Day-Trading 2.0 for small traders

[jjrvat]

Developing a price based trading plan #1

There are many variables in a consistent and sustainable price based trading plan (PBP): the most important are timeframe, time, risk, instrument and capital. All of them have their unique implications, yet they all are mutually interdependent. The success or the failure of a trading plan is given by how consistent these unique implications and their interrelations are in your own trading plan. Finding the equilibrium between these macro interrelations is the key for a successful PBP.

However, these interrelations must never interfere or blur basic price analysis; on the contrary they are adaptive variables that have to be used to facilitate trading. Again the order of analysis is the key to develop your own trading plan. Thus, you have to manage your adaptive variables building upon pure price analysis not the other way around.

The first variable in a price based trading plan (PBP) is the timeframe:

a. The timeframe will define the time between waves meaning how much time you have to make a trading decision. The longer the easier.
b. Longer timeframes are smoother because fundamentals will clearly reflect on a chart.
c. The longer the timeframe the shortest the time and screen time required to trade
d. Shorter timeframes will require more “technology”: auto or semi auto trading, perfect feeds, a good broker, etc
e. Longer timeframes will obviously lead to larger profit targets, however not necessarily viable for a small trader who is wishing to make a living (waiting 4 months for a potential 25% return in 12 months investing $5000 trading in a stock is not consistent or efficient)
f. And the obvious relations between risk, capital and timeframe. Longer timeframes requires more capital to make them worth which lead to an increase in risk.

Nevertheless, there are also other important micro interrelations between timeframe and perspective (the way you plot a chart: volume, tick, constant range bars, etc), the way you pull the trigger (timing), profit targets, stops and exits, the time of the day you are trading and the amount of time a small trader have for the market.

Look at the following stocks charts (BSC - BEAR STEARNS COS THE (NYSE) the infamous one weekly chart … we could have make millions [especially on the friday close before the sunday news] with just price analysis and the daily BRKR - BRUKER CORPORATION (Nasdaq) amazing bull in a bear market). More than the implications of price analysis the important issues here are to understand why the simple 25 Hull MA works flawlessly in these charts for entries and exits (either a close above/below or a change of slope) and what are the unique implications for each trader in terms of time, risk and capital required to trade in this case stocks with longer timeframes.

I’ll continue later …

jjrvat

 

[jjrvat]

Pkchilly,
Your welcome …

1. What are some of the size constraints of the futures market? I have not started trading different instruments than bp, jpy, and eur, and I am sure there are other instruments where 1 lot = a whole lot more than $6.25 or $12.50.

There are many and sometimes better options in futures in that range. Check OEC web page under …/traderstoolbox/contract.cfm for a good reference.

2. I would assume that a trade for say 10jpy would be filled much slower than a trade for 1jpy--I have not done this live yet as I am working my way up...lol. In following yours and others advice to not over trade, but also in wanting to make a decent living off my capital, I am wondering where you think the line is for scalping. It's easy to get 1 lot, and also 2, and 3, but those larger sizes often don't get wholly taken--then, with oec at least, I'm pulling my hair out trying to get my sl's and tp's reset to the amount of lots that were taken...

Liquidity during “normal” trading hours in the major future contracts is not an issue for small traders (depending on the instrument you will have “decent” fills up to +/-10 contracts). Remember that if you are scalping for example more than 10 6Exx contracts you will need at least $15000 just for the margin requirement meaning your account should be at least $150.000 to have “some“ risk consistency with your capital and you will be moving “serious” money for a "small scalper". $125 per tick …

If you are having troubles managing your trades (in terms of executions of course) with OEC you have FOK, IOC, AON and Iceberg orders. I personally use bracket orders.

3. How did you go about setting up the wma's for the different instruments you trade? I've gone ahead and plagiarized your settings for bp, to just get an idea, but I suppose screentime on the tf you trade will help a whole lot...were you constantly changing out wma's until you felt comfortable?

The longer WMA I use it as default for all charts, it’s just a visual aid for macro direction. I don’t necessarily use a wma as a trigger (if that is what you referred) depends on the instrument and timeframe. In general yes, experience (screen time) and change it until you feel comfortable but don’t play with it too much… you are trading price not the indicator.

