2+2=4 After All!!!

[Chris_Anonymous]

Every trader I consider to be successful always emphasizes the importance of psychology in trading.

1. For a couple months now I keep thinking that I need to find decent setups and then I'll be good to practice the psychology aspect. Why does nothing work? Am I that different? More importantly, why do so many traders keep saying that choosing setups is the easy part to trading??

2. If only I could just play reversals during ranges and continuations during trends!

3. I keep thinking about that word context.

4. Okay so fade ranges in ranges, and trade with-trend (pull-backs) in trends. Simple. Done. Still doesn't work. WTF???

5. If you don't know where you're at, and you only know other traders through ET's message boards, then it's really hard to figure out what to do next. So I keep trying, day after day.

Then, today, I read a post that puts it all together for me.

Here it is:

To try to put it as succinctly as possible, in my view traders that are focusing all their attention on "set-ups" and finding out which combinations of indicators work are never going to become profitable. They are trying to follow the advice of trading books that say trading is simple and psychology is everything. So they search for set-ups that 'work', and that can take the guess work out of trading. They want to be "disciplined" and have simple rules that guide all their actions. But there's a few problems with this. Namely, while psychology is HUGE, it's not everything. And while trading is all about simple principles, actually having an edge is NOT simple. It's a myth that you can have a couple simple price or indicator set-ups and make money consistently if only you are disciplined. That's a load of crap. It keeps the dream alive for wannabe traders who never realize what it's truly about. Well let me tell you what it's truly about...

Trading is about being okay with ambiguity. It's about tolerating confusion. It's about sitting with discomfort and being at peace with it. It's about not having an exact script of when to trade or not to trade, or what's really a high odds trade, and being okay with that. It's about exceptions to the rules. It's about contradiction. It's about uncertainty.

And yet traders left and right want to make it simple. They want to reduce it to a few simple set-ups to trade with discipline. And yet the market is not simple. The market is all about uncertainty, and complexity, and ambiguity. Simple set-ups could never capture that, and they can never give you a true lasting edge.

So what's the solution? Is the problem in the simple set-ups themselves? No, it's in how they're being used. The bottom line is, every trader needs to learn to READ the markets. This means that simple rules will not do. There has to be a synthesis of different elements (whether they be price action, indicators, inter-market themes or whatever), and real-time interpretation must take place. It has to be all about CONTEXT. Once you can read the markets, and don't fool yourself it is a very complex process, then you can choose to employ "simple" set-ups to enter and exit. But the real work will be in interpreting the market to see when you should use which kind of set-up. Seeing a hammer or whatever near a support means nothing unless you've identified the broader picture and gotten a sense of the kind of tactics you should be using, and what the odds are for different scenarios unfolding.

So now it makes sense kinda. Yes it seems I do know the basics of price action after all, and it seems I do know setups, tons of them. So maybe it is as simple as fading ranges and trading continuation in trends.

The hard part is appropriately evaluating context in real-time.

The hard part I imagine is staying disciplined in uncertainty, following my setups in a market where anything can happen, and distinguishing between my errors and the market's wildness.

The hard part seems to be all the subtleties and nuances that no one can explain because the only way to get to that point is by spending the time. It's not just get a setup and trade it. It's all the questions that go along with the ability to read a market, and that takes time.

I just wanted to share this "ah-ha" moment with ET in case there are others that have been in my shoes.

 

[Big AAPL]

I would imagine the a-ha moment occurs to most traders that have given their study enough time to sink in and take shape. Don't expect it to be the last one. As an engineer by trade, my youth was spent looking for exact answers to complex problems. It was a tough transition dealing with a living, gyrating entity that is nothing more than the collective sentiment of global funds. Human beings are not "within specs" but can be predictable. Behavioral patterns repeat themselves over and over again. Learning setups that work for you personally is a key step on one's road to success. Learning to recognize what is going on between those setups was an even larger step for me personally.

And yes, everything in context.

 

[beachhouse]

Quote from Chris_Anonymous:

Every trader I consider to be successful always emphasizes the importance of psychology in trading.

1. For a couple months now I keep thinking that I need to find decent setups and then I'll be good to practice the psychology aspect. Why does nothing work? Am I that different? More importantly, why do so many traders keep saying that choosing setups is the easy part to trading??

2. If only I could just play reversals during ranges and continuations during trends!

3. I keep thinking about that word context.

4. Okay so fade ranges in ranges, and trade with-trend (pull-backs) in trends. Simple. Done. Still doesn't work. WTF???

5. If you don't know where you're at, and you only know other traders through ET's message boards, then it's really hard to figure out what to do next. So I keep trying, day after day.

