Day-Trading 2.0 for small traders

[jjrvat]

Rob,

Thank you for your post, it contains a lot of highly relevant information and I will elaborate an argument in detail on some of your comments so we can have a constructive discussion but for now:

Everyone talks about risk as if it were a single-issue entity but, of course, it actually has two components -- the risk in terms of dollar amount and the risk in terms of probability. The above entry (2), compared to entry (1) lowers the dollar risk compoment but raises the probability risk.

It's finding the balance between those two components, measured against potential profit which holds the key to success over a large number of trades.

Excellent, I do agree with you 100%. That’s exactly what I was trying to imply with “the tradeoff between indicators/efficiency and price analysis/consistency” but you went one level below in the analysis and put it in a better and clearer argument.

However, whilst it might be true to say that "If price analysis is ok (macro ok and waves HH and LH) any indicator will be valid as a trigger.", I feel the issue of entries is more critical.

In my opinion the importance of entries is only critical when you understand price analysis. If a trader focus only in this part (like most of small struggling traders) the results are always catastrophic. That’s why always insist that the order of analysis is key for developing a profitable trading plan.

In any case, I will continue later with the discussion on pros and cons of various entries based on price action

jjrvat

 

[amitman]

Quote from rdhtci:

jjrvat, that's an excellent post.

The point about using pure price for wave analysis making it difficult to avoid mini bottoms and tops is a 'heart of the matter' observation.

However, whilst it might be true to say that "If price analysis is ok (macro ok and waves HH and LH) any indicator will be valid as a trigger.", I feel the issue of entries is more critical.

Let's say we have all price analysis correct, the macro and the wave analysis are in the right direction and confirming, and we have a new higher low representing a new up move and a valid long trade opportunity. We need a pivot low to mark the beginning of that move and we know there will be a pivot high some unknown time and distance away which marks the end of the up move.

The stop is going to be beneath the pivot low because it represents the only logical point at which price analysis is broken. The further into the move our entry occurs, the larger the distance back to the stop and the smaller the distance left to wherever our exit will occur. So the entry has a crucial effect on R:R. We know that over a large number of trades, R:R will assert itself and, if it is in the wrong proportion, our net result will be unfavorable even if we have a high proportion of winning trades.

It's finding the balance between those two components, measured against potential profit which have got an early jump on the move with a small stop, which compensates for the slightly higher failure rate.
holds the key to success over a large number of trades.

Rob

Great post! you spelled my words out.
BTW for the last part you might be aware of the PF (profit pactor) formula that consist of these two factors (R:R, %success rate) which is:
PF = W*R/(1-W) while W = precentage of sucsess and R = r:r ratio. for example if you have a system with a 1:1.5 R:R ratio (meaning you risk 10 dollars for a 15 dollars gain) and and 75% of success the formula will be PF = 0.75*1.5/(1-0.75) = 4.5.
this is by the way not such a good example becuase a PF of 4.5 is pretty rare. actually anything abouve 1.5 is good enough.

Anyways, another aspect of the trading system that should be really considered is the NUMBER OF TRADES the system produce becuase it might be nice to have a 90% succsess system but if it only produce 2-3 trades per day it might not be good enough. I'm actually struggeling with this thing right now sinve I have a good system but it only produce 4-5 trades per day which makes me trade all day long and be more bored

oh and BTW i find the concept of determining a low based on a bar that goes above last bar high and/or didn't go below last bar's low to be very problemtic, espcially in ranging times, unless you're scalping really fast charts where this alone can be good enough.

 

[TheRumpledOne]

Quote from rdhtci:

Ref"This is almost scary!!"

TRO, can you explain what specific combination you are seeing here that is significant?

Thanks,

Rob

Notice how well the MA(12) acts as support/resistance when a line chart is used for price.

 

[rdhtci]

jjrvat,

Thanks,

In my opinion the importance of entries is only critical when you understand price analysis.

I couldn't agree more. I was basing all the above on the assumption that price analysis was already in place before we looked at entry.

Look forward to your further thoughts on price-based entry.

Rob

 

[rdhtci]

TRO,

Thanks very much -- understood.

Rob

 

[rdhtci]

Amitman,

Thanks, the info on PF perfectly represents the point I was trying to make.

oh and BTW i find the concept of determining a low based on a bar that goes above last bar high and/or didn't go below last bar's low to be very problemtic, espcially in ranging times, unless you're scalping really fast charts where this alone can be good enough.

I think 'ranging times' is the significant factor there. This system is based on identifying a trend and trading on the probable continuation of that trend. When price is range-bound, you are going to be stopped out -- I don't think any entry will save you under those conditions. At least this one gives you a smaller stop and therefore a smaller loss. Also in truly range-bound times, you're not going to get the HHs and HLs required for this system so you will be prevented from entering by price analysis -- so you should only get stopped out once until there is a breakout/breakdown from the range giving you trading opportunities once more.

I'm certainly not holding that entry out as the Holy Grail, but it can be a good workhorse entry assuming the other required components for a successful system (eg price analysis) are in place. I just checked my records before replying, because I don't want to mislead in any way, and that particular entry -- used in a longer-term swing trading system -- has resulted in 70.29% winners over 138 trades, over a 7-month period. This has limited relevance because that system is very different from the one under discussion in this thread, and I don't want to get off-topic -- I'm just trying to show that I don't think the entry itself is problematic. But it's also not "the solution". As jjrvat has tried hard to emphasise, an entry in isolation is useless, so I want to make sure also that this is clear.

Rob

 

[TheRumpledOne]

This is a slight twist to what jjrvat has been teaching and it is NOT my intention to derail this thread.

Someone mentioned RANGING TIMES.

I have RANGE displayed for 8 different time frames so I can see whether or not the current range has exceeded the previous range.

What ties this to jjrvat's teaching is only trading in the direction of the candle when it matches the direction of the candle of the next time frame up.

For example, I would trade short when the current price is below the daily AND the weekly candle (red). Then I would trade short when the hourly candle is red because the daily candle is red.

I would only switch to long when the weekly and daily turn green.

This approach allows the trader to scalp almost every hour in the direction of the trend.

Once the current daily has exceeded the previous daily range, the trader would exercise caution because a reversal may be imminent.

I also use average range to know when to stop pushing my "luck".

 

[TheRumpledOne]

Quote from rdhtci:

TRO,

Thanks very much -- understood.

Rob

Thought it would be helpful to show what happened after the last post.

Just so you know, the yellow and brown lines are the one hour Vegas Tunnel lines which serve as a Macro direction. Trade short below and trade long above.

 

[rdhtci]

TRO,

Thanks for that -- appreciated.

I just read about the Vegas Tunnel -- that's quite a compelling document Vegas wrote. I found some of your usual generous shared code in my travels, so I imagine you have tried it 'in anger'-- is this as good as it looks, or is it something that looks great in hindsight but has problems that are not immediately obvious until traded live?

Rob

 

[TheRumpledOne]

Quote from rdhtci:

TRO,

Thanks for that -- appreciated.

I just read about the Vegas Tunnel -- that's quite a compelling document Vegas wrote. I found some of your usual generous shared code in my travels, so I imagine you have tried it 'in anger'-- is this as good as it looks, or is it something that looks great in hindsight but has problems that are not immediately obvious until traded live?

Rob

No anger.

The one hour Vegas Tunnel works. Why else would I have it on my charts?