Trading NQ via Price Action

[NoDoji]

Who exactly is supplying and demanding at these micro-levels? HFT algos trying to capture a tick or two? Leave that game to them and focus on levels that have enough meaning to enough players that there's a chance to scalp 5 or 10 or even 20 NQ points.

Yes, I'm a day trader and yes, I'm a scalper, but if I were to use a 1-min chart to draw these micro trend lines and try to trade off them, I'd have no way to attain positive expectancy (necessary for eventual profitability). On slide 3, you've drawn a demand line across the lows of a couple of consecutive 1-min bars. There's nothing there but a couple of 1-min price bars.

Now compare this micro-management style of trading to a slightly bigger picture style of trading:

Five minutes prior to the market open, connect the swing highs and lows of the overnight session leading into the open such that you define a trend or, if there's no clear trend, you define a triangle or range (whichever applies). Since I saw a wide range around overnight lows with very slightly higher lows and very slightly higher highs, I connected the lows from 5:35 and 8:30 eastern time, and the highs from 2:00 and 9:00am (the 9:00am high was the parallel upper channel line of this slightly uptilting wide range). These upper and lower lines formed a wide symmetrical triangle. I can then watch the price action surrounding the open and see which side wants it more. Leading into the open, price was coming back down from the upper channel line and would be fairly likely to test the LTL. If the bulls want it badly, 4034.00 should be well-defended.

Sure enough, it's not only well-defended, price pushes through the UTL and the upper channel line a few minutes after the open. This is a long signal IF there's a shallow pullback to the breakout zone and a close back above it. This is when I watch the 1-min chart, not a moment sooner. There's a bit of wiggle and jiggle and then the 9:37 bar provides a long invitation that fits my 5 pt max stop loss and 5 point minimum profit target criteria.

Notice also when price pulls back from the next push up, the level that's defended on the pullback is the high of that 9:37 long signal bar. You can get long again or add to your position for another measured move target around 4053.

This is what happens in a trend. This is "Trading for Dummies". This is classic 5-min/1-min price action behavior. This is stuff of which dreams are made.

HOWEVER, BEWARE! When you read this, don't just take my word for it! You see, I've been revealed to be a despicable sort who makes all this stuff up to lure newbies to their demise. So please, please, only try this at home in the safety of a simulated replay account.

 

[k p]

Wow.. and wow! I am just about to run out so I can't do proper justice with my reply to you. Very quickly, here is a 5 minute chart with what I understood as I read it only once. (but I will for sure read it a few times). It does seem absolutely brilliant. And as always, I love your into regarding the algos. I was a bit lost today with the 5 minute because it just went straight up... so where to get in? But given the way you used the overnight action, it made so much sense. Anyway.. let me reply a little better later this evening.

And let's just say, if you're despicable, I am wholeheartedly coming along to be corrupted and taken advantage of so feel free to do your worst as you have total power over me!

 

[NoDoji]

Wow.. and wow! I am just about to run out so I can't do proper justice with my reply to you. Very quickly, here is a 5 minute chart with what I understood as I read it only once. (but I will for sure read it a few times). It does seem absolutely brilliant. And as always, I love your into regarding the algos. I was a bit lost today with the 5 minute because it just went straight up... so where to get in? But given the way you used the overnight action, it made so much sense. Anyway.. let me reply a little better later this evening.

And let's just say, if you're despicable, I am wholeheartedly coming along to be corrupted and taken advantage of so feel free to do your worst as you have total power over me!

Yes, those are the 5-min lines!

The "where to get in" comes from the 1-min pullback action after the breakout. You'll see it when you look at the 1-min chart. I take my signals from the 5-min chart and most of my entries from the 1-min chart (sometimes a 1st entry off the 5-min chart makes sense, like today's short break of the 3:35 ET bar after price hit the UTL of a clean wide channel).

Trying to trade directly from the PA on a 1-min chart lures me into trades counter to the signal at hand.

