This writeup regards the chart in my previous post above. IT was MES 5 min chart on April 13th, 2020
I have colored coded the arrows showing the entry and exits for each trade. I considers averaged down trades as one trade. While the entries may be multiple (as I average down) in 90% of my trades the exits are at one whack.
The first trade arrows are the yellow one. At the time of the averaged down entries The gray range box had not been drawn as it was not yet classified as a range. So we got a GAP down open then the PB's in a row with 4 legs down (by the bottom of the box). That is effectively 4 pushes down and a wedge bottom. So why did I begin shorting the 4th PB? Because even though it was a wedge bottom I considered that any PB would not go too far (because of the weakness since the open) so I could short the PB expecting a trend continuation. However, that was not to be. The wedge bottom was a successful wedge bottom and the 4th PB (where I started shorting) became a three legged reversal back up. So here I was ten contracts on the wrong side. Look at the dark green arrows. That is the max I will let this go against me. If price reaches there my premise is wrong I have to get out and go in the other direction. So, when price reaches my checkout point I exit with around a $450.00 loss I believe it was. But remember, I am on the wrong side. PA has proved that to me. So, what do I do?
I double up long 20 contracts on the second trade of the day (red arrows entry long on that 11:00 bar green triangle) and I am out about 15 minutes later on that 11:15 bar, the second red arrow, and I have not only recuperated my loss but am now 421.25 to the good. See, if a trader is going to play the averaging down game the context has to be right and there must always be a point where he sees his premise is wrong he takes the loss reverses and doubles up in the new direction. The process of getting a loss back is quite easy but does require discipline and some guts. A trader just has to do the right thing at the right time. Ok so why do I exit my doubleup position when I do. Well it has become clear this is going to be a range day. Over 20 bars are in the range and the gray box can be drawn. After that is done it is easy to see price is trading at the top of the range so it is better to just get out of the doubled up trade and take my profit because price will more than likely start back down, which it did.
That leads us to the third trade and a new range trading tactic That I want to introduce. Before I do that I first want to remind folks that the basic idea in range scalping is to sell or short in the top 1/3 averaging down as necessary to build a position and lessen the movement needed for profit or BE when price goes back down. And when price is at the bottom 1/3 of the range then go long averaging down as needed to build a position at cheaper prices while lessening the distance price needs to travel for profit or for BE, if entirely wrong on the direction. I might add here that if you are a conservative trader you can divided the range into 1/4's and follow the same process but short in the top 1/4 and go long in the bottom 1/4. You will miss out on some trades but you will generally be taking on less risks. So, why does this work? It is based on the concepts that 80% of BO attempts out of the top or bottom of a range FAIL within 3 to 5 bars and price goes right back down into the range, enough for at least a scalp. So, the idea is to cover on any shorts as price moves towards the middle of the range and exit any longs as price moves up from the bottom of the range up towards the middle. If the range is broad sometimes a trader can capture two legs of movement up or down.
Now to the new concept. Can you sell or buy in the middle of a range? Yes, when price action gives that opportunity. Look at the two dark gray arrows for the third trade. In this case a range has been established and price was heading back down towards the middle or the bottom of the range (don't know how far at the time the trade was taken). But here is the concept: If price is in the middle of the range following a leg of weakness (and we had one 3 bear bars one after the other) then a PB then the second largest bear bar in the entire range forms. So the idea is that price will probably go at least a little more down that will be enough for a scalp. So I short (gray arrow) in the lower 1/4 of that bear bar betting I will get enough move down for a straight short scalp. Two bars later I exit (second dark gray arrow) with a several point profit. At this point I am up on this 2 contract scalp to 466.25. Why do I exit so soon. Well because this is a straight scalp and I don't know yet if price will continue down a lot more. So I grab what the market gives me. Lock it in.
Three bars later I take a 4th trade. I see a bull bar and price is in the bottom 1/3 of the range so I go long (green arrows) and exit 4 points later on the next bar as price moves up towards the middle, again locking in my profits. See, a bird in the hand is worth two in the bush. And as a scalper I lock in profits, as opposed to letting them run. I can always enter again!
Then I went to eat so missed the move back up towards the top of the range and just did miss shorting in that top 1/3 (black arrows).
