correctly. In future, try to imagine this element of every chart as new candles continue to print. You will find that most trends meet this criteria and that most trends will have at least one example of the move getting ahead of itself and bouncing back to an orderly pace. I hope that makes sense.


Back to your trade


I have no reason to assume you will remember my previous FF posts in any detail but one of them talks about the importance of 'wiggle room'. The only thing you did wrong in this trade was to remove that element. Put simply, you moved your stop too early. Now, this is easy for me to say but it presents you with an argument you must have with yourself and your trading account. I will explain how I would have managed your trade if you opened the short and left it with me. However, my appetite for risk and my profit targets are likely to be different to yours. Therefore, the approach I outline may well be entirely unsuitable for you.


The retreat away from 3410 area around 27th April tells us that the integrity of the down move is still intact and that a lower high is likely to be formed. Your entry was plenty aggressive enough and your initial stop was placed in an appropriate area. The lower low achieved around 3140 only serves to further confirm the trend is still down. At this point I would be mindful I had three options available:


1. Close out a successful trade. Expected market to decline and it did. In fact, the pin bar directly before the one you've shaded blue would be the one that'd be my signal to bank the whole profit, if I was that way inclined. That'd be circa 160 pips banked.


2. Decide a retracement is likely (pin bar gives us a massive nod in this direction) and close existing trade. Again, circa 160 pips banked. Then, as long as the integrity of the downtrend isnt broken, wait until the move down indicates it is resuming again and get short. If I was following this strategy, the closure of the large bearish candle around 3rd May (that took price down to around 3200) would be the signal I'd take to suggest we should get back in play.


3. Leave the trade to run and accept that some of the profit might temporarily evaporate. If I was following this approach, I would move the stop to circa 3360 after that long bearish bar. The fact the stop would be around break-even is purely a coincidence. The stop would go there because the latest swing high suggests that is where counter-trend buyers ran out of steam previously.


Option 2 is probably the most precise and profitable. My trading style is such that I would likely follow Option 3 however. That is why nobody can ever tell us the right or wrong approach to a trade. Our styles, preferences, psyches and risk appetites are all different.


In terms of fibs and correlations, I completely accept that a lot of traders find great success in observing confluence. Personally, I just see them as making my analysis take longer and become more complicated. I'm an old fart who believes everything you need should be on a price chart.


Hopefully this has served some purpose for you, even if only to analyse why you disagree with the points I make or to re-consider your risk management approach. I did promise to also clarify when and why I got short EURUSD but my view is a bit longer term so perhaps that won't be much help to you. However, take a look at a weekly chart and notice the failure of the 4200 area around the middle of January. That was my signal to get very bearish. If you then look at a daily chart, the daily close on 20th January gave me my entry signal. On 21st January, I entered at 4084. The weekly chart got me interested. The daily chart got me in and the daily chart will eventually get me out.


Fortunately, from the following day, that trade has never been out of profit. However, note that March/April saw price go from 32xx to 36xx, reducing my profit from circa 800 pips to circa 400 pips. That would drive some traders to drink or pop pills and I recognise it's not for everyone. In terms of my moving my stop, it might be helpful for me to provide a summary of how the stop has changed over the course of the trade:


At open: stop around 4620 (this is where risk:reward traders become purple with rage... "silly old fool, he risks over 500 pips... what sort of ratio will that provide him with?" - my response... risk reward ratios have never paid a gas bill for me). A stop should always be an indication of where the market must move to in order for your hypotheses to be proved wrong. At that initial point in the trade, price could have risen 400 pips and I would not yet have been proved wrong. I have to be careful at this point as it might sound as if I'm suggesting every trade requires such wiggle room. It doesn't. It is relatively easy to find entries that require much smaller moves against your position to confirm you are wrong.


28th January: stop moved down to 4220... swing low of 22nd December provided logical protection but permitted the trade still plenty of wiggle room.


4th February: stop moved down to 4040... price action the day before strongly suggested 4020 had altered from support to resistance. So, around two weeks after entry, my stop is now slightly better than break-even. Note that I haven't allowed anything other than price action to dictate when the stop gets moved and where it gets moved to.


24th March: stop remains in same place for around 6 weeks. Only at this time do I feel comfortable moving it to 3830, just above the most recent swing high.


3rd May: stop moved to 3320. It took another 6 weeks for the market to show me where to place my stop and it allowed me to lock in another 500 pips profit. It is just above the previous swing low from 25th March.


13th May: stop moved to 3120 after market suggested down move was continuing.


Yesterday (26th May): stop moved down to 2720. Again, something to note - market has been around 2150 and my stop was still 3120. Therefore, in theory, I was risking losing 1000 pips of profit. This would horrify some traders. Taken in context though, I was risking half of my accrued profit (entry at 4084).


