Trading NQ via Price Action

[NoDoji]

Thanks for this NoDoji. I am attaching a chart with what I think you're saying. I had a bit of trouble with the measured move but I think I got it right. When you said to connect the swing lows on the 5 minute.. you meant the swing low at the bottom dip after we opened and the low at 4016... correct? This gives a line whose parallel can be connected with the high at 4033 and extended to roughly 4045 at which point the 5 minute bar does make a slightly lower low.

I am also attaching what I think the 1-2-3 setup is. To be honest, I don't look for it nor do I have it in my head as I'm trying not to think about setups but rather behavior. I think that behavior on a short time scale chart like a 1 minute is a bit tricky though, and so a general macro view of what traders want seems to be better. Also, after the first hour, it seems to be just more of the automated trading as you once its been established if we are going up or down from the opening level.

I really appreciate how you have studied this in such depth that you can look behind the scenes and know what is going on.

I do absolutely know that it doesn't matter what the fundamentals are... I just needed to vent, and feeling what price should do is very dangerous for me. Perhaps with years of experience my "feel" might actually be a translation of "statistical probability", but at the moment, my "feel" for the market is just an emotion.

I got a chuckle our of your advice during a strong trend. My emotions seem perfect for buying tops and selling bottoms, so just reversing this would be what is needed for making money! On my chart, where I sold at Q, it was just as you say, where I am missing the reversal, and when I bought it back at R to cover my loss, it was also where I just couldn't take it anymore, and it too was a momentary top so a great place to get out of a long for profit. Incredible.. just incredible! So perhaps the secret is that I can use my emotions for trading, I just have to do the exact opposite!

Do you ever having losing days now?

Your illustrations are perfect. I cheat on my 1-2-3 entries by taking the early entry as Trader Vic describes here (I enter my 1-2-3's at the X): http://www.dacharts.com/123.htm

My advice on that thread was based on my own "the market is out to get me" experiences. It really, really works, LOL!

Profitable trading feels counter-intuitive, so you have to learn to get comfortable doing something that feels uncomfortable or "wrong".

I have plenty of losing trades, but it's pretty hard to have a losing day when you learn to wait for a trend to assert itself and trade in the direction of the trend.

 

[k p]

That is exactly the illustrations I used as my cheat sheet!

I really can't thank-you enough NoDoji... you really did lift me up today believe it or not.

I of course know that the market has no idea that I'm even in so there is no way it can be out to get me, but the algos hunting for stops certainly is something to consider. Db also puts its well I think when he says that traders are just looking for trades and they might try lower and find not enough people want to trade down there so then they try higher. It does all make sense when you look at it from the supply and demand point of view, the buying and selling pressure (and as you say, the hedge funds need to buy lots throughout the day and hence the trend), but taking advantage of what looks so obvious is another ball game all together.

I also know that I'm mixing up expectations and stops and targets and such when I look at both the marco and the micro. I have seen myself getting into a trade based on one piece of evidence, but using a stop from a totally different thing I see on the chart just so I can hang in longer. (ie. I might take a trade that drops out of a hinge simply because it dropped out.. so my stop should be if it doesn't take off right away and goes back into the hinge, but instead I make my stop a swing high somewhere which could be so far away from the entry that the stop loss isn't based on the entry criteria)

I know that one day when I'm completely free, when I really don't care what price is doing, it will be easy to just see the trend and get on board, but my gosh, getting there is an emotional roller-coaster.

I will absolutely look up that book you mention. I thought after reading both of Mark Douglas's books, along with The Nature of Risk, that I would be set, but its obvious that my core is fighting this probability thing and also this what I "feel" about price thing so strongly. As you say, its so counter-intuitive. Its perhaps stupid to be throwing money at this when I'm so ill prepared but I don't think I would have ever thought this would be me if I didn't see for myself. They should give you a psychological test before you can open up an account to see how fit you are for this sort of thing!

Gosh, it really is unfortunate to miss out on a 50 point rally... oh well... moving forward.

 

[k p]

Really going over the chart today, I am making a note in my journal of the importance of what NoDoji said today about range breaks, especially the counter trend ones. I identify these two that I would have seen in real time.