Then, today, I read a post that puts it all together for me.

Here it is:



So now it makes sense kinda. Yes it seems I do know the basics of price action after all, and it seems I do know setups, tons of them. So maybe it is as simple as fading ranges and trading continuation in trends.

The hard part is appropriately evaluating context in real-time.

The hard part I imagine is staying disciplined in uncertainty, following my setups in a market where anything can happen, and distinguishing between my errors and the market's wildness.

The hard part seems to be all the subtleties and nuances that no one can explain because the only way to get to that point is by spending the time. It's not just get a setup and trade it. It's all the questions that go along with the ability to read a market, and that takes time.

I just wanted to share this "ah-ha" moment with ET in case there are others that have been in my shoes.

chris, listen to me, what you read is bs.

You don't have the ability to tell what is bs, so let me tell you: it is misleading. Don't buy it.

your ah ha moment is nothing more than a passing hallucination.

 

[Brass]

One person's aha moment is another person's haha moment.

 

[NoDoji]

Quote from Chris_Anonymous:

For a couple months now I keep thinking that I need to find decent setups and then I'll be good to practice the psychology aspect. Why does nothing work?

Okay so fade ranges in ranges, and trade with-trend (pull-backs) in trends. Simple. Done. Still doesn't work. WTF???

Chris, post your written rules for fading the extremes of ranges and for entering a trend on a pullback.

Be explicit:

At what point do you define a trend or a range and what are the criteria for each?

What exactly does a setup in each scenario look like, what kind of price action triggers an entry, and do you enter with a stop order or a limit order?

Where do you place your stop loss in each scenario, and do you have a max survivable stop beyond which you skip the trade and wait for the next setup?

How do you set a profit target?

PM me if you don't want to post this stuff publicly.

 

[Chris_Anonymous]

chris, listen to me, what you read is bs.

You don't have the ability to tell what is bs, so let me tell you: it is misleading. Don't buy it.

your ah ha moment is nothing more than a passing hallucination.

Beachhouse,

Thanks for your input, but I assure you it's not needed. Everyone takes their own path, and I'm going to continue trudging down mine, at least while I have the time to do it. My forays into the world of trading have in no way been detrimental to me yet, monetarily or otherwise, so I see no reason to stop this journey especially on your behalf. If you really think you know what's best for someone who you've only ever written to over the internet, go ahead and start a new thread in Chit Chat or something. Until then, unless you can write positive or constructive feedback, I'm going to ignore your comments. I'd appreciate it if you stopped writing both in this thread and in my journal.

Chris.

 

[Chris_Anonymous]

NoDoji,

My responses to your post:

At what point do you define a trend or a range and what are the criteria for each?

- I use only horizontal lines to determine price levels. I locate pivots (turning points) where price turns and mark them on a chart with a horizontal line.

- Price is ranging if there are no successful breaks past current price levels.

I define a successful break through a price level as a 5-minute candle that closes beyond the level in question. Therefore, an unsuccessful break is when a candle pokes through, stops at, or cannot go beyond the price level, and then closes on the same side of the level.

- Price is trending if there are a series of successful breaks through higher or lower price levels, and then price comes back to test the "flipped" level and it holds.

- I begin to question if a trend is beginning once I see price break through a level successfully and then come back to test the level in the other direction and it holds.

(if any of these definitions do not make sense, just ask me to refine my explanations and I'll gladly give it another go.)

What exactly does a setup in each scenario look like, what kind of price action triggers an entry, and do you enter with a stop order or a limit order?

A setup in a trading range usually looks like a candle that has a tail going through a price level but with the close on the original side. For a short trade, assuming the price level is marked and the bar has just closed, a sell stop is placed a tick below the low of the candle that couldn't close beyond the level. A break of the candle is what triggers the trade. If no candle breaks the signal candle's low, the sell stop is moved up until either the context changes, the trade is triggered, or the level is successfully broken. For a long trade, assuming the price level is marked and the bar has just closed, a buy stop is placed a tick above the high of the candle that couldn't close beyond the level. A break of the candle is what triggers the trade. If no candle breaks the signal candle's high, the buy stop is moved up until either the context changes, the trade is triggered, or the level is successfully broken.