In the next posts I will continue to expand on how to develop a trigger that is consistent with price analysis.

jjrvat

PS: LOL…Don’t worry about “plagiarizing” my settings… I trade price not the indicators. I hope they help for developing your own trigger … good luck

 

[amitman]

Quote from pkchilly:

Good to see you back from your travels! Hope you enjoyed. Just some questions if you would like to delve into them. 1. What are some of the size constraints of the futures market? I have not started trading different instruments than bp, jpy, and eur, and I am sure there are other instruments where 1 lot = a whole lot more than $6.25 or $12.50. I would assume that a trade for say 10jpy would be filled much slower than a trade for 1jpy--I have not done this live yet as I am working my way up...lol. In following yours and others advice to not over trade, but also in wanting to make a decent living off my capital, I am wondering where you think the line is for scalping. It's easy to get 1 lot, and also 2, and 3, but those larger sizes often don't get wholly taken--then, with oec at least, I'm pulling my hair out trying to get my sl's and tp's reset to the amount of lots that were taken... 2. How did you go about setting up the wma's for the different instruments you trade? I've gone ahead and plagiarized your settings for bp, to just get an idea, but I suppose screentime on the tf you trade will help a whole lot...were you constantly changing out wma's until you felt comfortable? I suppose 2 is enough for questions...and again, I just want to thank you for the teaching time you put in!!! pkchilly

for your first question I have the same question so what i do is focusing on the instrument with the highest liquidity so i know I'll be able to scale up sizes to make a lot of money, these instrumenst for me are the ES and the SPY in the last few weeks I'm focusing on the SPY and learning it through and later on when I'll feel comfortable enough I'll move to the ES.
For your second question I think i really depends on your timeframe and instrument and you should play with it until you feel comfortable. One thing though, from my limited experiece i found HMA's to be the best both for price analysis and for being the trigger to enter so, in my opinion you should check them and find what number have a combination of not producing too much noise on the one hand and not lagging to much in terms of when you pull the trigger on the other hand. You might also want to try a combination of two HMA's one a bit slower (25 or something like that) to determine the waves and one a bit faster (12-17) to help you pull the trigger.
I'll try to post a chart of te SPY tommorow to visualy explain what i mean.

 

[amitman]

Hi,
as i promised an example of trades from the SPY today, just the first hour an a half. 8 trades, 6 winners.
Notice, that the fatser line (black, HMA17) is used to enter and and the smoother line (grey HMA25) is used to check that the micro direction coorraltes with the macro (WMA144).

 

[amitman]

Quote from jjrvat:

[and the daily BRKR - BRUKER CORPORATION (Nasdaq) amazing bull in a bear market). More than the implications of price analysis the important issues here are to understand why the simple 25 Hull MA works flawlessly in these charts for entries and exits (either a close above/below or a change of slope) and what are the unique implications for each trader in terms of time, risk and capital required to trade in this case stocks with longer timeframes.

[/B]

JJvrat, i don't get it you post an example that simply doesn't go with your trading plan. you've marked 3 arrows of a supposdly succesful trades in BRKR but actually only one of them is valid. the second arrow is a failing trade since the traget the stock reached was way lower the the risk involved in this trade and the third arrow is also not a valid entry since the waves are making Lower lowes thus not following the overall trend. If you'll insist and say that you allow yourself to enter even if the waves are making lower lowes then the real entry in the third arrow is a few days earlier (on about the 7'th to Feb) and in that case it is also a failing trade since you get stopped put later on (on the 18th to Feb) what I'm trying to say is that i think you really underestimates the importance of knowing when to enter and not only why. as I've just shown, what look perfect when you exmaine a chart does't neseccerily work in live trading...
ant comments will be useful. thanks.

 

[pkchilly]

Dear jjrvat and amitman, thanks so much for your lightning quick replies.

That contracts page under traders toolbox is a real helper, I've been all over the site and I'm sure I've seen that page b4, but today it took on a whole new light...lol. I'll keep researching, but currently I'm making headway with the bp and the jpy, so spending the majority of my time there. Amitman, looked all over for spy, finally found it on the amex--does oec carry it? Sorry if that question was stupid, I'm new to the whole new world of futures and stocks--it was quite a bit simpler back in forex, just couldn't stand the brokers. But this new world will become familiar b4 long.

jjrvat, thanks for your thoughts on liquidity. I am only trading 1 lot now, and find it to be no problem at all to get filled, but want to get used to trading right around 8-10. That will get rid of my day job...and fits into my risk assessment. Your comment on 150k brought another thought to mind. Since it only takes 15k to place the trade, and realizing max sl on a scalp to be at the most 20 ticks, I don't ever plan to have more than 25 to 30k in my account (trading 8-10 lots). 1st, it seems like a waste for the rest of that money to sit idle, while it could be making interest in a liquid insured account. 2nd, I will continue to worry about brokers going awol and with them my money. While I do believe that for proper risk, one needs to have that 150k in liquid assets, I just am shy to put that in the pot with a broker. In fact, I have half a mind to leave it in it's current un-liquid state. (we own rental real estate, some of which I have sold to divert into forex-->futures trading.)