"A" is pretty clear, but by the time we get to B, we have a broken trend line first. So then I can make the case for a short as outlined, the 123 setup essentially, and we even break the previous swing low (there might have even been this setup 5 minutes earlier right at the break of the line... but its best to wait for the clearer one). But price very quickly reverses back up after dropping out the bottom, so a quick exit is essential. After its all done, I can see how this was in fact a range, and a failed break out the bottom, but in real time, it looks like it could have been a reversal. After that failed break, we can also fan the DL to include this swing low at B now.

The important thing to note is that the early entry on the short is legit, and no harm is done as long as the exit is made once price comes back up. No wishing and hoping. If I enter a trade on just a hunch, I gotta be ready to leave just as quick. I've said it before that being nimble like this is what I strive for. Who cares if I'm wrong, the important thing is to keep taking these setups because the next could be the start of the huge move with no reason to leave until there is at least 20 points of profit.

On top of this... when I'm not freaked out in the moment, I can also see that price not doing what I thought it would do is a case of the dog that didn't bark, so if going down was quickly rejected, lets be nimble enough to consider a very quick long. In this case, we also have 2 ranges that fail breaking out the bottom, so the bigger picture is starting to form for an up trend. There was of course a huge retracement after this, but once price reversed back up from 4016, it was a big trend up.

 

[k p]

A - Tried for a long here based on the rejection of going down and some RETs in the 15 sec chart.

B - Shame I exited here, just 2 ticks above where it turned around but oh well. At the time we even has a higher low on the 15 sec and we dipped back below the OH. As a result of going back up, I can now draw a DL. Perhaps this was my one problem of going long where I did... not waiting for a RET on th 1 minute chart. I of course would have been happy if price shot up cause I would be in early.

So I'm at -$49.

C - Made it to just above the PDH but then turn back down going through the DL.

D - I note we don't go below the opening low.

E - By the time we get to here, I start drawing in the hinge.

F - Now I'm not sure if this bounce here is legit for taking a trade below this bar, and I'm not sure if it wasn't in fact at this point where I finally saw the hinge, but at any rate, looking at it now, If I see a hinge and I see this third bounce off the line, shorting below this bar seems sensible for at least a trip back down.

G - We break through and I consider a short here but given that its at the level of the opening low I don't take it... don't want to find more support there again.

H - We turn around here, and if I look back I can see this as the bottom of a range that formed after the spike up from the news release, so if I had noted this range for the hour prior to the open (not just the range of the overnight action), seeing this bounce could be reason enough to take a long above this bar that forms the low.

I - So we come back into the hinge and are at the apex here, but we do go above... no bounce off the apex as a test. Before even getting this far, just seeing that the hinge exit didn't take off, it might have been reason enough to go long as we get back into the hinge with the rationale being that since it failed to go out the bottom it might now try to go out the top. You know.. all I really need to do is to look at all my old charts where I have a hinge drawn and see what happens. I have enough data already myself in the charts that it should be easy to find 20 and do a statistical analysis. Far too often I see the hinge exit fail quickly, so I get sad that the hinge exit isn't reliable enough, but then this would mean once the exit has failed, the great trade might be in the opposite direction.

J - Here is a hinge as well, but I don't draw it in real time, nor would I trust the exit given that there is just so much overlap. And I don't like the whole idea of a hinge inside a hinge, and when the hinge forms inside of a trading range, it really is just one big trading range. This area of 57 to 67 is just too messy now.

K - If I drew a line from "C" to here, this would be the upper bounds of an even bigger hinge that encompasses this entire day after the open, the mean of which would be pretty much at 61, our overnight high. This hinge looks quite nice on the 5 minute chart. This also happens to be where the apex of that previous smaller hinge would be... but on a day like today, this isn't providing me enough to actually take a trade from.

L - Right about here is where the 5 minute hinge breaks to the down side.

M - Wow... we have an initial bounce here with the swing low at H.

N - So we do break through. There is a bit of a retracement just above 56, but its tricky to take a short there given the support at H and M... so lets just see if there is any follow-through here.

P - Slight penetration of the SL now that we turned back up after breaking below 56. The buying doesn't look strong though.

Q - Sure looks like a higher low here... buy above this bar???

R - Dammit.. that was a good trade here, and the perfect 123 setup NoDoji brought to my attention yesterday. We had a SL break... the higher low at Q hence a failure to make a lower low... the stealth entry could have been just above that Q bar, and then confirmation once we made a HH here at R. It is breaking down, but it would have been good for 3 or 4 points if the entry was made before the 3rd step, the higher high. If you waited until the HH... well you have a loss!

