How I came up with my trading method.
After trying many optimized indicator based ideas that obviously (after sometime) did not work for too long, I started to think about what would make a trading strategy endure for a long time in different market environments.
The idea was to find a common denominator that causes movement in the markets.
I found a few references to the similarity between charts in the late 20's and the late 90's and I came to the conclusion that the common denominator between the two periods was US. HUMANS.
Specifically, emotions in humans and lack of control of emotions in particular.
The next step was to identify certain chart patterns that would repeat themselves in reaction to human emotions.
I noticed that most of my losses came from trades that I took after an impulsive reaction to a quick and strong price movement.
No most people would do a rash thing (act impulsively), then they calm down and reflect on what they have just done only to do another rash thing in line or against what they have just done.
That CALM DOWN period or THINKING WHAT TO DO NEXT manifested itself (in my mind) in the form of NARROW RANGE BARS.
So I started to look for candle formations that were comprised of 1 or more large candles followed by 1 small candle, in the anticipation that the next wave of impulsiveness will come in the form of a large candle.
At the time when I came up with this idea, I added a condition that the small bar should be on a 20EMA and that I would trade in the direction of the EMA.
Also, the small bar had to close agains the direction of the large bar before it.
All the above was done on a 5min chart (15min was too long)
When I did not find enough setups to satisfy the above requirements I ditched the requirement that the small candle had to be on the EMA but kept the idea of trading in the direction of the EMA.
This worked better but I still missed out on many opportunities because the small bar would close in the same direction as the large bar before it or there were 2 small bars that closed in a direction opposing the impulsive move.
So I accepted the fact that there could be more than 1 small bar that would close in the opposing direction but I still rejected the idea of having a small bar with a color/direction similar to the impulsive move.
In 2009 I bought Al Brooks' book about trading Bar by Bar.
It was the best book I have ever bought about trading but it was written very poorly.
Trading based on 5min bars was too coarse so recently I switched to the 1min bars but I would still look at the 5min charts.
The attached chart will show an example of what I was writing about.
Gabe
To be continued.
After trying many optimized indicator based ideas that obviously (after sometime) did not work for too long, I started to think about what would make a trading strategy endure for a long time in different market environments.
The idea was to find a common denominator that causes movement in the markets.
I found a few references to the similarity between charts in the late 20's and the late 90's and I came to the conclusion that the common denominator between the two periods was US. HUMANS.
Specifically, emotions in humans and lack of control of emotions in particular.
The next step was to identify certain chart patterns that would repeat themselves in reaction to human emotions.
I noticed that most of my losses came from trades that I took after an impulsive reaction to a quick and strong price movement.
No most people would do a rash thing (act impulsively), then they calm down and reflect on what they have just done only to do another rash thing in line or against what they have just done.
That CALM DOWN period or THINKING WHAT TO DO NEXT manifested itself (in my mind) in the form of NARROW RANGE BARS.
So I started to look for candle formations that were comprised of 1 or more large candles followed by 1 small candle, in the anticipation that the next wave of impulsiveness will come in the form of a large candle.
At the time when I came up with this idea, I added a condition that the small bar should be on a 20EMA and that I would trade in the direction of the EMA.
Also, the small bar had to close agains the direction of the large bar before it.
All the above was done on a 5min chart (15min was too long)
When I did not find enough setups to satisfy the above requirements I ditched the requirement that the small candle had to be on the EMA but kept the idea of trading in the direction of the EMA.
This worked better but I still missed out on many opportunities because the small bar would close in the same direction as the large bar before it or there were 2 small bars that closed in a direction opposing the impulsive move.
So I accepted the fact that there could be more than 1 small bar that would close in the opposing direction but I still rejected the idea of having a small bar with a color/direction similar to the impulsive move.
In 2009 I bought Al Brooks' book about trading Bar by Bar.
It was the best book I have ever bought about trading but it was written very poorly.
Trading based on 5min bars was too coarse so recently I switched to the 1min bars but I would still look at the 5min charts.
The attached chart will show an example of what I was writing about.
Gabe
To be continued.
.