So, the current trade is circa 4 months old, 1900 pips in profit and has just over 1300 of those profitable pips protected. I do hope you realise I in no way intend to boast by sharing this information. Play-by-play analysis is worth so much more than me simply spouting theories at you and this trade demonstrates quite well the lifespan of a managed trade.


As you will know, the fractal nature of the markets provides us with the ability to replicate strategies that work on weekly/daily charts onto 4H/1H charts and I therefore think you can implement a similar approach without having such a stomach for risk as I do.

I've exhausted myself with all that rambling so time to step back and see where this thread goes. What I do next will be dictated by whatever future contribution there is from the community here. After all, there are no squiggly lines or flashy indicators here

Ideally, those that wish to get involved in some discussion will reflect upon what has already been posted and will gain a decent idea of how I trade. There is no such thing as a stupid question so please feel most welcome to raise any queries.

If the appetite exists, we will continue the dialogue in the same comprehensive manner I have answered the email I pasted earlier.

Kind regards,

O N D

Thank you for posting. When I get some time I will analyse your trade management technique because I have a problem holding on to them for weeks. I can manage days, but usually a retracement, or threat of one, will get me. I know Jay Walker and Pipmutt can do this. I wonder how they manage it?

Hi OND

Good to see you back on FF !

Insightful critique on the above trade. I have some observations and questions.

Lots of questions. Please answer them in your own time.

I would feel that as a trader I am a combination of options 2 and 3. So therefore, I would like to take partial profits off the table when the market is giving me signs that a retracement is due, but also leave the remaining part of the position on in case I don’t get an opportunity to re-enter short at a better level.

In Option 2 you talk about the integrity of the downtrend being broken. How would you interpret/define that this was the case ? For example, are you looking for higher highs being made ? Are you looking for PA on the higher time frame ? I take it you are not looking at other markets or fundamental developments to help confirm your view that the trend is broken, as per your belief that everything you need is on the price chart.

On your Euro trade you mention that you entered on the 21 Jan at 1.4084. On my chart this price was also the close on the 20th. So did you ‘buy at market’ when the daily bar on the 20th closed ?

You’ve been short in this trade for a while now. Do you ever exit without your stop being hit ? For example, a bullish pin bar on the weekly. I guess what I’m asking is do you ever try to anticipate a change in trend, or do you always wait for an obvious sign of a trend break.

Do you ever scale-in and scale-out of trades ?

How do you make yourself available to trades ? What I mean by that is how much and how often do you monitor what is going on in the market, how might that alert you to a trading possibility, and how do you ensure you don’t miss the trade (eg. price alerts) ?

What is your view of the Euro now ? Using the scatter graph technique you mentioned, are you anticipating that the Euro will bounce back to its orderly pace ? Looks like a bottom to me, but there is still lots of risk aversion out there, so to be honest ….. I just don’t know.

And finally,

How might you go about looking for a medium-term trading opportunity in the current market ?

Apologies for all the disjointed questions. They are things I have scribbled down during the day, in between being annoyed at the confectionary vending machine which never gives me my damn change.


Many thanks,

Astellas

Allow me to add a bit more detail to this question as it is far too general.

In the chart of the AUDUSD below I see that price has broken strongly through the 0.8360 level. The daily PA makes me think there could be further strength to come, possibly back up to 0.8700 where I would look to take profits.

Hence I am looking for a retrace back down to the 0.8360 level, and then entry on a lower timeframe.

Is this a trade you would even consider viable, and if so, how would you be looking to play it ?

Thanks,

Astellas

Well I did read what you wrote. Then I had to ask myself the question. Why don't I trade like that? It never ceases to amaze me how many styles of succesful trading there are and I suppose we all settle into ours. Some benign deity forbid that I end up glued to the screen, shoulders hunched, squinting at some 1 minute or 5 minute charts and periodically making coffee and kicking the dog. (I don't own a dog so that's a start).

So I look for entries on the daily charts and I wait for complimentary entries on the H1 or H4 to enter the daily trend. Then I plan to let my trades run for days and weeks and months. Unfortunately my method of entry and capital restrictions mean I usually close within a few days to a few hours because I want to move on to the next set up. This has become my style of trading. As you put it, the fractal nature of trading allows this.

Hello Astellas - thank you for the welcome back

I'll try to answer as many of your questions as I can but want to take a 'one step at a time' approach if I may. Please do remind me in due course if I forget anything as we go along though.

