Making of a method

[Ghost of Cutten]

Quote from game:


Trade Execution: Monitor high EV ideas and execute on technical confirmation signal.

Good thread. You need to test trading the technical confirmation signal by itself, to see if all your other inputs are adding any value.

For example shorting >2% breakouts below 12 month lows may work just as well on undervalued stocks as on overvalued growth stock favourites. In this case, the profit is coming from the technical signal, not from your valuation analysis.

One last thing - AAPL was not richly valued when it peaked. The PE was about the same as the S&P 500.

 

[yossy]

One question regarding the 2 charts on Reversals.

Why are you looking at reversals? Why is it not seen as a retracement of the uptrend? Is it because a Trend Line has been broken?

I mean what qualifies for the 1st retracement and what qualifies for the 1st retracement in the other direction. For example, Db says 1st long in the other chart is at 8.35. Is it because it is the first higher low after a higher high? If that is the case, at 8.59 though I have a Higher Low I have not yet broken the Swing high of 8.48 and thus do not have a Higher High. Or is it that I am looking at HHs from 8.50 onwards and that suffices.

Thanks.

 

[game]

Quote from yossy:

One question regarding the 2 charts on Reversals.

Why are you looking at reversals? Why is it not seen as a retracement of the uptrend? Is it because a Trend Line has been broken?

I mean what qualifies for the 1st retracement and what qualifies for the 1st retracement in the other direction. For example, Db says 1st long in the other chart is at 8.35. Is it because it is the first higher low after a higher high? If that is the case, at 8.59 though I have a Higher Low I have not yet broken the Swing high of 8.48 and thus do not have a Higher High. Or is it that I am looking at HHs from 8.50 onwards and that suffices.

Thanks.

On the Reversal chart: My understanding is that three things can happen to a trend. It can either keep going as a continuation (with or without a pullback), lose momentum and drift sideways or stop/drift and gain momentum on the downside (reversal).

In this case there was a clear turn and momentum picked up on the dowside with price reaching the prior swing low of the uptrend. Yes, the Demand line was broken.

I think the Demand line, Swing lows, Higher lows, etc are helpful as a quick reference to determine the current trend. But it has been helpful for me to visualize waves. The extent and duration of the down wave makes this a reversal - an indication that supply is back on top.


What qualifies for the first retracement in today's replay chart is that:
1) It had been established that there was a current trend - in this case up.

2) Price had not retraced all the way back or even 50 % from the height of the buying wave. Had it had come back down a long way, it would be an indication that sellers are rejecting the price made at the high and the buyers who rode the trend up are getting out fast. This would be a sharp reversal.

A retracement on the other hand is a temporary pullback in the wave and not an indication of sellers having completely rejected the high. Some are shorting, some are cashing the trend's profits and some are jumping in hoping for a continuation of the primary trend. Price dips a little in relation to the primary wave.

But the first thing is to determine whether there is a wave and whether it is big enough or has crossed a major S/R zone to qualify as a trend. Once the trend is determined, dips in trends become retracements.

If the trend is not determined, then you will see retracements everywhere since price is constantly going up and down, even when going sideways.

Once again, imagining price moving as a continuous wave has been helpful. Different time frames will give different bar patterns but if price is seen as continuous then a dip in price from previous high will always be a retracement. Bar patterns are very helpful in getting a quick read but I like to look at the 30 tick line chart alongside the 1 min to remind myself of the continuous nature of price and to get in and out as price moves - not relying on bar openings and closings as signals.

I am sure you know a lot of this already so please excuse my pedantic reply. It was helpful for me to clarify my own thoughts and if they are not clear then it would be great to have that pointed out.

 

[yossy]

Thanks for your reply. My question was that you took a long at 8.38 while Db takes a long at 8.35 so naturally identification of a retracement and by implication, an uptrend, is different.
Similarly, Db sees a long at 8.59, so possibly the move from 8.50 to 8.59 is being identified as an uptrend.

