smilingsynic trading observations etc.
By Lawrencesmilingsynic’s trading observations, techniques, etc.
*** this is part of our archive, complete thread now moved to forum under same name ***
Trading Edges That Last
By LawrenceOnline Series
- You May Also LikeDear Fellows of this Great Blog! Any contributions to 'WHAT BROKER IS SAFEST/BEST?' would be very welcome. I trade ETFS/stocks, futures and forex. Naturally it is easiest to have it all in ...READ MOREThis is the start of my forex journals, I mainly use 1 hour and 4 hours chart to trade 6 major pairs (i.e. EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD and AUD/USD). ...READ MOREPlease add your abbreviations and short descriptions here so that I can better organize them over time. This way, newcomers can understand our lingos better. On a second thought, I will assign ...READ MOREHi Lawrence, I was wondering if the New Moon indicator would work with Forex. plus, I am not a programer. so can you send me a link where I can ...READ MOREanyone? cant find that anywhere! Thanks! OdysseusREAD MORE
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Reprint from SS’s Journal
25. “All swing tops start with a PP failure day. That day may not be the day printing highest high in the run, instead, are usually the day right after that.
So it is both a good intraday strategy and a good entry method for swing trades. For swing tops that stopped at or below R1, and resulting in close below PP,
they are very good tops to hang onto overnight.
Reprint from SS’s Journal
26. “Using ES as an example, if there are 100 discretionary traders using BOT assisted order entry, think of the following scenario.
1/2 of them see a buy setup at a pull back price level and then place their limit orders there. All orders will be clustered within 1 to 1.5 point range. Most order entry BOTs have options to wait 3-5 seconds and also chase the offer if it is being lifted.
Some traders will setup their chase method using market orders, while some will choose to chase up to 2-3 ticks.
All these are done automatically. Bracket orders (target, trailing and stops) are placed right after the entry orders are filled, also done by the BOTs.
Think what happens when the offer is hit by a block order?
All the parked orders waiting there will fire and zoom the price level up 3 to 4 ticks, as most traders’ do not like to chase the price after that.
That is what we see now at critical price levels all the time – a shoot up/down of 3 to 4 ticks and come back to the same level in seconds.
Now, when the most active stocks are all traded with these BOTs, that creates a new kind of problem.
The cash S&P can lift or drop 2 points in seconds due to the use of these BOTs, and that can in turn triggers other auto algorithms – like arb program, buy/sell program, etc.
Thus a small push at a critical level can result in extremely fast price movement.
Knowing that, it implies no stops are safe if placed within current noise level, making the risk/reward ratio for basic daytrade setups much less attractive.
I keep track of the average 15-min bar range in the regular session as my reference for stop placement.
As of today, the average stands at 9 pts. It used to be 4 or less several months ago.
Reprint from SS’s Journal
27. Triple gap up within 5 days is a classic exhaustion pattern across all commodities, an uptrend killer.
Explanation of the reprint
i. it is a collection of points that SS gathered from his online journal from fattail.org
ii. many contributed to the journal over the years thus it is a collective effort of trading related knowledge
iii. fattail.org is no longer functional, so I am posting the points here in number format so that we can continue our discussion and expand / update the ideas here.
Thanks for finding the document, Lawrence. I have it on paper but, for some reason, not anywhere else.
No problem.
I asked anyone who has it send me the copy. Got quite a few copies. =)
Brooks, Trading Price Action–Trends: part one: I am putting this in smaller doses.
The most important message that I can deliver is to focus on the absolute best trades, avoid the absolute worst setups, use a profit objective or reward that is at least as large as your protective stop or risk and work on increasing the number of shares that you are trading.
Price action is a manifestation of human behavior and therefore actually has a genetic basis.
A trader can know just about everything there is to know it still lose money because applying all that knowledge in a way that consistently makes money is very difficult to do.
If there is a bull trend, a pullback, and then a rally to a new high, but the rally has a lot of overlapping bars, many bear bodies, a couple of small pullbacks, and prominent tails on the tops of the bars, any experienced trader would see that it is a weak test of the trend high and that this should not be happening if the bull trend were still strong.
The most common successful reversals first break a trend line with strong momentum and then pull back to test the extreme, and if traders focus too much on divergences, they will often overlook this fundamental fact.
Brooks, continued:
Discipline something means doing what you do not want to do. We are all intellectually curious. We have a natural tendency to try new and different things, but the very best traders resist that temptation.
As a trader, I see everything in shades of gray and I’m constantly thinking in terms of probabilities.