Its funny because looking at it now, just like ND said, it always feels wrong, so going long above that Q bar makes me uneasy because I think we are in a downtrend and I might just get sucked in. Far too often I see it works without me though, and then I'm left chasing terrible entries... so I need to get comfortable with being uncomfortable as long as the trigger is there on the chart.

I did spend a bit of time yesterday going over this "setup" on the chart, and I did find many places where it didn't work... it all depends on how you draw your trend lines, how tight you make them. Perhaps if you keep losses small and hence exit quick, and take every one, this might work, but I want the perfect trade! (which of course doesn't exist!)

I also realized that this 123 setup is essentially SLA. Only key difference is that in SLA, we don't really need to wait for the confirmation of the higher high or lower low, we just take the trade at one point away from the retracement, so with price hitting the target, this is the confirmation that price is moving in the direction you're trading.

CONCLUSION

Well I better pack up for today. shame I couldn't make up my 2 point loss today, but nothing about today was easy. We did have 2 big trending days in a row so this breather shouldn't be a surprise.

I am a little bothered by not taking the hinge exit at L. It looks so obvious on the 5 minute chart, and puts you into a short up nice and high, above where the worry of that possible support at M that did break would be. Also that long above Q was an excellent trade. Sigh.. this is so easy in hindsight.

So I end at -$49.

Oh yes, and I'm reading that book ND suggested.. its excellent. It follows the same theme about beliefs like Michael Douglas points out, but its a specific belief about mindset, being either open to learning more, or closed, and hence setting up the inability to grow. I have said over and over again that I can see in myself that I don't have the trader's mindset, and although I poked at this being genetic just yesterday, if I have an open mindset then this is something I can learn. I kid you not... its such an emotional release to fight something so hard and then slowly let it go. I did a bit of this back in my acting days... such an enlightening experience.

Although I didn't make money today, I was calm for the most part and saw things quite clearly. Didn't have enough confidence to act on them today, but it works... its in the charts.... just waiting for me to take the opportunity.

 

[k p]

I should also add that if I did take those hinge exits as I saw them (especially the 5 minute one), along with that 123 setup, I think this would have been a good day. Reading ND say that she has lots of trades that don't work really inspires me. I realize that Db says often that most people over trade, and I can certainly see how this is so, but if you're not going to be taking the high time frame perspective (which I guess I'm not prepared enough for), then as long as you're seeing what you need to be seeing the charts, then a valid trade is a valid trade to take.

So if I just kept plugging away, and kept the exits nice and clean and quick, not getting wrapped up in the idea that failed because I took a bad trade, then I think those hinge exits would have cause me to BE or tiny loses, but there were also some good gains which I think would have made for a positive day.

 

[k p]

Oh.. one more thing. The mindset I need to change is the idea that when I see a trade, I want it to be right. I guess I take money losses much harder than I need to, knowing that it then prevents me from taking the next trade. But I see so much on the chart that I think is good, but I wonder if its good enough. If I was fluid with my entries then I think I can really make this work.

 

[k p]

Here is that 5 minute chart. The hinge is beautiful.. and not only that, if we draw a trend line from the lows over night, extend it to the swing low 25 minutes into the open (the low that forms the hinge hence why these lines end up overlapping), then when we have a break of the hinge, we also have a break of this trend line. So a short around 58/59 was a solid solid trade, and no wonder price dropped quite strongly there... so many people must have been watching this! It even comes up to test the apex but doesn't quite get there before turning back down.

So even though the day was kind of crappy, when you really look at it, there was plenty of high probability stuff to trade. Can I do this day over again????? I'm always just a little too late!

 

[NoDoji]

The concepts of "right/wrong" and "bad trade/good trade" are best replaced by "trade criteria were met/entry was proper " (such trades are always "right" no matter what the outcome) and "gain/loss" (outcomes are not predictable so why give a loss a negative label when losses are a necessary business expense?)

When I see a setup that looks "sloppy" I ask myself what I don't like about it. Usually it turns out that there's a range containing the price action or the 20EMA on the 5-min chart has flattened. I'd rather miss out on the initial move out of this flat condition than lose money by gambling on black or red. (Look at the NQ right now - 11:50 ET - to see an example of this.)