And contrary to what you say, I don't know much, so just asking, seeking clarity for myself.

Thanks.

 

[game]

Quote from yossy:

Thanks for your reply. My question was that you took a long at 8.38 while Db takes a long at 8.35 so naturally identification of a retracement and by implication, an uptrend, is different.
Similarly, Db sees a long at 8.59, so possibly the move from 8.50 to 8.59 is being identified as an uptrend.

And contrary to what you say, I don't know much, so just asking, seeking clarity for myself.

Thanks.

I took the long at 8:36.

8:35,8:36,8:37 - all these bars represent the retracement. So the zone is the same - just that the entry timing is different. Db was encouraging me to get in a little early during these retracements, hence his long at 8:35 or even the beginning of 8:36 as price starts to rise from the trough back up. Identification of retracement and uptrend is not that subjective.Perhaps a shade - but for the most part it is pretty evident as to what is a trend and what is a retracement within that trend.

P.S Yes the move from 8:50 to 8:59 was an uptrend - being a reversal of the prior down wave. I did not take any action - but it was a trend and it had the retracement set up.

 

[game]

Quote from Ghost of Cutten:

Good thread. You need to test trading the technical confirmation signal by itself, to see if all your other inputs are adding any value.

For example shorting >2% breakouts below 12 month lows may work just as well on undervalued stocks as on overvalued growth stock favourites. In this case, the profit is coming from the technical signal, not from your valuation analysis.

One last thing - AAPL was not richly valued when it peaked. The PE was about the same as the S&P 500.

Since you seem to use both TA & FA together - could you share some of your thoughts on what is TA and what is FA? I realize that these definitions can be looked up online but I thought it would be nice get a take on it from a trader.

I remember reading an interview of Paul Tudor Jones where he attributes about 50% of his profits to TA and 50% to FA. Does this match your experience?

 

[dbphoenix]

Quote from game:

On the Reversal chart: My understanding is that three things can happen to a trend. It can either keep going as a continuation (with or without a pullback), lose momentum and drift sideways or stop/drift and gain momentum on the downside (reversal).

In this case there was a clear turn and momentum picked up on the dowside with price reaching the prior swing low of the uptrend. Yes, the Demand line was broken.

I think the Demand line, Swing lows, Higher lows, etc are helpful as a quick reference to determine the current trend. But it has been helpful for me to visualize waves. The extent and duration of the down wave makes this a reversal - an indication that supply is back on top.


What qualifies for the first retracement in today's replay chart is that:
1) It had been established that there was a current trend - in this case up.

2) Price had not retraced all the way back or even 50 % from the height of the buying wave. Had it had come back down a long way, it would be an indication that sellers are rejecting the price made at the high and the buyers who rode the trend up are getting out fast. This would be a sharp reversal.

A retracement on the other hand is a temporary pullback in the wave and not an indication of sellers having completely rejected the high. Some are shorting, some are cashing the trend's profits and some are jumping in hoping for a continuation of the primary trend. Price dips a little in relation to the primary wave.

But the first thing is to determine whether there is a wave and whether it is big enough or has crossed a major S/R zone to qualify as a trend. Once the trend is determined, dips in trends become retracements.

If the trend is not determined, then you will see retracements everywhere since price is constantly going up and down, even when going sideways.

Once again, imagining price moving as a continuous wave has been helpful. Different time frames will give different bar patterns but if price is seen as continuous then a dip in price from previous high will always be a retracement. Bar patterns are very helpful in getting a quick read but I like to look at the 30 tick line chart alongside the 1 min to remind myself of the continuous nature of price and to get in and out as price moves - not relying on bar openings and closings as signals.

I am sure you know a lot of this already so please excuse my pedantic reply. It was helpful for me to clarify my own thoughts and if they are not clear then it would be great to have that pointed out.

This is what doing one's homework is all about, and the results should serve as an example. I didn't realize you'd been studying so much. It shows.