A setup in a trend usually looks like a candle that cannot successfully break the "flipped" S/R level. For an uptrend, price breaks through "resistance", forms a pivot high and then the following pivot low generally stops around the resistance which is now acting as "support". A buy stop is placed above the high of the candle that cannot successfully break through the level in question. A break of the candle is what triggers the trade. If price does not exceed the signal candle's high, the stop is moved down until either the context changes, the trade is triggered, or the level is successfully broken. For a downtrend, price breaks through "support", forms a pivot low and then the following pivot high generally stops around the support which is now acting as "resistance". A sell stop is placed below the low of the candle that cannot successfully break through resistance. A break of the candle is what triggers the trade. If price does not exceed the signal candle's low, the stop is moved up until either the context changes, the trade is triggered, or the level is successfully broken.

Where do you place your stop loss in each scenario, and do you have a max survivable stop beyond which you skip the trade and wait for the next setup?

I place my stop loss 1 tick beyond the signal candle on the other side. My maximum allowable risk tolerance is generally 12 ticks (trading the NQ). In other words, my maximum risk per trade allowed is $60 per contract.

How do you set a profit target?

For trading ranges, my profit targets are at least half-way through the range. If I believe the trade's potential target is smaller than what the stop will be, the trade will be passed.

For trends, my profit targets are at least the next price level. During any trade, if a price level is approached and broken through, I will hold the trade through to see if price encounters the next level.

Hope this answers your questions.

Chris.

 

[ElectricSavant]

A true edge works always until it doesn't...

eS

 

[NoDoji]

Quote from Chris_Anonymous:

NoDoji,

My responses to your post:

[........]

Hope this answers your questions.

Chris.

Chris, it sounds like my own trading strategies, which do work. Hmmm...I think you need Trader Intervention (my friend told me about Trader Intervention today).

If you're inclined, post a chart or two of where you trade these setups throughout the day and they fail to produce a paycheck.

If you're not inclined (I don't blame you), you know where to find me, at "Trader Interventionist Headquarters"

 

[Chris_Anonymous]

Quote from NoDoji:

Chris, it sounds like my own trading strategies, which do work. Hmmm...I think you need Trader Intervention (my friend told me about Trader Intervention today).

If you're inclined, post a chart or two of where you trade these setups throughout the day and they fail to produce a paycheck.

If you're not inclined (I don't blame you), you know where to find me, at "Trader Interventionist Headquarters"

NoDoji,

Tomorrow I'll post examples.

The reasons I have always gone back to the drawing board in search of new setups were two-fold:

1. Distrust in my setups. Anytime this occurred it was due to the fact that I had been emotionally trading. I had been emotionally trading because of several reasons:

- I was stopped out and didn't actually feel comfortable with my max risk, leading to doubt regarding my trading.

- I jumped the gun or took a setup that wasn't a valid one in my plan.

- I chased a trade or missed an opportunity altogether.

- I was trading setups that either weren't statistically proven to have a positive expectancy over the long-run or I hadn't back-tested enough.

2. This is the more important reason, and it occurred more often: I, as Mark Douglas wrote, had core beliefs that I could find a simple setup that would work without much more work or effort required.

What I mean by this is that for months I've always figured that I'd do like everyone said and would keep things simple. Well simple to me has also meant cutting corners at times in my life, and so although I may have known price action basics and how to trade trends, I was always convinced that if I could find a simple setup (such as HH/HL or LL/H) that would be all I needed. I paid absolutely no regard to context. Instead of trying to trade according to price action, I figured I could simply trade every price swing, and from pivot to pivot, and somehow I'd find a way to make it work.

About two weeks ago, I read something that Redneck posted in another thread. It was this:

Simple 3 step process….

Step 1 – Ask yourself this question

Will today;

Be different

or

More of the same

Step 2 – Answer

Step 3 – Trade like it

That's when I realized that banging my head on the same wall with no different results for a couple months probably meant I should change something. Then I started to look at price action, yet I still had the same concept in mind that I quoted when I started this thread.

I repeat it because it's so important to me:

...traders that are focusing all their attention on "set-ups" and finding out which combinations of indicators work are never going to become profitable. They are trying to follow the advice of trading books that say trading is simple and psychology is everything. So they search for set-ups that 'work', and that can take the guess work out of trading. They want to be "disciplined" and have simple rules that guide all their actions.

So upon reading that tonight, a really bright light went off in my head, and I realized I had to stick with whatever setups I've got (the ones actually based off of price action principles). All along I figured psychology would come later once I found the grail or the simple setup that works every time, but that line of thinking IS the psychology others talk about. I have setups now, and I need to practice employing them every day in the market, and I need to practice reading price movement every day until it becomes as intuitive as reading a book or as intuitive as driving a car. I don't treat anything else in life in black or white, so I can't treat trading as a black and white activity either.

And yes, I had another ah-ha moment while typing this out.