Trading NQ via Price Action

[dbphoenix]

I am looking at two things. First, I am using trendlines, major ones from a 5 minute chart, so essentially encapsulating the entire overnight session, and watching for either a break or reversal trade after the open. The idea being that a change of trend needs to happen with a trendline that occurs over major swing points, not trying to use micro trend lines that I might be inclined to draw if just looking at 1 minute bars. I do draw these on my 1 minute chart, but they would be as drawn on the 5 minute.

So essentially I'm seeing if once there is a break, how far does price continue to go. Even if there isn't a RET above the break, can I essentially just buy or sell close enough to this trendline to make this a profitable trade, and if we break back below, how much against me would price go. The other thing that can happen is a bounce at at the line. I know that trendlines don't act as support or resistance, but many times price does respect these lines because I guess enough traders are watching this very same thing. So I just want to see if any rules can be made around taking trades at these major trend lines. Included are two charts, the first is an example of how it works when it works, the second is messy.

The second thing I'm looking at is hinges and trying to come up with rules about where the best entry, where the stop loss needs to be, etc. Just some statistical analysis. The trouble I'm having of course is as I go through my charts, its easy to see the hinges that work. But hidden within ranges are lots of things that look like hinges that don't go anywhere. In real time, I might be sucked into far too many things I think are hinges that then don't go anywhere so I could get chopped up. One thing I've seen is that the hinge works better when its in the middle of nowhere, not after it starts to form if there is congestion to the left.

First, pick one.

Second, all this is purely observational and unacceptably vague. If you want to test something, you have to formulate a hypothesis. Otherwise, you will not know where to begin.

Third, only after testing your hypothesis can you begin to formulate rules. Whatever rules you test without any sort of hypothesis, much less the supporting metrics, will be useless.

 

[k p]

First, pick one.

Second, all this is purely observational and unacceptably vague. If you want to test something, you have to formulate a hypothesis. Otherwise, you will not know where to begin.

Third, only after testing your hypothesis can you begin to formulate rules. Whatever rules you test without any sort of hypothesis, much less the supporting metrics, will be useless.

So if we stick with the first, the hypothesis is that if trendlines are drawn as so to encapsulate most of the overnight action, after the open, price will either run off in a new trend, thereby breaking one of these trendlines, or price will test this trendline and run off in the other direction. So essentially, I'm using the trendline as an extreme level to look for a trade.

The problem is that nothing seems to happen often enough. If I see price break through more than a point, entering the trade is an option, which doesn't work out often enough. Waiting for a RET makes you miss out on far too many of the big moves. So I am a bit stuck with coming up with an entry method that works that I can actually test on all of these charts.

 

[dbphoenix]

So if we stick with the first, the hypothesis is that if trendlines are drawn as so to encapsulate most of the overnight action, after the open, price will either run off in a new trend, thereby breaking one of these trendlines, or price will test this trendline and run off in the other direction. So essentially, I'm using the trendline as an extreme level to look for a trade.

The problem is that nothing seems to happen often enough. If I see price break through more than a point, entering the trade is an option, which doesn't work out often enough. Waiting for a RET makes you miss out on far too many of the big moves. So I am a bit stuck with coming up with an entry method that works that I can actually test on all of these charts.

You won't come up with "an entry method that works" until you've formulated the hypothesis, tested it, and developed a set of metrics.

Donna has explained in detail how to do this. I suggest you print out the posts she's made over the last month or so and study them.

 

[k p]

You won't come up with "an entry method that works" until you've formulated the hypothesis, tested it, and developed a set of metrics.

Donna has explained in detail how to do this. I suggest you print out the posts she's made over the last month or so and study them.

Yes, I'm definitely trying to go down this path. She got me really thinking about getting in as close to the line as possible, so I'm just trying to figure out what could mathematically work.

I'm still drawn to the big picture of course, but I have to figure out how to enter somewhere first.

 

[dbphoenix]

Yes, I'm definitely trying to go down this path. She got me really thinking about getting in as close to the line as possible, so I'm just trying to figure out what could mathematically work.

I'm still drawn to the big picture of course, but I have to figure out how to enter somewhere first.

Determine the elements of the entry. Then pick one element, formulate a hypothesis surrounding it, then test. How "close" you are to a "line" may be one element, but you must define what you mean by "close" and what you mean by "line".

 

[slugar]

The trend lines on a 1 or 5 will end up being the same

 

[k p]

Determine the elements of the entry. Then pick one element, formulate a hypothesis surrounding it, then test. How "close" you are to a "line" may be one element, but you must define what you mean by "close" and what you mean by "line".

Yes.. this is the trouble. And because lines also aren't in the market as you say, not like a swing low or high that has an actual value of price that couldn't be crossed, they are still a bit arbitrary.

Some ideas are just buying or selling once price has gone 1,2,3 points beyond this line. The more points, the less often you might be sucked in a bad trade, but the bigger the stop has to be if the stop will be placed back on the other side of a line, and of course the smaller the profit.

