There's no need to test SLA since the testing has already been done. If you're going to start from scratch with your own trading plan, then you have to begin at the beginning. And filtering SLA and using only elements of it and combining it with other things is no different from starting from scratch. So you have to decide what you want.
Trading NQ via Price Action
- Thread starter k p
- Start date
This is exactly what I will try and figure out this weekend. First I will complete my soft version of backtesting on ranges (I say soft because I will look for a couple of dozen instances, hardly exhaustive). And then I will also go through the past few days of the charts with nothing but SLA as I would apply it and actually count what my ticks gained/lost would have been. I realize I'm really fighting myself here, and the only way out of this mess is to show/prove to myself a path.
Ok, so as before, blue lines are overnight highs and lows, red lines are areas that could be S&R taken from hourly chart. Db was trying to get me to just follow SLA, and I am trying to follow SLA, although my lines aren't drawn in, but I want to have something else to look at as well, to see in real time what happens when price approaches these levels that could be of interest. I find that I can often draw the SLs or DLs a bit differently depending on which swing points I use or whether I fan them or make them steeper. Then of course if they are broken, I am trying to justify if I should follow the less steep line to still stay in the trade or just get out after a break of the newer and steeper line. So I figure I will just watch the price, and keep drawing the lines in my head. At the open today, I would have had no idea how to draw the lines anyway since we were kind of in a range, but had perhaps a shallow SL.
For the first 15 mins, there was no clear direction, at least for me. What I am extremely sensitive to now are these micro swing lows. I call them micro because they aren't swing lows in the traditional sense of having a trough, but more like pokes to see if there are sellers who want the price to go lower, and each time buyers step in. So in the series of 1a through to 1c, price keeps hitting a higher low. The fluctuations were quite huge in that price rallied up sharply, but each time it came back down, the low was always a bit higher than the previous low.
I keenly watched the 3708 level, the overnight high, and although it pierced, buyers above 10 couldn't be found. The drop down to 3 looks to be roughly 50% of the up move. This retrace could therefore tell you the up move is strong, since it didn't retrace more than 50%, but it clearly wasn't so in this case.
We test that 10 level again, and yup, no more buyers again so down we come. The frustrating thing is that while 4 is happening, I am still thinking it can go higher, its not until price got to about 3706 that you think "yes, double top, no more buyers up there". So then if you go looking for a retrace, you won't find it for a while. I haven't read too much about the rules of entering on reversal, or rather, I just have to make them and test them on my own, but my gut feeling is that if I think a reversal is happening, it is important to get in close to the level at which you think the price is bouncing off, have a tight stop in case price pierces, and then enjoy at least a few ticks profit if price should only reach level 3 for example and turn back up. In other words, if I sold just below 4 thinking its a reversal, but price didn't get lower than the price at level 3, I would sell to lock in a few ticks, not waiting till price came all the way back up to 4 to test 3710.
This is the risk, I think its called price risk versus information risk. If I have more info, price is no longer as attractive. So the closer price drops down to 3 in this case, the more confirmation I have of a reversal, but the more risk I take if price tests this level again. In hindsight, this looks like a perfect double top, a rejection and test of the 3710 level, which is just slightly above the overnight high that was plotted in morning prep work.
Price goes beautifully past the level of 3 on the way down. I like the little spike at 5. It offers not much in the whole grand scheme of things, but for that one minute or several minutes after, this is seen as an area of price that is rejected. Of course the bigger the spike the better the rejection. No idea if i can ever use this as I doubt a plan to scalp one point is worthwhile, but these stick out at me (excuse the pun! LOL)
Price drops to roughly 93, and when it rallies to 6, we have a series of points just below 98 that price cannot penetrate (line drawn below 6). In fact, after this, we continue to have a series of lower highs. As this was forming, it could have turned into a trading range, but the sellers were too much in control, or perhaps not enough buyers to keep price in the range and so it drops out the bottom without too much effort.
Got that little spike at 7 again, matches the level of the low point after 5 a few minutes earlier. In real time, this could look like a double bottom if you were watching right when the spike forms at 7 and price turns up, but we form an even lower high after that serious of highs at 6 and shortly after we have no trouble dropping below 7.
If I sold short below 7, since it seems like an attractive trade once it pierces the previous bars that seemed to offer resistance and the trend is clearly down, I would be getting in at the level of roughly 7a. Climbing back up to 7b would pose a problem, and I'm sure I would have gotten out. I know I'm in observation phase, but I can't help but think of forward testing entries that I think look good based on the behavior of price. In this case, the low of 7 gets tested a few times so when price does break through it seems like a good place to make a few points.
