Building an equity millipede

I like the idea of backtesting weekly. I think I'll give G/U a try since that is my favorite pair.

I remember Graeme's lesson in one of the "Homeworks" was that we need to take the oportunities that the market gives us:

1.- If the market say SELL you sell
2.- If the market say BUY you buy

that way If you have:

1.- only SELL orders means the market is going DOWN
2.- only BUY orders means the market is going UP
3.- Mixed SELL and BUY orders market is raging (time to diversify)

So I will do as Graeme adivises, and the entry method will be my "1 thing" that I have to improve every day.

Thanks Graeme for all the lessons and I look forward for more learning here.

As you know, one of the wonders in trading is how do pros/banks know when to trade and when to stay out. Do you have an answer? Or do you have an answer now?

I trade almost 20 pairs of currency. No person can monitor the action of 20 pairs. However, I can pre-select my interest beforehand. Some is correct to my hindsight but some are wrong. However, I do know for a fact and from real experience that the losses are very very small to what I can achieve when it happens.

When it happens may sound bleak but flying buddha, pin bar, inside bar, pennants, engulf are all above average good probability setups.

For the clarity of all, I would like to show one more inception method and I will move on to new material.

This is more for the intraday traders.

Daily chart

http://img843.imageshack.us/img843/5483/bb1c.png

Nice flying buddha. Remember this is daily. So each candle is one day of price.

Realistic expectaion from range? 100+ pips

Hindsight? Down

So after the completion of the daily flying buddha. We can write down on paper few things. Always write your plan.

1. Realistic expecation from range? 100+ pips
2. Hindsight? Down

Things to watch:

1. It might retrace first before it moves down.
2. Im interested in price that will close below that support to be classified as a volatile breakout after Flying Buddha.

http://img713.imageshack.us/img713/1700/bb2y.png

What do I anticipate:

1. Retrace. Focus on 50%, open price of the flying buddha, top of the upper wick of flying buddha.
2. Volatility breakout; then there will be no retrace so I will have one position nice and early just to respect this fact.

Filtering levels:

Daily (hindsight) -> 1hr (area) -> 5min (razor sharp entries)

Level 0 – Daily
Level 1 – 1hr
Level 2 – 5min

And this is your plan, nicely written. We write it down so our minds subconsciously encodes it into our thinking process and tells our eyes what to look for on the charts.

Day 1

http://img833.imageshack.us/img833/3097/bb2.png

One thing wrong about this chart is that we know the outcome. For now, consider we don’t know what happened after the flying Buddha.

Lets know zoom into level 1 (1hr)

We are anticipating DOWN. This is our hindsight. So we are looking at sell opportunities for now. On level 1 we are picking an area to sit down. Once we sit down we will zoom in closer for razor sharp entries.

With hindsight you cannot purposely make wrong decision. The hindsight says DOWN and as long as you keep your price interpretation same on all levels, you cannot enter wrong direction. Not sure what I mean?

Look below..

http://img641.imageshack.us/img641/8475/bb3e.png

Unless you purposely want to go against your own hindsight: DOWN there is no ‘area’ on the first 4 hours to worth consider sitting down. See how this keeps you away from the market. Learners will just enter here and there and everywhere. Pros will only enter when there is A) low-risk entry B) higher probability

http://img689.imageshack.us/img689/1213/bb3q.png

The price is now in range. I want to know where the price is in daily chart. This next chart is very very important for your understanding. This is the secret.

http://img148.imageshack.us/img148/4421/bb3z.png

What do you see??

If you entered from just daily chart thinking you can make bigger profits because you are trading larger scale have just suffered a loss because the price went above much higher than the flying Buddha. However pros, looked at the flying Buddha on daily and then went into 1hr chart and saw it closer. And 1hr is now telling the trader ‘NO. Wait”

And we do wait. We wait for the market.

http://img827.imageshack.us/img827/8475/bb3e.png

For all traders who might not know why I might start moving into action after the completion of that candle here it is again:

http://img153.imageshack.us/img153/3691/bb3i.png

See how one single candle explodes down cutting the support by almost twice. That is a lot of power. Descending wick pattern at top with long wicks (a sign of weakness for buyers and they cant get the price any higher as the time goes).

After the completion of that 1hr candle now I can sit down and write down few things.

1. Price did retrace. Infact it retraced more than most traders would like to see after a flying Buddha on a daily chart.
2. Lengthy period of time where price didn’t move. Long upper wicks that are decreasing now.
3. A big momentum candle near UK start.

It is now time to look into razor sharp entries. It may not work out or it may work out but we have done the best we can and have stacked probability of winning to our side.

http://img810.imageshack.us/img810/1381/bb3h.png

Now I write down few things Im anticipating

1. I will focus price action near 50% fib.
2. It might retrace but im anticipating a descending wick or at the worst case scenario a double wick bounce.

http://img831.imageshack.us/img831/42/bb4v.png

http://img339.imageshack.us/img339/7996/bb5u.png

So we know what happens but lets focus on that x1 1hr candle in 5min chart which is this area.

http://img689.imageshack.us/img689/2861/bb5.png

http://img716.imageshack.us/img716/5267/bb6o.png

So the second flying Buddha is now telling us to enter with a razor sharp entry. You must check where this price is on the 1hr chart/daily as a reference point to see if its part of your anticipation.

http://img405.imageshack.us/img405/3277/bb6a.png

http://img839.imageshack.us/img839/1299/bb4.png

But. It doesnt work out as the next few candles are the wrong price action.

http://img812.imageshack.us/img812/9821/bb6.png

So the price wants to go higher. Than you must ask yourself how much higher?