The trade was entered in early afternoon UK time on the 21st January. Had I been watching the close of the previous day's candle I likely would have initiated the position earlier but trading from the weekly/daily charts means I don't need to stay glued to the markets and my entry price is largely irrelevant (as long as the entry criteria is valid).

Just realised a typo in my original reply - the trade was running at a loss during the first week rather than day.

In terms of the integrity of a trend, my own personal approach is rather holistic but I will do my best to try to put it into some form of written logic. When I started manually plotting charts before the luxury of computers, the only thing that appeared on my charts were daily close values that were turned into a line graph and then manually drawn trendlines. Much has changed for the better since then and chart analysis is much more accessible as a result of technology. However, I'm sure I wouldn't be the only old-timer to say that it removes an element of attachment between price and trader. If anyone ever has too much time on their hands, I would strongly recommend obtaining daily close prices covering at least a 6 month period and plot a graph manually. I would be very surprised if you don't experience something quite different to pulling up a chart on your trading platforms.

I no longer feel the need to draw trendlines but I still mentally add them to every chart I analyse. I would advocate that trendlines are the first thing that traders learn to use properly. In addition to mentally adding traditional trendlines to charts, I mentally add statistical trendlines that demonstrate the general direction of price over a given period. I guess the best MT4 example would be the Zig Zag indicator. Please note that I do not advise using indicators and would suggest traders add their own lines.

The additional elements are price structure (of individual bars/candlesticks and combos) and swing highs/lows. This post has already become rather long so it is probably best I go into more detail about chart structure as we go along.

For the purposes of keeping things simple I used a trade where it is opened and closed in full each time but I do often ease myself into trades and scale out if the situation demands it. At the risk of repeating myself, I will go into more detail on this subject in due course. I was also asked if I ever exit before the market takes out my stops. The short answer is yes. There is a lot of merit in letting the market get you in and out of trades but personally I use stops more as disaster protection and to definitely confirm I'm wrong. We can discuss this later too

Finally for now, I was asked how much time I devote to trading. My life is blessed with many pleasures and trading is just one such pleasure. I trade for the intellectual satisfaction it provides now and I usually stick to longer-term charts so my screen time isn't much more than a couple of hours each day. Of course, we now have fantastic access to markets wherever we go these days and it's therefore pretty easy to keep checking on things regularly wherever I go.

OK I have exhausted myself again so time to bring this post to a close. I have made a note of all outstanding questions though and will resume again when I can. Unfortunately tomorrow will be dominated by a family funeral so it may well be the weekend before I focus on this thread again. In the meantime, please everyone feel free to get involved if you feel this thread has the potential to be of some use to you.

On an absolutely final note, I will say that I see no confirmation yet that EURUSD has bottomed. I would advise never to jump the gun and make assumptions until it's confirmed. A cursory glance back to 9th April on a daily chart demonstrates the last time it was felt a bottom was forming. We all know what subsequently happened!

Kind regards,

O N D

Thanks for providing your thoughts Smikester.

You are absolutely correct in finding your own style of trading and I will doubtless repeat this statement many times during the thread. If your style of trading works for you financially and provides you with the quality of life you desire then stick with it. Personally, I have no interest in babysitting trades minute by minute, hour by hour as there are other things I would rather do I know plenty of traders who need that frantic and sustained battle arena every day to feel as if they are alive.

I'd like to think there will be content appearing within this thread that will apply to all timeframes but there has to be an appreciation that the psychology and the technical elements of entry/exit do change according to our time focus.

Happy and profitable trading!

Kind regards,

O N D

Astellas,

Very brief reply regarding your AUDUSD scenario.

Your trade plan is certainly viable. Whether the market will bend to your will is another matter A general suggestion I would make is to analyse the chart to hell and back. Come up with at least 4 scenarios and decide what those scenarios will look like and how you will react if you see them playing out. You have 1 scenario so far - find another 3 and post them

Shorter-term traders might disagree with my assertion that your plan involves a counter-trend trade but I am sure you don't need me to stress that the bearish sentiment is still intact on this pair until we are convinced otherwise. Such scenarios demand a slightly different trading mentality and a much lower risk appetite. A lower risk appetite means you have to be more precise.

I'll look forward to your additional scenarios

Kind regards,

O N D

O N D - not wanting to disrupt the flow of your new thread but just wanted to jump in and say it's great to see you started this. While your style of trading seems to be quite different to my main method, I will follow your thread with interest as your previous post show much wisdom and you also have a very 'pleasant' style of writing that is often not seen on FF! All the best, HH.

It is the sign of a good tutor who gets his pupils to answer their own questions.