If you think about it, trading is a zero-sum game and it is impossible to have a zero-sum game where rules consistently work. If they worked, everyone would use them and then there would be no one on the other side of the trade. Therefore the trade could not exist. Guidelines are very helpful but reliable rules cannot exist and this is usually very troubling to a trader starting out who wants to believe that trading is a game that can be very profitable if only you can come up with just the right set of rules. All rules work some of the time and usually just often enough to fool you into believing that you just need to tweak them a little to get them to work all the time. You are trying to create a trading god will protect you but you’re fooling yourself and looking for an easy solution to a game where only hard solutions work. You’re competing against the smartest people in the world and if you are smart enough to come up with a foolproof set of rules, so can they, and then everyone is faced with a zero-sum game dilemma. You cannot make money trading unless you are flexible, because you need to go where the market is going, and the market is extremely flexible. It can bend in every direction and for much longer than most will ever imagine. It can also reverse repeatedly every few bars for a long, long time. Finally, it can and will do everything in between. Never get upset by this, and just accept it as reality and admire it as part of the beauty of the game.
Brooks, continued:
The only thing that is as it seems is the chart. If you cannot figure out what it is telling you, do not trade. Wait for clarity. It will always come. But once it is there, you must place the trader, assume the risk and follow your plan.
If you want to compete, you must minimize all distractions and all input other than what is on the chart in front of you, and trust that if you do, you will make a lot of money. It will seem unreal but it is very real. Never question it. Just keep things simple and follow your simple rules. It is extremely difficult to consistently do something simple but it is the best way to trade. Ultimately as a trader understands price action better and better, trading becomes much less stressful and actually pretty boring, but much more profitable.
There is an important adage in gambling that is true in all endeavors, and that is that you should not bet until you have a good hand. And trading that is true as well. Wait for good setup before placing the trade. If you trade without discipline without a sound method, you are relying on luck and hope for your profits. Your trading then is unquestionably a form of gambling.
For traders the fundamental issue that confronts them repeatedly throughout the day is the decision about whether the market is trending or not trending.
Brooks continued:
Because of the inherent high level of uncertainty, I often use words like “usually,” “likely,” and “probably” to describe what I think will follow in at least 60% of cases. This can be frustrating but if you’re going to make a living as a trader this is as good as it gets. Nothing is ever close to certain, and you are always operating in a gray fog. The best trades that you will ever see always will be described by uncertain words like these because they are the most accurate descriptions of the reality that traders face.
Sometimes the odds might be 60-40 in favor of one direction, and in very strong trends the odds can briefly be 80-20 or even higher but after most ticks in the day, the odds are about 50-50 and uncertainty, value, and balance prevail.
You should always have a plan in case the opposite happens since it will happen often. It is always important to be aware that the opposite of what you believe will happen in about 40% of your trades.
For example if you know that protective stops are likely located at one tick below a bar and will result in losses to traders who just bought, then you should consider getting short on a stop at that same price because you will have a good chance to make a profit off the trapped traders as they are forced out.
The market continues to do what it has just been doing. If it is in a trend, most attempts to reverse it will fail. If it is in a training range, most attempts to break out into a trend will fail.
Brooks, continued:
The two most important concepts in trading are that there is a mathematical basis for everything, and that at any moment when you are convinced of the market’s direction, there is someone equally smart who believes the opposite. Never be convinced of anything, and always be open to the possibility that the market will do the exact opposite of what you believe. Although the market at times is imbalanced and move strongly upward down for many bars, most of the time it is relatively now balanced, even though it might not appear to be so do a beginner.
Remember, you can rarely be 60% certain of the market’s direction, and I can quickly change to 50-50 or even 60% in the other direction. Every bar is either a trend bar or a doji bar. A doji bar means that the bulls and bears are in balance.
Although most trading ranges are flags on higher timeframe charts, and most of them break out in the direction of the trend, almost all reversals begin as trading ranges.
The single most important skill that a trader can develop is the ability to determine the times when there will be more buyers or sellers above or below the price bar.
Strong trends do everything possible to keep traders out, forcing them to chase the trend as it progresses relentlessly. Second-entry reversal setups at the tops of trading ranges often have signal bars with bull bodies, and buy setups at the bottom often have signal bars with bear bodies.
As a general rule, the stronger the trend, the less important the appearance of the signal bar is, and the more countertrend that your entry is, the more important it is to see a strong signal bar. In strong trends, most signal bars look bad and very few are trained ours in the direction of the trend.
Traders will not develop a key conviction in a reversal until the old extreme has been tested.
Brooks, continued:
How much overlap is acceptable? As a guideline whenever the midpoint of a bull reversal bar is above the low of the prior are in a possible bull (or if the midpoint of a bear reversal bar is below the high of the prior bar in a possible bear reversal), the overlap might be excessive and be indicating that a trading range is developing instead of a tradable reversal. This is far more important when you are looking to enter countertrend or attempting to pick the reversal of a trend, instead of with trend at the end of a pullback, when you have two be much less fussy about perfect setups.