On the other hand, if the setup shows a technically clear level at which the trade would no longer have odds in my favor (a reasonable place to put a stop loss) and if there's no obstruction in the way of a reasonable favorable move that preserves my risk:reward ratio, then it's "good enough".

 

[k p]

Absolutely right... and yet its such a hard thing to change. Just being aware of it is a big step I think, and although I've been saying this for weeks if not months now, I am still struggling with this. I guess its something deeply rooted in me so no wonder its taking a bit of time to undo. As Douglas would say, all I can do is give this belief (that a losing trade made me wrong and not smart enough) less energy and over time replace it with a different belief based on what you say.

The hard part is admitting that my trade/entry criteria isn't well defined and I'm still operating from the point of view of "this looks good". Sometimes it works in my favor because I am looking at the right criteria, other times the trades are based on a whim (and of course even if the trade is solid, it might still not work with the statistical probability). I am sad to report that I haven't done the testing that I should, that I haven't actually formulated a trading plan. Each time I thought I had something it didn't work enough to my liking so I think I gave up far too soon. (This is exactly what Carol Dweck discusses, not learning from the failure) So then I just went back to playing around.

Its a horrible cycle to be in, to want to take a trade that looks good, but in order for it to look good, you would have had to have done enough research on this trade. But when it comes time to doing this research, I get discouraged. I partly don't want to be trading "setups" as Db would put it, but in the live environment I am lost. I have a solid hunch, but not enough confidence to act on it. So mentally, I have really put myself in quite the pickle.

I'm frustrated because at times, there is just too much stuff to look for. Hinges look great, except if they are in a trading range. One trading range might in fact be part of another trading range. Trend lines can be as tight or as lose as you want to make them, so a break of one may not mean much if its too tight to begin with. Then of course you have 1 minute charts, tick charts and 5 minute charts. This is why I have been getting discouraged with coming up with something solid because trading seems to be as much of a science, waiting for proper pre-determined criteria, yet also very much of an art, where you can can be fluid with separating the signal from the noise.

I like what you do with your trend lines ND and in a few of the charts you have annotated for me, they have been used superbly. But somehow my ability to use them isn't all that strong, which makes me use them only sometimes, which then of course comes back to not having a solid trading plan.

But this is all good... I'm very happy with how I'm progressing so thank-you so much for the continued support.

May I ask if you took any trades in the NQ today and where they were?

 

[NoDoji]

The hard part is admitting that my trade/entry criteria isn't well defined and I'm still operating from the point of view of "this looks good". Sometimes it works in my favor because I am looking at the right criteria, other times the trades are based on a whim (and of course even if the trade is solid, it might still not work with the statistical probability). I am sad to report that I haven't done the testing that I should, that I haven't actually formulated a trading plan. Each time I thought I had something it didn't work enough to my liking so I think I gave up far too soon. (This is exactly what Carol Dweck discusses, not learning from the failure) So then I just went back to playing around.
But this is all good... I'm very happy with how I'm progressing so thank-you so much for the continued support.

May I ask if you took any trades in the NQ today and where they were?

You'll feel far more confident once you have a thoroughly tested defined plan. Be careful not to confuse "to my liking" with "works in my favor almost all the time", or you'll be on an eternal quest for the Holy Grail. I still trade off the same signals I discovered over 4 years ago. The core raw concept wasn't "to my liking" because it had no filters. I studied the stats of MAE/MFE and implemented filters to avoid chop/range as much as possible. However, I found myself getting taken out of too many trades break even and I learned to use the 1-min chart to enter on "second mouse" scenarios. This was very much to my liking because it fit my nervous impatient trading personality. The second mouse setups on the 1-min chart allowed me to place a stop loss with which I was comfortable because price already pulled back and took out all the weak hands (that used to be me). So it was far more likely that the trade would work rather quickly or fail rather quickly, and better yet often the failure allowed me to exit break even before hitting my stop loss.

It took an astounding number of hours of study to get to that point.

Then there are traders like Geez who had a very simple plan that took advantage of a ~50% win rate, with 2:1 reward. All the little details I have to keep in my head are basically irrelevant with his plan, but I didn't have the personality to effectively trade that way. If I were to have a day with 5 losses out of 5 trades I'd be back to the drawing boards trying to "fix" something that wasn't broken!

I didn't trade NQ today; CL offered incredibly clean price action and when I glanced at NQ, I didn't see much I would've traded anyhow.