As to order trades, I had wondered about how bracket orders were used, just didn't take the time to learn--I was having so much fun putting in orders and their counterparts as sl and tp. Then I started having problems with my oec account--blackouts, disconnects, and found out others were having the same thing after this last update. Have been looking at Mirus with Ninjatrader and Zenfire feed. Hoping that oec will get their act together, cause I really like their platform--possibly better than Ninja (which I got used to in forex).

As to wma's as triggers, I have used them b4, but I find the consistency to be limited to time frame and analysis of price action. For example, today between 7 and 10:30EST, bp was right on the money on the 30 sec chart with a 144wma. Crazy consistent, but what about tomorrow? I was more referring to how you figure which one is going to be a better guide for direction changeovers. I look forward to your expanded conversation on developing triggers consistent with price action--that's where the money lies.

Amitman, I'm going to take a look at the spy and es, haven't even seen what their charts look like, I'll study some on it tomorrow. I threw in the hma's on the 30 sec bp chart and they are too close to help, will look at some other configs for triggers like what you have on the spy.

Again, thanks to both of you!

I've posted a couple trades that I think follow price action pretty well. They are on a 1 tick chart and at a pretty horrible time of day, but I was trying to put in some screen time. Should have traded the 2nd and 3rd retrace, but Tombraider was on and I got a bit distracted...got in on the 4th retrace and just barely got my tp filled. I usually don't like to trade more than twice on one move, cause soon after that, it's bound to change major direction. Please share any feedback! pkchilly

 

[pkchilly]

Well, it evidently didn't like my pic, so here I go again...

 

[jjrvat]

Amitman,

Your comments raise a very relevant issue related to my previous post: Why a particular trigger works or not in longer timeframes (in this case a Hull MA)? but before that let my answer to your comments with two charts.

The second arrow is a failing trade since the traget the stock reached was way lower the the risk involved in this trade and the third arrow is also not a valid entry since the waves are making Lower lowes thus not following the overall trend...

The second trade is a 100% valid trade

- Nov 30 close and a new wave started marking a new lower (Wave Low 1) in this chart I will mark the Low only when HULL changes its slope to Green (+).

- Dec 12 there is a close below the HULL marking the potential end of the last wave and the beginning of a new one. By Dec 18th Hull changed its slope to Red (-) confirming the formation of a new wave.

- Dec 21 a close above the HULL marking the formation of a new wave. Dec 24 Hull close changed its slope confirming the Higher Highs and Higher Lows. A clear and objective entry!!!

The second trade is 100% valid trade (not necessarily with a great profit).

If you'll insist and say that you allow yourself to enter even if the waves are making lower lowes then the real entry in the third arrow is a few days earlier (on about the 7'th to Feb) and in that case it is also a failing trade since you get stopped put later on (on the 18th to Feb)

The third arrow is less clear at first glance. But let me explain you with the same chart first (using the Hull Ma for wave analysis) an after with a zoom in chart with just price analysis.

- By JAN 4th you clearly have the previous high (Wave High 3) ‘cause price below HULL + slope is Red.

- On Jan 17 and Feb 4 you have closes above Hull but not changing the slope ***(These are the key issues but I will explain later ….Why a particular trigger works or not in longer timeframes? and trading indicators or trading price analysis?).

- On Feb 7 a new close above HULL (this is the entry you are talking about) but this time price continue to close above until February 13 when Hull changed the slope to Green (+) marking the end of the last wave and the beginning of a new one. Then and only then you can plot the low (Wave low 3) which obviously is a Lower Low.

- Feb 15 and Feb 18 mark the end of the last wave (price below and change of slope to RED). Now you have a Wave High 4 which is also a lower High.

The next bar again closes above but the most important bar is the one on the close of Feb 21 because it made the slope change to green again (+) marking the Wave Low 4. Wave Low 4 is now higher than Wave low 3 (I know this LL is based on waves given by HULL. The actual price make a lower low but that’s the key issue … I’ll explain in detail with the next chart).

You still need a wave Higher High to go long. On the close of the Feb 22 (Horizontal Black line) the wave break the previous high meaning you ARE 100% that the next WAVE is going to make a HH, you may wait for a very conservative entry after the HH and a new LL is confirmed but why?

This doesn’t mean you expect or you have a confirmation for a big wave (like the one it happened) or that if you have a new wave against you, you don’t have to close the trade with maybe a loss. The only important thing here is that you have a valid objective long signal given by HH and HL.

Let me show this last trade with price analyis in a zoom in chart ... I'll continue in the next post

jjrvat

 

[jjrvat]

Amitman,

This chart is just price:

- Jan 31 price make a new low (PL2) which is a LL and Feb 4 price make a new high (PH2) which is a LH. You have a LL and LH meaning no Longs.

