Day-Trading 2.0 for small traders

[jjrvat]

is it possible to this part-time using this methodology/method/scalping? (Hanz)

When scalping, the only differences between a daily chart and 1 tick chart are the height and the frequency of each wave (potential trades). In a daily chart (see Reply #4 daily Eur/USD Forex) you may only have 4 or 5 waves of +400 pips? in one year. On the other hand, an 8 tick chart with a fast instrument can give you 4 or 5 waves of +6 pips in less than 1 minute (see Reply #35 ER2Z7 8 ticks). Thus, basic price analysis should work at any time in any timeframe (I have posted examples from daily charts to less than 1 sec charts) as long as your trading plan is consistent with the time and timeframe you are using.

I can’t tell you which timeframe or time of the day will be the most suitable for you. You should find the best playing field for you and only FOR YOU according to your time, capital, risk and trading plan.

Nevertheless, in general and in my experience a small trader will have better probabilities trading both timeframes extremes: Long term “investing” (this by far the best option) and the very short term “scalping”:

1. If you have the capital, capital, capital, patience, etc, to trade the dailies I will highly recommend that you forget about any other timeframe below 240 Min (and this is only for fine-tuning your entry). You will have plenty of time to analyze the chart so your 2 or 3 hours a day will be more than enough (You need 15 minutes per day max), the waves are going to be really clear, you may easily recognize the beginning of a new wave (fundamentals or news will be unmistakably reflected on the charts) plus you can aim for big profits.

2. Or on the other side very sharp charts (max 8 ticks and optimum constant volume charts of 1 or 2 for futures depending on the instrument of course) will give you smooth signals, lower time and risk exposure and plenty of opportunities to trade during the day.

Better probabilities don’t necessarily mean that these options are feasible in practice (sadly). Why? ‘cause in the long term option (i.e daily charts) you need a lot of capital to make it worth plus u +++ risk and time exposure…. In the very short term charts you need a semi-auto trading platform to place the trades for you otherwise good timing is almost impossible (you need perfect timing otherwise you will be gambling) + you increase overtrading risks which in addition to the low profit / loss ratio associated with scalping … you’ll end up playing with fire.

…So we are force to find something closer to one of these extremes. If you decide to go to the “scalping” side the only thing I may suggest is that you shouldn’t forget two additional important concepts that usually are blurred by the “technicalities” of a scalping system: Consistency and Efficiency

For example: If a scalper is trading 5 secs charts in a wild instrument (E/J) for +/-3 hours (US open till noon) he/she will have “hundreds” of waves (potential trades). In my opinion, if a scalper wants to be consistent and efficient (at least) shouldn’t:

1. aim for more pips in a trade than then normal distribution for the waves in that particular instrument, timeframe and time even if 1 every 30 waves moves more than 50 pips!!! (meaning 3 to 6 pips no more…depends on the instrument of course)
2. Use a stop away of the normal distribution for that particular instrument, timeframe and time.
3. “... try to catch a big fish with small boat”

Why should a scalper “wait” for the perfect setup in a 5 secs charts using unconsciously S/R of 1 minute with 5 mins stops and profit targets that match a 60 min chart? . If you are scalping 5 secs charts SCALP them !!! don’t use it to catch moves in a different timeframe. Why should you risk 20 pips for a potential 3 pips when for the same risk you can trade a smother timeframe with a potential of 12 pips, etc, etc. Are you comfortable analyzing a chart and pulling the trigger without hesitation in less than 5 secs?, Do you recognize the cost of placing market orders in fast timeframes with a wild instrument? Slippage? Commissions?.

Conclusion: Of course you can trade part-time during your time using a price based methodology but what you have to define is a trading plan and goals and be consistent with them. You can trade a daily chart or scalp a 8 tick chart, each imply a different playing field. A serious trader should recognize their different implications and recognize if those implications are consistent with his/her trading plan.


