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Breakout, Fakeout or a Reversal?

  • #1
  • First Post: Sep 25, 2015 5:00pm Sep 25, 2015 5:00pm
The power of market consolidation, market trend and market comfort. Which way will the market go ?

Being a zone trader, which allows for market profile, support and resistance, supply and demand and any other way of determining key levels in the market is obviously step 1. But when it comes to day trading/scalping and short term positions. What tools do you use to determine if the channel will break ? trend will continue ? a fake out ? or an all out reversal ?


Personally I trade the reversal, with a tight stop with a 3 minute reversal candle forming, divergence/convergence with market delta volume. Also look at candle patterns and just the way the price is behaving. With more rapid movement (rejection) large wicks, or even when price hovers at key levels I close the position to avoid a big thrust through the zone to continue trend.

Would love to hear some ideas on how to fine tune this idea.
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Learn, a forex trader must, unlearn and relearn he will.
  • #2
  • Sep 26, 2015 9:58am Sep 26, 2015 9:58am
Quoting COGSx86
when it comes to day trading/scalping and short term positions. What tools do you use to determine if the channel will break ? trend will continue ? a fake out ? or an all out reversal ?

Only education, experience and what I perceive as "the weight of probabilities" on the basis of them. Certainly not indicators. But for the most part I don't try to predict whether or not channels will break, anyway: I wait and see.


Quoting COGSx86
Also look at candle patterns

I find bars much easier to interpret than candles, for this purpose.

Think about what your "3-minute candle" is actually showing you. If you chose - for whatever reason (and there are some reasons that some traders choose to do this: it isn't just a theoretical point!) to start your 3-minute candles off at one minute or two minutes past the hour, instead of on the hour, the opens and closes shown by the candles would all be completely different from those on the chart of someone whose 3-minute candles started on the hour, wouldn't they? But the highs and lows would still be in all the same places, because those aren't an arbitrary artefact of "charting": they're a reflection of "where the price was", and they're objective.

It's because I do the kind of trading that you describe (though M3 charts would be a little too fast for me) that highs and lows are generally more important to me than opens and closes (there are also a couple of little exceptions, but they're not relevant to this conversation). That's also why I find "bars" more helpful than "candles": it's true that bars and candles give exactly the same information (the high, the low, the open and the close), but candles visually emphasise the opens and closes, whereas bars visually emphasise the highs and the lows.
  • #3
  • Sep 26, 2015 10:39am Sep 26, 2015 10:39am
This is a great topic. Ability to spot breakouts, fakeouts and reversals really is the holy grail of trading.

I like fundamentals (big ticket items like CB changes in policy, not the constant noise of tweets and reports) and higher time frames and then trade in the direction of the prevailing trend when using the lower TFs to trade.

Not sure that the bar chart and the candle chart really provide different information. Both have opens and closes with highs and lows. Both are completely dependent upon time of opening and closing for their formation, and the trading platforms use the exact same data to create the different presentation. I think it is just different presentations of the exact same data, and in the end it is the end users preference that determines what they use.
Kill the ego, or it will kill the mission.
  • #4
  • Sep 26, 2015 1:25pm Sep 26, 2015 1:25pm
Quoting Xela
{quote} Only education, experience and what I perceive as "the weight of probabilities" on the basis of them. Certainly not indicators.

I would have to agree indicators can be a tough way because sometimes it will show the break and the break doesnt happen. Other times the break happens but the indicator is showing the reversal.

CVI is just volume nothing else,

So with that said you mentioned highs/lows/open/close and disregarded the 3 minute theory. My thoughts on the m3 is that this shows some momentum with price not being able to make a new high, as I said before it gives a good indication for stops. however I have found when price hovers at possible reversal zones this is a sign that price will break the zone. Especially with the accumulation of volume.

I honestly just use the 3 minute candle for strategic purposes, sometimes I act early. Other times even if the reversal forms I wait because there isnt enough velocity/change in ticks for me to feel confident the market will reverse. however other times I act early and we get a big thrust through the zone. Which hurts so I think just trying to learn ways to identify or at least reduce the probability of getting stopped out.


