Quote from k p:
I read the attached PDF, thank you! I would venture to guess that this is a document you wrote! I have read many of your posts and this attached PDF certainly sounds like a summary of the message you are always trying to deliver.
I am trying to do exactly what you say, find a price pattern or market behavior that offers a level of predictability. I just wonder if it can be as simple as reacting to an opening gap, and how I can go about testing for this. Manually testing ideas would be exhaustive, and minor adjustments would cause me to have to start all over again, and hence why software would help immensely. But I fully appreciate that doing this manually will teach me more.
Is it a good start to look for very simple patterns such as what I outline with gaps or double bottoms? Can a system be built with just double bottoms or is this too simplistic? When you only need to be right 50% of the time, it seems like a lucrative proposition, but I doubt that I could have stumbled onto something so easy. Perhaps it works given the right values for stop and target?
1. Yes, it can be as simple as reacting to an opening gap, assuming you're talking about stocks (there are no gaps in futures, except from Friday afternoon to Sunday evening). And, yes, manually testing this would be exhaustive. And after futzing with it for hours and days and weeks, you might decide that you want something that shows up nearly every day, not just once in a while. Be wary, however, of being in a hurry. If you hurry, whatever you're doing will take two to three times longer at minimum.
2. I've been criticized for referring people to my threads, but repeating this stuff can get to be a drag. However, there are only three strategies -- reversals, breakouts, and retracements -- and what you choose will depend on a number of factors including how often they come up, how easy they are for you to define, what your risk tolerance is, how well you understand the auction market, how well you are able to detect changes in the balance between demand and supply, how easily you become disoriented with regard to up and down, whether you trade intraday or interday, etc. Yes, you can focus on double bottoms, which are a form of reversal. But if you trade only those which are most likely to generate a profit that will make the waiting worthwhile, then the waits will likely be lengthy. You won't make money trading crap, but neither will you make money if you don't trade at all.
As for being right 50% of the time, I suggest you go for much more than that. If half your trades are losers, you will not likely last very long. And if you set "targets", you will in effect be cutting your profits short, and doing so with such a tepid win rate will be wearing before long.
If you're a beginner, you're in a good position as you have so little to unlearn. Just make sure to determine for yourself what is or is not true among all that you read and that you are told, remembering that you have no way of knowing whether or not whoever is offering the advice is successful or not. And why would you want to take advice from some mystery trader without verifying for yourself that it is true?
I should also clarify with regard to your reference to "price pattern or market behavior" that this is not either/or but rather two ways of saying the same thing. If you don't understand how the behavior of traders is creating the pattern, you will not only interpret it incorrectly but play it wrong.