So, after I get back from eating price starts back down from the top of the range. Two big bears bars with the last one closing very nears it's low. Lets look at the two orange arrows. The fifth trade. So, here is an opportunity to sell or short in the middle of a range but with a different twist. I reason we will get enough movement down for another short scalp. Even if we get a PB on that large bear bar there is enough weakness shown by PA that I should be able to average down short and still get enough move down to make a profit scalping. After all, it is one of the largest bear bars in the range and it was preceded with a bear bar before it too. So, I short 2 contracts and average down short twice more with 2 contracts each time. I then exit all 6 contracts on the very next bar with a profit. A bird in the hand is worth two in the bush. Again, selling not in the top 1/3 of the range but in the middle of the range. It can be done when the immediate context indicates so.
Now lets look at the 6th trade. The magneta colored arrows. I initiate shorting in the top 1/3 of the range. Why? Well were are 67 bars in the range. We get the biggest bull bar of the entire range and it is breaking out of some sideways PA after that 5th trade. This has the potential to BO out the top of the range and run on up. However, I am betting it won't. Why? Well because we are nearing the close and all day we have been going sideways and price has yet to reach the high of the day made on the open. So it can be reasoned that even if PA BO's out if the top of the daily range nd has FT (follow thru) i.e. a bar that closes outside the top of the range. It will still probably drop somewhat back into the range before the close. So it does BO above the top of the range and actually puts two bars above the top of the range before it trades back into the range far enough for me to cover all the contracts with a profit. By this time of this exit I am up $591.25. What would I have done if it kept going up towards the close and broke the high of the day? I would exit my averaged down shorts and double or triple up long and exit before the close making my loss back and a profit. But there was no need to do so as I was able to exit the shorts with a good profit.
Now I want to show another way to trade a range with this 7th trade. As price dips back into the range and I exit my shorts (second magenta arrow) I initiate a 7th trade (blue arrows). Here is the concept: In a range when you get a big bar, bull or bear bar, average in on a 50% PB's on the same bar as price retraces up or down the bar. On a bear bar the odds favor it will go back down for another good scalp. So first blue arrow. I make two entries short (averaging down) as price retraces back up the bar. Then I exit (second blue arrow) on the next bar with a profit on the entire position.
Finally, I make a last and 8th trade. Entry and exit indicated by the last yellow arrow on the chart. I watch price retrace back up aprox 60% of that big bear of my previous trade and I short 2 contracts and grab a quick 3 to 4 point scalp. At this point I am up $771.25 and quit for the day.
To recap:
Tactic #1 for range trading. Utilize the top 1/3 and bottom 1/3 of a range for averaging down expecting BO attempts to fail and price goes back into the range. This will generally happen on 80% of the BO attempts. Good odds.
Tactic #2 for range trading. Short in the middle of the range (when it is a broad enough range to do so) when there has been a strong enough prior leg down that indicates further weakness is likely coming, at least enough to make a scalp. The opposite is true for going long. Go long on strong prior legs.
Tactic #3 If need be AVERAGE DOWN in the middle of the range short or long depending what the previous leg was (bear or bull) and if it was strong enough to indicate further movement at least enough movement for an averaged down scalp to be profitable.
Tactic #4 In a range if an extremely (relative to other prior bars) large bar bear or bull shows up then fade 50% PB's up (if bear bar) nor down (if bull bar) of the same bar.
Tactic #5 may repeat tactic 4 but at 60 to 65% PB's of the same bar. Bigger PB's of the same bar say 70% or 80% are too risky to use tactics 4 and as price may be reversing. I hope this helps. I would suggest printing the chart out and the explanation in this post and studying the concepts then perhaps try them out on a live SIM.
Remember, these tactics are for trading in an established range. What is an established range? 20 or more bars in a sideways move. MY first and only losing trade was when there were 17 bars or so and the range was not yet established. However, at the moment of that losing average down trade I was trading on a different premise. That premise was that a PB from that wedge bottom would not go too far and the bear trend would continue. But I was wrong and did what I had to do. I exited it with a loss but three bars later got the loss back with a handsome scalping profit. For MES that is..LOL