"Execute the basics; master the basics,...When you master and execute the basics, the rest comes naturally”

jjrvat

 

[alex.samant]

to the OP.

first of all i appreciate the exchange of information which to me looks pretty well documented and with good intentions.

however, the remark about the forex trading being based on NOTHING is a bit off...

brokers charts may be manufactured, i mean nothing is stopping them from doing that, but ECN charts are reflecting price action in a certain liquidity pool and it's nothing different from other centralized markets.

also, FX has different trading rules in general, and many traders are trying to apply equity/futures strategies, that many times are useless.... or at least not worth the time.

 

[jjrvat]

Alex,

Maybe I made a wrong generalization on forex trading but my critique aimed to small retail forex brokers. The problem with forex for a small trader is not its trading instruments but how "prostitute" this non regulated market is (brokers,slipagge, data manipulation, overleverage, etc, etc). I believe trading currencies is a valid option for institutional and pro traders (+++ has a lot of potential), however small traders should at least have a look to other more formal markets (even if open e micro account with $500 and trading $1 a pip seems tempting for a small trader).
ECN charts definitively reflect price action in a certain liquidity pool but they are different from other centralized markets because:

1. Instruments traded on a stock exchange are regulated by government / accountability
2. Integrity and open access
3. Fair and transparent pricing

I am not against forex trading but in my opinion if you don’t have the capital (>25k) to trade with a real broker the shortcomings exceed its virtues.

jjrvat

Quote from alex.samant:

to the OP.

first of all i appreciate the exchange of information which to me looks pretty well documented and with good intentions.

however, the remark about the forex trading being based on NOTHING is a bit off...

brokers charts may be manufactured, i mean nothing is stopping them from doing that, but ECN charts are reflecting price action in a certain liquidity pool and it's nothing different from other centralized markets.

also, FX has different trading rules in general, and many traders are trying to apply equity/futures strategies, that many times are useless.... or at least not worth the time.

 

[alex.samant]

i don't disagree with you on that.

 

[Joab]

Quote from alex.samant:

to the OP.

first of all i appreciate the exchange of information which to me looks pretty well documented and with good intentions.

however, the remark about the forex trading being based on NOTHING is a bit off...

brokers charts may be manufactured, i mean nothing is stopping them from doing that, but ECN charts are reflecting price action in a certain liquidity pool and it's nothing different from other centralized markets.

also, FX has different trading rules in general, and many traders are trying to apply equity/futures strategies, that many times are useless.... or at least not worth the time.

Whats your edge ?

IF your edge is a pattern, Whats a pattern ?

IF a broker can manufacturer basically anything "they" want on their software then where is your edge ?

Your putting a lot of trust in a company that is unregulated and only a fool would do that.

Sorry but its the truth no matter what you WANT to believe.

I personally have a few friends that own a forex brokerage (unnamed) and when they started they asked me to be seed capital and showed me exactly how their software worked. I outright refused because it was pure thievery.

Both of them now live VERY comfortably offshore (for a good reason).

 

[jjrvat]

I find that so many approaches to forex or other markets for that matter work in times when the market is moving, but cease to work if the market starts to consolidate--could you offer any advice as to how to determine if a market is moving in/out of consolidation? (pkchilly)

I will go a little bit out of topic because I am not sure in what context are you asking me this question. I would like to post some examples for the discussion as well but can you be more specific because if you are scalping (are you?) tick charts is kind of vague to understand … “work in times when the market is moving, but cease to work if the market starts to consolidate” and “how to determine if a market is moving in/out of consolidation?” Do you mean trendy times vs choppy times?, or “consolidation” after a big trend? or simple a ranging market before a trend begins? Or maybe a high volatility low liquidity times (i.e pre news, pre opening, etc). Let me know in what context are you asking your question so we can start a good discussion.

In any case some random comments:

In a theoretical level: What is a moving market? What is a range? What difference does it make when a market is “moving in/out of consolidation” in a 5 mins timeframe when you are scalping a 5 secs chart? Or the opposite? …

What I am trying to say is that the importance of establishing if a market is moving in/out of consolidation is a dependent variable (NOT INDEPENDENT) … on what? On many factors: type of trading, trading plan, timeframe, Goals, Instruments, Time, etc.