Although a classic reversal bar is one of the most reliable signal bars, most reversals occur in their absence.
An unusually large trend bar that forms in a trend that has lasted for 10 or more bars usually means that the market is exhausted and will correct for at least 10 bars and sometimes it leads to a reversal.
A climax is usually followed by a two-legged correction that lasts for many bars, at least an hour on a five minute chart. Whenever there is a trading range just below the moving average, the odds favor a downside breakout.
The current bar can always be the start of a big move in either direction, and you have to watch carefully as the price action unfolds to see if a pattern is changing into something that will lead to a trade in the opposite direction.
The single most important point about the trend line break is that it is the first sign that the market is no longer being controlled by just one side and the chances of further two-sided trading are now much greater.
One the most important points that everyone needs to as reality if they are to become successful traders – most breakouts fail.
Brooks continued:
The key point is that most trends and to be very strong when starting out and lose momentum as they mature, and the market eventually as larger pullbacks and evolves into a trading range.
About 80 percent of breakout attempts will fail.
One of the best ways to trade a trend is to anticipate when the next spike will begin and to enter on a stop as it is starting.
Wherever the market goes up far enough above the breakout to enable a trader to make at least a profitable scalp before there is a pullback, then assume that there was mostly new buying at the high. If it goes sideways, soon that there was profit taking and that the bulls are looking to buy again a little lower. If the market reverses down hard, assume that the strong bears dominated at the new high and that the market will likely trade down for at least a couple of legs and a least 10 bars.
As the trend weakens, the price action at a new low will the less clear, which means that the strong bears are using the new low as an area to take profits on their shorts rather than as an area to add to their shorts. As the bear trend further loses strength, eventually the strong bulls will see a new low as a great place to initiate longs and they will eventually be able to create a reversal pattern and then a significant rally.
Brooks, continued:
A trend that has gone on for 30 or more bars will often have an unusually strong breakout, but it can be an exhaustive climax.
As the two-sided trading increases and the selloffs have more bear trends and last for more bars, the strong bulls will want to buy only at the bottom of the developing trading range and will look to take profits at the top. The strong bears begin to short at new highs and they are now willing to scale in higher. They might take partial profits near the button of the developing trading range if they think that the market might reverse up and break out to a new high, but they will keep looking to short new highs. At some point the market becomes a 50-50 market and neither the bulls nor bears are in control. Eventually the bears become dominant, a bear trend begins, and the opposite process unfolds.
Traders who are trading on the motion are competing against computers, which do not have the motion as one of the variables in their algorithms.
Often the largest in bars are countertrend, trapping traders into looking for countertrend trades and missing with-trend trades. The countertrend setups almost always look better than the with trend setups.
Over time, the trend weakens; more signs of two-sided trading develop, and the signs of strength began to disappear. For example, in a bull trend traders begin to take profits above the highs of prior bars and above swing highs, and aggressive bears begin to short above the highs of bars and above swing highs and will scale in higher. The strong bulls will eventually only buy pullbacks. The initial bull spike is replaced by a bull channel, and eventually evolves into a trading range.
Brooks, continued:
Large gaps that the reverse early usually mark the start of a strong trend for the day and today often closes at or near the high ( or low in a bear).
Be patient and take only trades where you are comfortable with your read.
Spike channel = most likely
Spiketrading range
Spikereversal = least likely
Almost all spike and channel bull patterns end with a breakout through the bottom of the channel and a test to around the bottom of the channel.
If it forms a spike and channel, it is better to treat it only in the direction of the trend.
After a spike, expect a channel.
In strong trends, the signal bars look bad.
When a trend has gone on for a long time and then has unusual further strength, it usually signals the end of the move for the time being and the start of a two-legged a pullback that will last about 10 bars or so.
All pullbacks in trend from the open days are great with trend entries, even though they almost always look weak.
Experienced traders understand that bad buy signal bars and bear trend bars in a trend day with very small pullbacks are signs of the very strong bull trend. They made sure to buy despite the weak setups.
The first trend line break usually fails.
Always be ready for the opposite of what might appear likely, because it will happen about 40% of the time.
Most reversal days start as trending trading-range days.
After a morning trend, and consolidation during lunch time, look for a failed afternoon reversal that traps countertrend traders.
Takes these notes from Brooks with a grain of salt.
Question everything, and believe in something only if there is a good reason to do so. The fact that it appears in a book or on a website is not enough of a reason.
Most of the notes are from Brooks directly; sometimes I paraphrased them, because his writing is not his strength. Nevertheless, his books imo represent the best work in print on price action and on trading the ES. I strongly recommend reading them.
His second book came in the mail yesterday. I will get to it on my vacation, which starts tomorrow.
Thank you. The notes are much appreciated.