It may be difficult to understand how you're differentiating between reversals and retracements to someone who's jumping in at this point and doesn't visualize the demand and supply lines. If those lines were drawn, it would be clear that there is no break of the first "trend" until 0845. Until that occurs, everything, as you point out, is a retracement. When it does occur, the attention immediately shifts to the short side, whereas one who isn't cognizant of these waves would still be looking to go long and thus be on the wrong side, perhaps for the rest of the session.

As regards the 50% business, it's almost necessary to judge this in real time. Otherwise it seems like equivocation. In real time, there is no "close", but there's really no other way to describe it when studying a static, hindsight chart. Here, for example, after price has made its highest high at 0831, it does come back slightly more than 50% of the upmove, but it "closes" above that level. The next bar sinks even further, but it "closes" even higher, adding confidence to taking the long in the next bar. This is strength, and if one isn't attuned to it and to the balance between buying pressure and selling pressure, he's going to get it wrong.

Gold star.

 

[game]

T1: +0.50
T2: -1.00
T3: -1.00
T4: -1.75
T5: +0.75
Net: -2.50

Summary:

Positive: Trade 1 entry.The first buy stop was cancelled as I saw price move down. But then there was strength shown and I was able to reapply the buy stop.

Positive: I was able to take trades when a setup was available.

Unknown: The long on trade 4 met resistance at 2971. This area had rejected price on six previous attempts. Thus, once trade 4 failed, I was not keen on taking the missed opportunity that led to price breaking free of the R and going all the way to 2976.

In these situations when price is repeatedly hitting a R level, there is a good possibility that it will be rejected, but on the other hand if it manages to break through it will likely go far.

In the missed opportunity setup, since price was compressing towards the R, I could have taken the trade with a low risk level, since the compression was providing support underneath.


In general: The most uncertainty at this point occurs after the trade has been taken. I do not have a way to think about price movement after the trade has been initiated.

One easy way would be to have a rule that says that once a trade reaches a 1 point profit it should not be allowed to go past BE. But I am not sure what the logic behind this is. Ideally, I should be able to rely on an understanding of supply/demand to guide exits.

 

[dbphoenix]

Quote from game:

One easy way would be to have a rule that says that once a trade reaches a 1 point profit it should not be allowed to go past BE. But I am not sure what the logic behind this is. Ideally, I should be able to rely on an understanding of supply/demand to guide exits.

The only reason to have such a rule is that you're (a) afraid of losing or (b) tired of losing. The solution is not to crap out but to focus on your process.

The exit is made when the line is broken. If there's a good reason to hold off on the exit, fine. But in your situation it's best to just take it because you're losing your way.

The first long is fine but the first short is too early. It should be taken two bars later. The second long is also too early. It should be taken four bars later. That needn't be exited until 0908 or 0909.

 

[game]

Quote from dbphoenix:

The only reason to have such a rule is that you're (a) afraid of losing or (b) tired of losing. The solution is not to crap out but to focus on your process.

The exit is made when the line is broken. If there's a good reason to hold off on the exit, fine. But in your situation it's best to just take it because you're losing your way.

The first long is fine but the first short is too early. It should be taken two bars later. The second long is also too early. It should be taken four bars later. That needn't be exited until 0908 or 0909.

On the first short: Price had not only crossed the DS Line indicating trend break, but also plunged down close to the start of the previous wave. In hindsight taking the short two bars later would have been a better entry but at the time I did not know that price would go back up to make a deeper retracement crest.

Was this trade incorrect because there was not a clear downside trend established yet?


Similar issue with the second long. At the time I did not know price is going to keep going down to form a deeper trough.

What is the mistake being made in these two trades?

Regd the exit: By the line you are referring to the DS line.

But is there any thought process applied to trades which are still around the entry level or below? Can one apply a similar horizontal line at the retracement crest/trough to act as a reference for an exit? I feel you will say that it depends on how price is behaving around the entry.