The one piece too add, any trader can look at a chart finding these areas after they form and look like a genius but during live trading, entries can be tough Enter to early, and then sometimes we get a big thrust through the zone

So Im hoping we can share examples of when price did what we thought or when price went against are analysis. I think this way we can see what seems to work for traders or doesnt. Personally analysis the weaknesses has brought myself many successes in trading but this part Im having trouble with.

attached same zone 1min and 3 min
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Learn, a forex trader must, unlearn and relearn he will.
  • #5
  • Sep 26, 2015 11:42pm Sep 26, 2015 11:42pm
Quoting AaronWard
This is a great topic. Ability to spot breakouts, fakeouts and reversals really is the holy grail of trading. I like fundamentals (big ticket items like CB changes in policy, not the constant noise of tweets and reports) and higher time frames and then trade in the direction of the prevailing trend when using the lower TFs to trade. Not sure that the bar chart and the candle chart really provide different information. Both have opens and closes with highs and lows. Both are completely dependent upon time of opening and closing for their formation,...
I think the problem has a lot to do with the academic discussion of EMH, and market predictability.
If you take the ACF of the eur/usd log returns then we see the following

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the auto correlation of the log returns at one hour can be interpreted as random like (there is no correlation between current price x and price at x-t1) the pearson's correlation coefficency is merely -0.03893676, this means that the last hourly log return has a very weak ( for all intents and purposes ,none ) correlation with the current log return.

if we accept that the market has trends and certain predictability but moves in a randomlike way then we can get the general direction correct but not the timing, all we can do is choose an acceptable risk and attractive price (according to what direction we think the price is moving).
AVT INVENIAM VIAM AVT FACIAM
  • #6
  • Sep 27, 2015 5:30am Sep 27, 2015 5:30am
Hi Red, Good to see you alive and well.

Quoting the redlion
{quote} I think the problem has a lot to do with the academic discussion of EMH, and market predictability. If you take the ACF of the eur/usd log returns then we see the following {image} the auto correlation of the log returns at one hour can be interpreted as random like (there is no correlation between current price x and price at x-t1) the pearson's correlation coefficency is merely -0.03893676, this means that the last hourly log return has a very weak ( for all intents and purposes ,none ) correlation with the current log return. if we accept...
My thoughts/questions
1. EMH is bogus. Markets are a function of crowd psychology and not some idealized "rational behavior". The reason why it is hard to beat the market is that when you remove the inflationary effects + the value creation effects, the market is a zero sum game that charges a commission to play. People that anticipate the crowd win and those who are the crowd lose.
2. Not really sure what the ATF is or why it is important. My guess is it shows that on an hourly basis market movement is really random. Hoping you could explain.
3. Picking (guessing) direction is what makes a successful trader. Timing makes a wildly successful trader. Ability to spot a fakeout, breakout and reversal is timing. I know that I am not really great at this and believe there may be some sort of trick, either technical or an art. These folks are working on this and I am interested in seeing where it goes.
Kill the ego, or it will kill the mission.
  • #7
  • Sep 27, 2015 6:37am Sep 27, 2015 6:37am
Quoting the redlion
{quote} I think the problem has a lot to do with the academic discussion of EMH, and market predictability. If you take the ACF of the eur/usd log returns then we see the following {image} the auto correlation of the log returns at one hour can be interpreted as random like (there is no correlation between current price x and price at x-t1) the pearson's correlation coefficency is merely -0.03893676, this means that the last hourly log return has a very weak ( for all intents and purposes ,none ) correlation with the current log return. if we accept...
A huge problem we have as quants is that all the usual regression and machine learning methods or the statistical tests, like ACF, assume that the signal is corrupted by noise which is small w.r.t the signal (good SNR). In financial time series the noise is usually bigger, much bigger, than the signal. For us, in the AR(1) formula the noise is 10-20 times bigger than the two other terms (trend and MR component). Similar problems as quantum physicists have. But unlike them we can't experiement as needed we have one and only one history of price. Not only ACF can't estimate the coefs correctly but -0.03893676 is perhaps highly significant. Worse, the coefficient at lag 7 may be insignificant dispite it is bigger...