For example, If you are scalping you don’t need a 200 pips trend (nor a wild instrument) to “steal” your 2 to 6 pips. Trend analyisis in my opinion is of little value (if you don’t know how to use it) and I will even dare to say (in my experience) that it is easier to SCALP in NON TRENDING MARKETS (ranging markets, markets in consolidation, etc). *** Not all non trending markets are good for scalping of course

Moreover, “scalping” trends can reduce consistency (even when you are wrong sometimes you can make 1 or 2 pips: THE PERFECT TRAP FOR NEWBIES!!!…but you’re doom in the long run). It also might obscure the analysis in the sense that allows all your inner demons to be tempted: Greed, overtrading, fear to miss the train, fear to pull the trigger, etc, etc, etc. You are looking for 4 pips and you see the E/J moving 100 pips in 2 mins …tempting, really tempting, to survive you must have iron discipline ...worse if you try to trade the whole day!!!

At the end you’ll lose perspective sooner rather than later (except for very few pros scalpers ) and obviously this will be reflected in poor consistency: Scalping wild instruments in 5 secs charts with 1 min charts for “major direction”, 5 mins S/R lines, SL that match 15 min charts and with profit targets of 60 mins charts and reading but not understanding news that will fully be reflected in weekly charts …

General "tools" that helped me reduce and establish non trading conditions:

- If you can't establish the current direction in the first minute you see a chart (doesnt mean you are going to trade) just close everything and come back later...
- Tick charts
- Wave analysis (look at last Highs Lows analysis, plus see the height of the last waves)
- Time of the day
- Common Sense

jjrvat

 

[jjrvat]

I have had your 240wma, and the rainbow flame set up on a seperate chart to my rainbow charts. There are several patterns I have noticed over the last week that seem to keep happening. (kermut)

Remember that the 240 WMA is just a visual aid and it doesn’t override basic analysis. The only difference between this WMA and a random H line is that the former is based on the fact that the last 240 bars have, in AVERAGE, move the price to one side more than the other. Therefore, a scalper may have statistically more probabilities to trade in that direction as long as basic analysis confirms it.

One of them is that as price starts to mvoe in a direction, and the 240wma starts to slope, price often comes back to the 240wma and then continues in its direction. Is this something that you have seen as well?

Yes, that’s why “TA experts” call it smoothed dynamic trendline (smoothed ‘cause the Weighted MA). However, I prefer to use it as visual aid and not as a reason to place a trade. (Why? in the next post...)

Although scalpers are not interested in fundamental analysis, I find useful to understand some basic ideas about price dynamics.

1. The macro intraday direction usually changes because of news, open or close of markets (Japan, London, US, etc), important externalities or when price reach a point where can’t go any further without a fundamental reason and big investors and traders are not willing to take the opposite side until further confirmation.

2. Among these reasons, the only one which is difficult to establish when it’s going to occur is when price reach short term exhaustion areas. That’s why I use Pivot Points as visual aids to determine macro direction. (See the chart in the next post)

3. In other words and in general, if any of the reasons mention above is not true, price will usually respect dynamic trendlines.

And do you suggest that an entry can be made on the 240wma rejection, so the entry is being made well above the previous wave peak/bottom?

If the rejection of 240 WMA is in accordance with basic price analysis (current time and move direction) I will take the trade.

In my opinion, the later you place a trade in the current wave the least probabilities you will have to be successful.

I’ll continue in the next post…

jjrvat

 

[jjrvat]

The second thing I have noticed is that if the slope of the 240wma is quite steep(same as the spine), then the price might pierce the spine, but only by 1-2 pips, and then continues in the spine direction. Would you suggest that this too is a good entry point? Or is it best to trade breaks of peaks/bottoms?

From your comments it seems that you are trading retail forex with time charts (??). If you use tick charts in futures or stocks price action will be smoother because price is given by the market not by your broker…

The first chart I think it captures exactly what you are asking me.

+/- 12:15 (2nd Blue arrow) price fails to make a higher high (1st Blue arrow). If you want to have high probability scalp you need price confirmation so you should stay aside until this happens.