- Feb 6 price make a new low (PL3) again a LL. Feb 13 a new high but this time is Higher High (+/- 0.10 cents higher). You have LL and HH.

- Feb 15 price a new low (PL4) again a LL but this time price continue to go up. Feb 25 price close ABOVE last high meaning that you ARE 100% that the next WAVE is going to make a HH and that’s when you should have entered.

From a strictly academic point of view even if price is set to make 2nd Higher High you still need the confirmation of a Higher Low to have perfect high probability trade if it is in accordance with macro direction. Moreover I do agree with you, in practice it is a valid option not to take this long until price makes a new low.

Why would you trade this long?. The reasons lay down on my previous post: “Finding the equilibrium between the macro interrelations is key for a successful PBP…”

Look, this is DAILY CHART. You only have a few tradable waves per year. If this chart would have been a 18 tick chart I probably wont take the trade (you have hundreds of tradable waves per day)
Macro direction is pointing up. Don’t get confused about the slow WMA its just a visual aid. In the previous chart is a 144 WMA (is usually better for longer timeframes) this one is the default 240 WMA and it seems better for this stock. This indicator it’s just a visual reference not a predefine rule or a exact support or resistance level (as I explained before http://www.elitetrader.com/vb/showthread.php?s=&threadid=113456&perpage=6&pagenumber=5)

If macro direction is OK and price make a new high right after touching the 240 WMA (2nd chart) or breaching the 144 WMA (1st chart) it’s a very good indication.

A double Higher High (which take place well above the slow WMA) with macro direction pointing up are good indication for a good trade (not a perfect entry of course).

When price break the last high observe the distance between price and the HMA (the slope). HH and LL are supported by wave analysis bases on the “fast” Hull MA. The very low sensitive Hull MA helps a lot in this long term charts and that’s when indicators are valuable. In this particular case because the low sensitivity of the MA allow us to reduce whipsaws (that’s why they make higher lows). Of course if you use it in a fast timeframe with a wild instrument its weaknesses may prevail over its benefits (lagging entries). This doesn’t mean that you are going to base your trading on the HULL !!!

Either you wait for +/- 1 month until price confirmed the new LL for a perfect entry or you balance your adaptive variables in your trading plan (timeframe, time, risk, instrument, capital, etc) to have a realistic, consistent and sustainable trading plan and evaluate if the conditions and probabilities for taking this trade (Macro direction ok with price making HH and waves making HH and HL) compensate the risk of placing an order. In any case, if you take the trade the only rule is to close the trade if price close below HULL (not when it change slope) Why? because it is not a perfect entry…

In conclusion if you are trading weekly or daily chart you will need a lot of patience and you’ll require a lot of time to find a Perfect Price Analysis Setup (btw, very rewarding), the key for me is to be consistent with your trading plan and in your analysis.

jjrvat

 

[amitman]

hi JJVrat,
thank you for your answers i know the second trade is valid but the risk/reward ratio is so poor that if you have trades like this you are going to fail in the long run...
al in all i think i understand the basic concept but the entries and stops are still a problem. maybe you coukd help me with what i had today...
today was my worst trading day in a month, I'll attach a chart to show you but this is my strategy:
1) a 30 seconds chart of the spy
2) a 144WMA to determine macro direction
3) a 25HMA to determine waves
4) a close above/below a 17 HMA
5) entering a tick above/below the high/low of the bar that crossed the HMA17
6) stop above/below last high/low
7) profit traget match the stop but no more then 20c (the usual hight of a wave in the spy) and no less the 10c

why this settings? because i found that the 17HMA waves produce less noise and not lagging to much. the 25HMA are just visual aid and can't be used as an entry bexuase i lags most of the time.
the PT are set to get about a 1:1 r/r ratio.
and last i enter only above the high/low in order to avoid whipsaws that will happen if i'll just enter anytime the stock close above below the 17HMA.
now, as you can see in the chart today in the first 2 hours of trading i made 6 HP trades (macro ok waves ok etc.) and all of them failed!!!
now, i never had such a thing i'll really apprcieate if you can take a look on the chart and see what can i improve in terms of timing stops and targets.
thank you.

BTW
the reason i wait for my stop to be hit and not exiting when the price croses again the 17HMA against my direction is because i found that sometimes exiting whenever the price crosses the HMA against your direction is that sometimes you'll get a 4-5 whipsaws in a very short time and the commosions+slippage will kill you instead of just waing while the stocks chops a bit and then (sometimes) goes in your direction.
second, the reason i use a close above/below 17HMA and don't wait for it to change the slope is because if i wait it to change the slope most of the time it's to late to enter in terms of what i can get comparing to what i risk.

and help would be apprciated thanks.