The other option is to maybe wait to see what the next bar does, or the one after that. (ie. Can price remain above this trendline for 1,2,3 minutes) (If price just penetrated this trendline in the last few seconds of the minute bar mind you, then it may appear to be outside of this trendline for 2 minutes when in fact it might only be seconds though.... 5 second before the close of the bar it penetrated, spends 15 seconds above this trendline and then drops back in. It may therefore appear to be above the trendline for 2 minutes (2 bars), when in fact its only seconds)

These things are also unfortunately the things that a computer is very good at, doing these calculations. So I'm not even sure if these "mathematical" rules are in the "spirit" of trading behavior. Who cares if it works of course... but I guess what I mean to say is this number crunching seems to be an edge that the quants may have already mastered, so no way can I compete on this level. But at the same time, seeing the behavior has to be quantified somehow and expressed via a set of rules.

 

[k p]

The trend lines on a 1 or 5 will end up being the same

Except that on a 1 minute you may be inclined to draw a trendline that on a 5 minute chart would be just connecting 3 or 4 consecutive highs, versus actually connecting swing highs. I am far too often sucked into drawing micro trendlines.

 

[dbphoenix]

Yes.. this is the trouble. And because lines also aren't in the market as you say, not like a swing low or high that has an actual value of price that couldn't be crossed, they are still a bit arbitrary.

Of course they're arbitrary. That's why you have to define what you mean by "line". Only then can you begin to test it.

 

[k p]

So this chart is a bit busy, but let me explain.

A - This is how my first SL looks.. drawn from the top at 23:06, connecting down to this swing high here. Its just a bit lower than the earlier once, hence the line is quite shallow.

B - Below here is another swing high used for a slightly steeper SL going into the open. There is also a blue line here which will track 50% of this down move.. but more on that later.

C - Here is a swing low I used for a DL going into the open. Its essentially straight, more of horizontal support.

D - By the time we get to here, this SL has been providing a nice trend down. I don't like it when price hugs the trendline going into the open too much because with price being so close, there is no way to really test it... it breaks too easily. If traders want to test a level first, they should have to work for it by either dropping or raising price a few points, not just ticks. These tests to the 5 min trendline do happen often enough that they need to be tracked, so we will have either a break or a bounce/test.

O - At the open, we essentially open at this SL/support line and drop below. Can't really think of a trade when price opens up right at the line.

E - We come back up, and would you know it, can't go past this SL. Unless you are watching a tick chart, this might not mean much, but my little brain was saying "just short with a market order and watch closely".

F - So after we REJ going higher at the SL, we drop back down again, and retrace up to the DL. An entry below here is called for which clearly works.

G - We make it down to here, and I've already got this level at 64 marked on my chart from earlier. It sure looks like we are rejecting going lower here.

H - We quickly come up to here, but based on the red line, which tracks the move from the spike up after the open at E down to G, this 50% level at 69.50 hasn't been breached, hence this down move is still solid. Shorting below this RET can be done.

I - We do drop lower, but come back up again. This new move from E down to I, as per the green line now, has a 50% level slightly lower, and price does come up to here and penetrates.

J - Now if we consider the move from the swing high at B where our downtrend started, and call the level at "I" the bottom, our 50% level is here now. Price just goes right through.

So once seeing all 50% levels breached, can we put on a long somewhere... anywhere??? Great idea to test of course. I "know" this works often... but I also see where it doesn't work. The question that needs to be answered is how often does it work, and when it doesn't work, where do you have to get out and how many points will it cost you.

K - It just so happens that if we still have that first SL, the shallow one from the overnight high connected with the swing high at A, the line comes to here now. I note that this is the 3rd touch of this SL (first 2 touches make the line, this 3rd one respects the line)

Now am I saying I would short in this strong up move just because price bounced off this line? Not without solid testing of course. The context of the past fews days is that we can barely make higher highs on the daily/hourly charts. So seeing as we are at the top again, heading down is the higher probability.

Anyway, here the SL provided a nice move down after about 15 minutes.

L - This swing low is far too short of the 50% move from the bottom at "I" to the top at "K" here, so not enough weakness yet in this general trend, so if a short was taken at K, its time to get out.... look at how strongly price goes back up again.

CONCLUSION

Well, this is the type of analysis I enjoy. None of this stuff I have seen works well enough that makes me throw money at it. It works when it works, but when its costly when it doesn't. Perhaps I just get too discouraged when I see it work not enough, but I don't realize that stops would keep losses small and the winning points would more than outnumber the losing points.

There is far too much in this analysis to test.... I can't even come up with stats for the first initial thing I'm testing via the 5 min trendlines at the open. But this type of analysis is something I do in real time, and if only I had enough stats from backtesting in my head to go on, I think this would make me quite the nimble trader.

I do feel very stumped right now though... so I need to stare at my 104 charts (105 after today) and see if I can make something simple work... just something to start trading. Even if I only make 10 points after a whole week, having a plan and practicing disciple to trade it would be most welcome right about now. The further I go, the longer the journey it seems.