Scenarios:

1. Retrace to 0.8360 and enter long. Look for counter-trend trade on retrace back to 0.8360. Entry will be long at this level. Indication for entry will be PA at this level on a lower timeframe. Additionally, I would also consider a blind entry at this level, with a tight stop below the bar which broke the level. Reasons for this are that a smaller stop is required, and that the level has seen a strong reaction in the past, and is likely to again when price next gets down there. If price doesn't bounce off the level strongly, then I will look to exit early.
As counter-trend I will be looking for a short-term trade with a fixed target. Stop will be trailed tightly accordingly. Be aware of descending trendline on way up. Initial target will be 10 pips below the round number of 0.8700, which acted as support on the way down.

2. Price continues up without retracing. Look for short entry around 0.8700, with confirmation PA. As this is with the trend I will give the stop more room and place it above an area that saw resistance previously, 0.8840. I am aware that the 50% fib retracement is also just above 0.8700 so may expect the market to push for that on the way up, before more shorts jump in and the retracement begins. My target will be whatever the market gives me so I will therefore be moving my stop behind areas of resistance on the way down.

3. Price retraces to below 0.8360. Look for short on retest of 0.8360
Price breaks below 0.8360 level with a strong close. Wait for retrace back to 0.8360, then go short based on PA on lower timeframe. Stop above round number at about 0.8405. As target, if price gets back down to this level I’m look for trend continuation, and I’ll be watching for a break of the next level down at about 0.8069.

4. No setup, stand-aside and don’t force it.

Reflecting on the above I see that they are likely to have a short shelf life in the larger scheme of things. It’s the big long-term trends that I would like to capitalise on, but that is where I struggle most. How do you monitor for long-term trend changes ? For example, looking at USDJPY on the weekly chart I see that it has recently broken the long-term trendline down, and is now bouncing off the other side of this line. I also note it is has made a higher-high. On a fundamental basis I am also aware that the American economy is in recovery and that there is the anticipation of interest rate rises by the FED. I am also aware of the carry trade implications of this. How do you keep yourself abreast of the next possible long-term trend change ?

Hedginghog is right when he says that you have a very ‘pleasant’ style of writing not often seen on FF, and I would also like to add ‘courteous’.

Regards,

Astellas

Astellas,

I would add a little to one of your scenarios.

1. I use hourly rather than 4 hourly as my sub-daily timeframe because what some see as noise I find can be quite informative and also because I believe that the banks and funds tend to use daily and hourly. So my chart shows slightly different information to yours.

2. I have found that the fib may be from the extreme to the extreme (which places 50% above the point you reached) but is often from the top of the wave 2 to the extreme. In this case that places the 50 on the nose of your top bar.

3. Either way though, while price is within the 38-62 zone I treat the original trend as "quite probably still in force." I will trade against it if I get advantageous position but will do so with care.

3. I look for 3 and 4 little indians (smaller pushes into the resistance) pattern and if I see it I take warning. Here on hourly it is quite a beautiful example terminating in 50% and prior minor structure.

Easy to say in hindsight (I wonder if I would have posted if I hadn't got up this morning and seen price action overnight) and just one possible view.


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http://charts.dacharts.net/2010-05-28/kw4.gif

Hi Kiwi Trader

Thank-you for your input.

Point noted on banks and funds preference to use daily and hourly.

So may I ask what setup you would be looking for to trade the Aussie ? As the 38-62 zone hasn’t been broken to the upside then your bias must be short. Perhaps a move back below 0.8360 and retest from below, or would you be looking to short before that ?

Thanks,

Astellas

Any price action that indicated resumption of the down trend. Perhaps just a break of the daily bar. Or a break of the channel up on hourly with some sort of retest to provide conviction that it really broke.

Ignoring fibs and 50% retracements S&R is also interesting at this point. It is interesting if you look at a weekly chart that 8500-8600 is old resistance that became support and is thus quite probably resistance again.


Just a comment. I personally have a bias up on AUD for a few weeks because I believe the AUD to have gone down in response to uncertainty; I believe the stock markets are likely to rise over the next few weeks in at least an attempt at a new high; and thus AUD would rise or hold. However, my biases are frequently proven meaningless, so it will be the market's movements that dictate my actions.

And to OND. I'm enjoying your thread and went back and read some of your earlier posts. I also believe fibs to be unnecessary but have found that they are so frequently observed in forex that they are a good zone probability multiplier for S&R and price action. It seems that most people can see a horizontal line and an awful lot of them must pick up the fib tool as well to get a judgment of whether a retracement has gone "far enough" to make it worth rejoining the trend

Dang it, another thread to follow. Oh, I have feeling this is going to be one of the better ones and maybe an FF classic. Subscribed and look forward to the journey. Thank you for contributing and sharing your knowledge.