They also work "at the limit" or "converge in probability", they can't work with small sets of samples. You need 500 samples to estimate the variance of a normal white noise. This implicitely assumes that the variance won't change during that time. We know it's wrong.
No greed. No fear. Just maths.
  • #8
  • Edited Sep 28, 2015 4:56am Sep 27, 2015 6:46am | Edited Sep 28, 2015 4:56am
After 2 years of insane full-time trading studies, I understood that the key for good analysis and (why not) fast gain in any market is to recognize the changes in volatility .

No matter the market you are looking at, no matter the TF or the situation: volatility can't lies.

As a losing trader which I was, I drastically improved my results once I realized that, whatever graphic I take, i'm always looking at the combination of the same variables: time and space.

Look at the same charts you have studied for years, and ask yourself: "where is the volatility going in this situation, up or down?".

This is, in my opinion, the way to filter most of the situation you can deal with.
It's not over, until I win.
  • #9
  • Sep 27, 2015 7:16am Sep 27, 2015 7:16am
An untested idea, borrowed from my profession (experimental physics):
When we want to find out the (periodic) response of the system compared to the periodic driving perturbation, we use a lock-in amplifier. In trading, the perturbation of the market system is the activity of the participants - a quantity that can be compared with the tick volume. The volume is approximately periodic with T=24 h. The signal is the price. To employ the lock-in amplifier method one multiplies the price with the tick volume and integrates it over a time period n*T. The larger the n, the higher the noise reduction, but of course, the higher the lag... The catch is that we usually expect repetition of the response with the identical perturbation, where the difference is atributed to noise. Things probably do not work this way in the market.
Cheers,
k
  • #10
  • Sep 27, 2015 9:18am Sep 27, 2015 9:18am
Quoting the redlion
{quote} I think the problem has a lot to do with the academic discussion of EMH, and market predictability. If you take the ACF of the eur/usd log returns then we see the following {image} the auto correlation of the log returns at one hour can be interpreted as random like (there is no correlation between current price x and price at x-t1) the pearson's correlation coefficency is merely -0.03893676, this means that the last hourly log return has a very weak ( for all intents and purposes ,none ) correlation with the current log return. if we accept...
I must admit I have never heard of ACF or EMH ?
Learn, a forex trader must, unlearn and relearn he will.
  • #11
  • Sep 27, 2015 10:53am Sep 27, 2015 10:53am
[quote=AaronWard;8510954]
Quote
Hi Red, Good to see you alive and well. {quote} My thoughts/questions 1. EMH is bogus. Markets are a function of crowd psychology and not some idealized "rational behavior".

EMH does not imply rational behavior, as far as I understand it implies that all available information is already priced in the current price, Strong EMH has been questionable in recent years, the biggest problem has been bubbles and fear in times of crisis. Price it self reflects supply and demand at any given point in time, the Bid will reflect the maximum price that a buyer or buyers are willing to pay for a security. The ask price represents the minimum price that a seller or sellers are willing to receive for the security, How much imbalance do you think there is from current price at any given point in time? and how would you know what the intrinsic value is? when you see a fake out for example how do you know that indeed at this current millisecond price actually is correct? a fakeout implies that in reality the market orders are moving price away from intrinsic value.

Quote
The reason why it is hard to beat the market is that when you remove the inflationary effects + the value creation effects, the market is a zero sum game that charges a commission to play. People that anticipate the crowd win and those who are the crowd lose.

this is exactly what EMH implies

Quote
2. Not really sure what the ATF is or why it is important. My guess is it shows that on an hourly basis market movement is really random. Hoping you could explain.