 

[k p]

Ok.. here is the slide I made with what you said. The test of that breakout level, indicated by my oval, is just so juicy. All I remember focusing on at the time of course was price going down and the fact that I just entered short.

Its unfortunate that today I didn't even see the channel really. I had the overnight levels marked and hence I am tuned much more to watching these horizontal levels. I can see now how beautiful these dips back down to test the breakout levels can be (if I have properly drawn trend lines... which is obvious a weakness for me). I didn't realize how the UTL drawn from the high overnight could have such an impact when it was tested, but following the lines as you show, it works out beautifully.

All those rejections of the 33/34 zone should have been enough for me to go long... this is what I have been training myself to see, but I was too stuck in wanting to see more, and thinking that I was being good for waiting for a decent retracement in the 5 minute chart or at least the 1 minute. This waiting of course made me get too caught up in the minor congestion area with now waiting for the proper long entry. (I should almost decide that either I will get into a move when I see it start moving, and if I don't take it within seconds, I will need to wait for a proper entry. But as my brain/emotions currently work, I wait, thinking I'm being good for waiting, and then jump in anyway without a proper entry, getting in just because of the frenzy, after its too late to catch the initial move up, just as a congestion area and retracement start to form)

I am also understanding so much better now of how you are using the 5 minute and 1 minute together, so this has been a huge eye opener.

Your 5 point stop loss is also an eye opener. My trades aren't anywhere as well planned as yours, but what I do see is that my small loss threshold is taking me out of moves. It is true that my entries aren't the best, but just in the past week or two, I am actually getting stopped out of trades that are entered in the same direction as the trend. I have taken 4 or 5 point losses before, so I thought that I needed to tighten these up, but I'm mixing apples and oranges here (holding onto trades that were in the opposite direction of the trend, and getting out early from trades that are with trend).

What I foolishly think is that by taking a 5 point stop loss, I can only have two failed trades before I hit my $200 daily loss (this isn't a firm limit, but I guess its what I've been taking lately before packing up for the day). But what in fact is happening is that I'm taking 3 or 4 losses of 2 and 3 points each, and these add up to just as much, and worse, the exits are usually just before price turns back in my favor and then takes off for what would have been a profit.

Likewise, I kept using having to have large stops as a reason to not trade a higher time frame chart, but a few days in a row of $200 losses adds up to one big stop loss target that I could have taken if I was to trade the hourly chart as Db has shown in the PDFs. So really, I'm getting needlessly chopped up.

It is good to be able to see how I'm doing this all wrong mind you, and as long as I learn from my mistakes before the account runs dry, this will all have been worth it.

Now if I can leave off with a question. Why not enter a long after the bounce from 34 when price respected that LTL you already had in play? Wouldn't this fulfill your 5 point stop loss in that if you got in close enough to 34 you could have exited for less than a 5 point loss in case price broke the LTL? And given that the channel had a high of roughly 43, a 5 point profit target could have been reached if you got in anywhere below 38 which was quite possible.

 

[NoDoji]

All those rejections of the 33/34 zone should have been enough for me to go long... this is what I have been training myself to see, but I was too stuck in wanting to see more, and thinking that I was being good for waiting for a decent retracement in the 5 minute chart or at least the 1 minute. This waiting of course made me get too caught up in the minor congestion area with now waiting for the proper long entry. (I should almost decide that either I will get into a move when I see it start moving, and if I don't take it within seconds, I will need to wait for a proper entry. But as my brain/emotions currently work, I wait, thinking I'm being good for waiting, and then jump in anyway without a proper entry, getting in just because of the frenzy, after its too late to catch the initial move up, just as a congestion area and retracement start to form)

I am also understanding so much better now of how you are using the 5 minute and 1 minute together, so this has been a huge eye opener.

Your 5 point stop loss is also an eye opener. My trades aren't anywhere as well planned as yours, but what I do see is that my small loss threshold is taking me out of moves. It is true that my entries aren't the best, but just in the past week or two, I am actually getting stopped out of trades that are entered in the same direction as the trend. I have taken 4 or 5 point losses before, so I thought that I needed to tighten these up, but I'm mixing apples and oranges here (holding onto trades that were in the opposite direction of the trend, and getting out early from trades that are with trend).