Price had no problem penetrating point 8, the overnight low as outlined by the blue line. Curiously, just a few minutes later, the longer term level of 84 clearly offered support, but once again, to me at least, this would have only been confirmed once price got to about 3688. Since it started dropping again, as outlined by the line at 10, who knows what I would do. Point 11 looks like it could be the higher low I would be looking for and end up buying just above 11, but its point 12 that ultimately ends up being the higher low after the reversal at 9.
If a long position was taken after the low at 11, perhaps at roughly 88, I'm sure I would have exited on my way down to 12. And if I wanted to get back in, I probably would have waited to clear the 3690 price of that high at 10. This would have worked out well since price did end up going much higher. But getting in right after the reversal at 9 would have been the best obviously. I know its difficult to pick bottoms though, so I shouldn't probably strive for this. And of course you never know if a level will in fact provide support or resistance until it is obvious and the good price to enter in at is long gone.
For the first 15 mins, there was no clear direction, at least for me. What I am extremely sensitive to now are these micro swing lows. I call them micro because they aren't swing lows in the traditional sense of having a trough, but more like pokes to see if there are sellers who want the price to go lower, and each time buyers step in. So in the series of 1a through to 1c, price keeps hitting a higher low. The fluctuations were quite huge in that price rallied up sharply, but each time it came back down, the low was always a bit higher than the previous low.
I keenly watched the 3708 level, the overnight high, and although it pierced, buyers above 10 couldn't be found. The drop down to 3 looks to be roughly 50% of the up move. This retrace could therefore tell you the up move is strong, since it didn't retrace more than 50%, but it clearly wasn't so in this case.
We test that 10 level again, and yup, no more buyers again so down we come. The frustrating thing is that while 4 is happening, I am still thinking it can go higher, its not until price got to about 3706 that you think "yes, double top, no more buyers up there". So then if you go looking for a retrace, you won't find it for a while. I haven't read too much about the rules of entering on reversal, or rather, I just have to make them and test them on my own, but my gut feeling is that if I think a reversal is happening, it is important to get in close to the level at which you think the price is bouncing off, have a tight stop in case price pierces, and then enjoy at least a few ticks profit if price should only reach level 3 for example and turn back up. In other words, if I sold just below 4 thinking its a reversal, but price didn't get lower than the price at level 3, I would sell to lock in a few ticks, not waiting till price came all the way back up to 4 to test 3710.
This is the risk, I think its called price risk versus information risk. If I have more info, price is no longer as attractive. So the closer price drops down to 3 in this case, the more confirmation I have of a reversal, but the more risk I take if price tests this level again. In hindsight, this looks like a perfect double top, a rejection and test of the 3710 level, which is just slightly above the overnight high that was plotted in morning prep work.
Price goes beautifully past the level of 3 on the way down. I like the little spike at 5. It offers not much in the whole grand scheme of things, but for that one minute or several minutes after, this is seen as an area of price that is rejected. Of course the bigger the spike the better the rejection. No idea if i can ever use this as I doubt a plan to scalp one point is worthwhile, but these stick out at me (excuse the pun! LOL)
Price drops to roughly 93, and when it rallies to 6, we have a series of points just below 98 that price cannot penetrate (line drawn below 6). In fact, after this, we continue to have a series of lower highs. As this was forming, it could have turned into a trading range, but the sellers were too much in control, or perhaps not enough buyers to keep price in the range and so it drops out the bottom without too much effort.
Got that little spike at 7 again, matches the level of the low point after 5 a few minutes earlier. In real time, this could look like a double bottom if you were watching right when the spike forms at 7 and price turns up, but we form an even lower high after that serious of highs at 6 and shortly after we have no trouble dropping below 7.
If I sold short below 7, since it seems like an attractive trade once it pierces the previous bars that seemed to offer resistance and the trend is clearly down, I would be getting in at the level of roughly 7a. Climbing back up to 7b would pose a problem, and I'm sure I would have gotten out. I know I'm in observation phase, but I can't help but think of forward testing entries that I think look good based on the behavior of price. In this case, the low of 7 gets tested a few times so when price does break through it seems like a good place to make a few points.
Price had no problem penetrating point 8, the overnight low as outlined by the blue line. Curiously, just a few minutes later, the longer term level of 84 clearly offered support, but once again, to me at least, this would have only been confirmed once price got to about 3688. Since it started dropping again, as outlined by the line at 10, who knows what I would do. Point 11 looks like it could be the higher low I would be looking for and end up buying just above 11, but its point 12 that ultimately ends up being the higher low after the reversal at 9.
If a long position was taken after the low at 11, perhaps at roughly 88, I'm sure I would have exited on my way down to 12. And if I wanted to get back in, I probably would have waited to clear the 3690 price of that high at 10. This would have worked out well since price did end up going much higher. But getting in right after the reversal at 9 would have been the best obviously. I know its difficult to pick bottoms though, so I shouldn't probably strive for this. And of course you never know if a level will in fact provide support or resistance until it is obvious and the good price to enter in at is long gone.