Perhaps the next is open of the previous candle or top of the upper wick perhaps?

http://img4.imageshack.us/img4/9435/bb6u.png

http://img441.imageshack.us/img441/2582/bb4p.png

http://img816.imageshack.us/img816/2861/bb5.png

http://img809.imageshack.us/img809/4889/bb3.png

Every position you stack on the 5min chart has the potential to grow for days while the risk is limited to what you can lose on 5min chart. Risk reward?

Potential loss on 5min chart : Potential profit of days

You have encoded r:r into your trading habit.

But…

Look at that engulf 1 hour candle. Warning sign.

http://img205.imageshack.us/img205/4559/bb3s.png

Even if you want to enter on the 5min chart it wont allow you to.

http://img696.imageshack.us/img696/9229/bb7.png

http://img829.imageshack.us/img829/2861/bb5.png

Now something unexpected happens on the 1hr chart.

http://img689.imageshack.us/img689/3056/bb3b.png

http://img706.imageshack.us/img706/5966/bb8g.png

I tell you something. Any positions you entered after that flying Buddha survived for the next 2+ months and is still growing and worth +1300 pips each. Surprised?

So you had an interesting day. You had few stacks of positions but all of them died on breakeven. The only thing you managed to open was last 2/3 positions from the latest flying Buddha which you don’t know at this stage if it will grow.

Always reflect back on higher timeframe to see that the current price is ‘a part’ of your anticipation.

Lets see what happened after day 1 on daily chart.

http://img831.imageshack.us/img831/1553/bb2m.png

What do you think?

Is it part of your anticipation?

We were expecting/hoping for a big volatile breakout downwards. The only saving grace at the moment is price closed slightly below the open. This is not good or bad. If price closes above the flying Buddha then this opportunity is over. At least we didn’t lose a lot.

And so on..

Now you would continue on choosing areas that are part of the higher timeframe hindsight and then razor sharp entries on the lower timeframe. As long as the hindsight remains valid you will continue entering towards the direction.

This is all you need to do. Very simple and it becomes very fast.

You know when to enter, how to enter and know what to expect.

But…

I will stop here and say something to add.

Im not sure if you can actually see that there are continuous cycle of generalized price action. It repeats and repeats on all timeframes.

You need to know this cycle well so you know when to trade and when not to trade.

Imagine you see a perfect inside bar on weekly chart. And the following week is a volatile breakout towards the intended direction. This information alone is worth thousands and thousands of pips.

And the price continues until that golden opportunity is over.

You then rinse and repeat the above.

It is that simple but yet complex in a sense as well.

Continuing on..

But…

Remember, I take every buy/sell opportunities?

So, if weekly hindsight says down then do I only look for sell opportunities?

No.

Let me quickly show you how you make quick short profit on both side of the coins.

http://img827.imageshack.us/img827/7151/cc1a.png

Level 0 – Weekly (hindsight)
Level 1 – 4hr (area)
Level 2 – 5min (scalp entries)

Lets write a plan before the start of the circled week candle.

Realistic expectation: 100+ pips
Hindsight: Down (continuation trend)

Things to watch: 1. Oversold. Quiet possibly a deep retrace or a stall.
2. Ema hasn’t crossed under yet (its crossed on the chart cause the weekly candle completed). Quiet possibly a big movement down around the cross. Chances are good.

What do I anticipate: Continuous compelling momentum with hardly any retrace, if retrace preferably somewhere below 50% fib.

Now we have a plan.

And the week starts..

http://img339.imageshack.us/img339/2940/cc2.png

I always keep the hindsight in my mind but I also know to expect the unexpected. I always ask myself the opposite questions to my hindsight. If price does reverse against me and against my hindsight how should I be watching the above chart?

I know my hindsight is DOWN but hypothetically if I said it was up where should I look? Where are the obvious areas?

Once again use price action interpretation:

http://img830.imageshack.us/img830/8676/cc2n.png

http://img185.imageshack.us/img185/6113/cc2m.png

http://img521.imageshack.us/img521/2131/cc2z.png

http://img230.imageshack.us/img230/1881/cc3.png

But, with trades against the hindsight require extra confirmation. Hindsight is your main objective and trades against your hindsight are just secondary punts.

You can still take calculated punts and create good source of short burst of profit.

Lets look back at 4hr chart and mark an area that if price does come I would be interested in taking a trade against the hindsight.

http://img837.imageshack.us/img837/2968/cc2q.png

So where is the orange line from 4hr chart on 5min?

http://img28.imageshack.us/img28/6789/cc3p.png

So you capture a short profit on the retrace of the weekly candle and once it bounces back down from 50% fib we would zoom in again into 5min and start capturing with more positions.

Let me take a step back and place few golden tips on taking trades against hindsight.

First, you don’t take any trades against hindsight until you are well skilled and comfortable with taking trade with the hindsight. Stick to one for now.

Secondly, if market is all relative then trends can start from weekly o r 5min chart. It can begin where it should end or it should end where it should begin. How do you know a retrace on 5min chart is not the actual new trend? What if our hindsight was wrong? We are never right all the time so if our hindsight is wrong then the opposite must be correct.

I always take trades on the opposite of my hindsight. Few possible scenarios happen for me:

1. My higher timeframe hindsight is correct and I have built a whole stack of positions.
2. My higher timeframe hindsight was incorrect unfortunately but my secondary punts actually grow to be legs on my wrong hindsight.

You cover both scenarios by doing the above.

Another quick example..

Graeme, your posts as usual are amazingly enlightening to me.

Thank you very much, every of the topics you cover is something new for me to discover and understand about the market.

Awesome posts Graeme ! It gets clearer and clearer each day. Thank you so much.

Bak

I am speechless, I have never read something like this. We can see how trade is complex and simple at the same time. Graeme, thank you very much.