+/- 14:14 sadly this wave was so deep that not only broke the previous low but also broke the 240 WMA and made it change its slope. Now you have a lower low and lower high + price below 240 WMa meaning a NO NO NO situation for longs.

+/- 14:16 (3rd Blue arrow) only here a new wave starts. If you respect the order of analysis you don’t have any reason to take this long.

+/- 14: 53 (4th Blue arrow) finally you have everything align again (current time and move direction, new wave with higher highs and lower lows + momentum ‘cause of pivot R1+ a clear “timing” to pull the trigger with the Hull MA…) and here is where I should have placed a high probability scalp.

More important than how to place a trade in this example is to understand why the price sometimes continues with the trend even if it broke the 240 WMA.

1. Look at the time of this example: US market opening. Remember during this time, “current time direction” usually changes (or continue).

2. And more important look at the Pivot Point (Pink line). I see this happening every single day in every single market. A 240 WMA is just a visual aid and also Pivot Points, however among these two in my experience PP will prevail. Why? Because big traders and investors usually use them as reference.

a. When price breach the PP you have a lot of stops order hit (especially from small and newbie traders), which is exactly what smart and big traders want (probably a false BO on a longer timeframe…???)

b. That's exactly what happened between +/-14:15 and 14:18 (Red arrow)

c. Then new traders (fools?) rush in to catch the supposedly start of a downtrend pushing the market down until the real money gets in buying the “bargain” and forcing the continuation of the uptrend.

3. Conclusion: Basic analysis always prevails over anything else. Regardless of the previous analysis if u just follow and respect the order of basic analysis you would never have place a trade there (short or long). The only HP trade is a long at 14:53 (4th Blue arrow) so the breach of the 240 WMA at 14:14 should stay only as a nice theoretical example.

Look now a different chart in which the breach of 240 WMA has different implication not because of the indicator but because of basic analysis.

+/- 13:00 (1st Orange arrow) Price breach the 240 WMA but it doesn’t change its slope + there are not news, externalities or open/close markers at this hour meaning there are lower probabilities of a sudden change of current direction (at least until the US market is open …)

+/- 13:08 (1st Blue arrow) although price makes a higher high and higher low this is not a HP trade. Why? Because basic analysis (current time direction). Current time direction is for shorts (price BELOW PP and S1 but way above S2 !!!). However you can take a quick scalp because price is confirming the direction of the next wave. But only a fast and aggressive scalp… there is very low probabilities of a sudden massive change of current direction ….

+/- 13:25 (2nd Orange arrow) If you took the scalp you have enough opportunities to take your 3 to 6 pips aggressive scalp target … NO MORE!!!. As you see by +/13:35 price makes a higher high but also lower low (meaning stay out…)

+/- 14:00 (2nd Blue arrow) US is open (only now current direction may change) plus price make a higher low but still is a lower high. At +/- 14:29 you may have another possible scalp for longs, but again it’s only a quick and aggressive one ... until the S1 pivot point is broken you are not going to have HP trades on the long side.

Conclusion: 240 WMA is only a visual aid and it doesn’t override basic price analysis….

jjrvat

 

[alex.samant]

joab: i agree forex trading can really bite people. and by no means do i recommend trading very short term using broker prices and/or charts.

however, there are ways you can trade if you step back and only look for certain things to happen. For instance, if you trade reversal patterns at the high/low of the previous day, or reversal/continuation at the day's central pivot point and having a good "eye" i guarantee you it's ok. you can make money.

if you pull up charts from 5 different "good" brokers (i am not referring to small bucketshops) and 3 ECNs that you all know, you will see the variations are quite small.

of course, i prefer trading futures too, but let's not diss forex altogether. Large brokers are regulated and you can search for their records on the NFA site.

 

[flyingiguana]

Quote from Joab:

ALL FOREX TRADERS NEED TO UNDERSTAND THIS



Your missing "the most important" piece to your puzzle.

The forex market (Brokers charting platforms) are NOT real but manufactured, therefor you are basing patterns of human behavior on NOTHING but a computers algorithm... not reality.

It's the equivalent of trying to understand love by having sex with a rubber doll.

Your wasting your time !

sometimes the rubber doll can be better!