Oh I certainly don't want to imagine that its an ego thing at all. I mention it simply as an accurate account of what I am thinking at the time. The trades I take in my head I treat as sort of sim trading and follow for the next few minutes to see how it turns out.
I am absolutely trying to take all emotion and ego out of it. I just want to watch price and think hmmm, price is doing what I though it would do given how I read the behavior, or hmmm... even though I thought price would do this, it didn't, so lets get out. After repeated instances of the same behavior I think I am either onto something or not.
Of course I might not be keeping an accurate account in my head, and the things I am looking for aren't well defined, but I find it keeps me focused and being a really "active" observer.
It is just too difficult now to not think about where good entries might be and just watch price. I do hope I'm not rushing it though Niko, but for the moment, I don't feel I am.
So I'm still working on my "tranding ranges study" from over the weekend. I have been just going randomly through charts looks for areas that I would identify as a trading range. I mark in the extremes of the range, and then see what price does when it exists or bounces off the limits. I have lots of screen captures of this so that when I've gone through a couple of dozen or so examples I can go back and do a tally of what is going on.
But I have also been reading, and going through Game's journal now, I found some great posts by Db on trading ranges. Here are the two posts.
http://www.elitetrader.com/vb/showpost.php?p=3791746&postcount=88 (last paragraph)
http://www.elitetrader.com/vb/showpost.php?p=3791771&postcount=91
What this does confirm for me is that yes, if you think you are in a trading range, you gotta take the trade at where you think the reversal is and not wait for a RET since price might be too close to the other extreme. I also liked the discussion on ret vs reversal and how difficult it is to tell these things in real time.
Coincidentally, I also see that Db uses the phrases support and resistance line to mean what he now calls the supply line and demand line. I am happy that I am able to follow the theory quite well and even spot this nuance. Calling them supply and demand lines certainly makes it much easier since they are distinguished from the support and resistance which are actual levels of price and hence horizontal lines vs. diagonal. I can now see how the SLA method came to be because it was a few months after this where the change in naming was done for the first Straight Line thread.
But I have also been reading, and going through Game's journal now, I found some great posts by Db on trading ranges. Here are the two posts.
http://www.elitetrader.com/vb/showpost.php?p=3791746&postcount=88 (last paragraph)
http://www.elitetrader.com/vb/showpost.php?p=3791771&postcount=91
What this does confirm for me is that yes, if you think you are in a trading range, you gotta take the trade at where you think the reversal is and not wait for a RET since price might be too close to the other extreme. I also liked the discussion on ret vs reversal and how difficult it is to tell these things in real time.
Coincidentally, I also see that Db uses the phrases support and resistance line to mean what he now calls the supply line and demand line. I am happy that I am able to follow the theory quite well and even spot this nuance. Calling them supply and demand lines certainly makes it much easier since they are distinguished from the support and resistance which are actual levels of price and hence horizontal lines vs. diagonal. I can now see how the SLA method came to be because it was a few months after this where the change in naming was done for the first Straight Line thread.
You may or may not have reached the following post. If not, it may be helpful at this point:
You'll note on the main chart that price has broken the demand line and held in a sideways direction for several days. Even though the demand line has been broken, this is a potential RET entry. And on the next day, price rallies and a RET entry would have been triggered. However, this trade fails immediately, suggesting that it is instead a potential reversal, and a reversal entry would have been triggered the following day. But this doesn't work either, so you end up in a hinge, with higher lows and lower highs, a hinge which remains intact today. So far. In other words, in real time all you have to go with is potentials, not certainties. You can expect and you can anticipate, but you can't know. Understanding this enables the trader to exit the trade without a lot of emotional self-indulgence. It's just business.
Pay lots of attention to that KP, that is how you spot chop in RT.
I hadn't reached it yet, so thank-you for pointing it out. What I am keenly aware of though is that on the very right edge, like in your example, you don't know what its going to be. And by the time you have confirmation, the trade based on it is gone.
Coincidentally, I have gotten to the point where you do mention that you usually call those lines demand and supply lines, and not support and resistance, so you clearly had this terminology for quite some time already. I don't know how people would get confused by that. Giving these lines different names than support and resistance is not only more descriptive of what the line represents, but it also avoids giving it the name that applies to a different concept.
I hadn't reached it yet, so thank-you for pointing it out. What I am keenly aware of though is that on the very right edge, like in your example, you don't know what its going to be. And by the time you have confirmation, the trade based on it is gone.
The trade is not gone if you place your entrystop in the right place. Whatever confirmation may occur takes place after the entry is triggered.