Auto Corelation Function, it boils down to : in a time series data, how much is one observation correlated to itself. The question it answers is, whether the price being negative/positive in this observation can tell you anything about where the price will be in the next? it shows no correlation (very weak negative)


Quote
3. Picking (guessing) direction is what makes a successful trader. Timing makes a wildly successful trader. Ability to spot a fakeout, breakout and reversal is timing. I know that I am not really great at this and believe there may be some sort of trick, either technical or an art. These folks are working on this and I am interested in seeing where it goes.

which brings me back to my first point, does the price right now reflect all available information, or has it somehow moved away from intrinsic value? EMH vs Price predictability.
AVT INVENIAM VIAM AVT FACIAM
  • #12
  • Sep 27, 2015 10:55am Sep 27, 2015 10:55am
Quoting PipMeUp
{quote} A huge problem we have as quants is that all the usual regression and machine learning methods or the statistical tests, like ACF, assume that the signal is corrupted by noise which is small w.r.t the signal (good SNR). In financial time series the noise is usually bigger, much bigger, than the signal. For us, in the AR(1) formula the noise is 10-20 times bigger than the two other terms (trend and MR component). Similar problems as quantum physicists have. But unlike them we can't experiement as needed we have one and only one history of...
exactly, the market has baffled the brightest of minds. All our statistical tests point to it being random yet we have evidence that it isn't.
AVT INVENIAM VIAM AVT FACIAM
  • #13
  • Sep 27, 2015 10:57am Sep 27, 2015 10:57am
Quoting kprsa
An untested idea, borrowed from my profession (experimental physics): When we want to find out the (periodic) response of the system compared to the periodic driving perturbation, we use a lock-in amplifier. In trading, the perturbation of the market system is the activity of the participants - a quantity that can be compared with the tick volume. The volume is approximately periodic with T=24 h. The signal is the price. To employ the lock-in amplifier method one multiplies the price...
sounds interesting what is the implication?
AVT INVENIAM VIAM AVT FACIAM
  • #14
  • Sep 27, 2015 11:12am Sep 27, 2015 11:12am
Quoting the redlion
{quote} sounds interesting what is the implication?
Digging out the parameters of the true system response (in-phase and out-of-phase response to market activity) buried in the noise (following PipMeUp's previous post). The lock in amplifier allows one to find the response parameters even though the noise is orders of magnitude higher than the true signal, as it filters only the signal corresponding to the driving frequency. However, this does require n being very large.

Cheers,
k
  • #15
  • Sep 27, 2015 1:58pm Sep 27, 2015 1:58pm
1. rational markets and EMH are more or less the same thing: http://ejeps.fatih.edu.tr/docs/articles/106.pdf

2. a zero sum game and a EMF are competing theories to explain the same phenomenon, namely the average player will on average make less money trading than if they just bought into an index fund. if you haul out Occams razor, then EMF gets a kick in the butt.

3. markets are patently not rational or efficient. As you said, bubbles and crashes show that. So what can explain bubbles and crashes? Crowd hysteria does a great job. At best markets are somewhat rational and efficient.

4. intrinsic value and price are unrelated. the intrinsic value of water is far higher than gold. price is a function of supply and demand. supply and demand are in actual fact an aggregate of buy and sell decisions by human players.

5. I personally love Bill Grahams Mr. Market as an explanation of the relationship between "value" and "price". https://en.wikipedia.org/wiki/Mr._Market
Kill the ego, or it will kill the mission.
  • #16
  • Last Post: Sep 27, 2015 2:45pm Sep 27, 2015 2:45pm
so I'm not trying to be "that guy" but none of this discussion about ACF or EMH pertains to, breakouts, fake outs or reversals nor does it provide examples, for the way price can move at these key areas. So please can we stay on topic ? Now that doesn't mean these ideas don't have examples or methods but if they do please share them. These can be great for theoretical talk but provide no hard evidence or clarification on what's this discussion is ment to be about.

Thanks
Learn, a forex trader must, unlearn and relearn he will.
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