What I foolishly think is that by taking a 5 point stop loss, I can only have two failed trades before I hit my $200 daily loss (this isn't a firm limit, but I guess its what I've been taking lately before packing up for the day). But what in fact is happening is that I'm taking 3 or 4 losses of 2 and 3 points each, and these add up to just as much, and worse, the exits are usually just before price turns back in my favor and then takes off for what would have been a profit.

Likewise, I kept using having to have large stops as a reason to not trade a higher time frame chart, but a few days in a row of $200 losses adds up to one big stop loss target that I could have taken if I was to trade the hourly chart as Db has shown in the PDFs. So really, I'm getting needlessly chopped up.

It is good to be able to see how I'm doing this all wrong mind you, and as long as I learn from my mistakes before the account runs dry, this will all have been worth it.

Now if I can leave off with a question. Why not enter a long after the bounce from 34 when price respected that LTL you already had in play? Wouldn't this fulfill your 5 point stop loss in that if you got in close enough to 34 you could have exited for less than a 5 point loss in case price broke the LTL? And given that the channel had a high of roughly 43, a 5 point profit target could have been reached if you got in anywhere below 38 which was quite possible.

I've been illustrating the same method for months now on ET for purposes of consistency, but it's only one of many entry methods. Getting long close to 34, or layering bids in advance around that level is as good a trade entry method as any. When you anticipate a level will hold as S/R and use a limit to enter, you get the advantage of a very tight stop. If the level breaks out with conviction you can then recover your small loss with a pullback entry in the direction of the breakout. However, the win rate on anticipatory trades may be lower than getting in on a pullback and hook back in the direction of the move once the market's tipped its hand. So smaller stops, lower win rate, or higher win rate, wider stops...what matters most is that you conduct statistical analyses of a variety of methods and choose one that offers net profitability over each series of N trades and that fits your personality.

Regarding the 5 pt stop loss, that's not necessarily the stop loss I use on every trade. It's a measuring stick I use for calculating R:R. I want first and foremost to see that there's a technical (mathematical) reason for price to travel at least 5 pts in my favor from an entry point. I then look to see where a technically reasonable stop loss would be placed. If it's more than 5 pts, I wait for a lower risk trade, but if it's 5 pts or less, and the setup has positive expectancy, I'll take it.

Late this afternoon there was a 5-min 1st entry setup off the upper trend line touch, the break of the 3:35 ET bar low. The technically clear stop loss level was only 3 pts from entry on that one.

 

[k p]

Late this afternoon there was a 5-min 1st entry setup off the upper trend line touch, the break of the 3:35 ET bar low. The technically clear stop loss level was only 3 pts from entry on that one.

And please do keep illustrating! Here is an attached chart but I am not sure what you are trying to show. I have an upper trend line that slopes down, and I see that my 2:35 bar (your 3:35 ET), above the letter A, does in fact come down below the line, but then goes higher. Now I'm not exactly sure what setup you're trying to illustrate. Are you saying that price went above the UTL, but only by just over 3 points before coming down... so entering a short somewhere meant that price only went against you 3 points before dropping down majorly? I am totally lost on this one! (I labelled the bars to make this easier, starting with "a", just before my big "A", and then the rest of the letters for the subsequent bars)

Also, why the huge drop right at the end of the day? Its rare to see such a big drop, even if there are trading just getting out of their long before the close, and even after the 4pm ET cutoff, although I realize the NQ keeps trading till 4:15 ET.

 

[k p]

Ok.. so first please refer to the 5 minute chart. I have drawn in what I think is the important stuff. It might be a lot of lines, but I think they were all necessary. So lets go back to the 1 minute chart.

A - Before the open there is a nice series of lower highs and lower lows but this one here is just one tick lower so it seems like this downtrend is slowing down. This point is also used to connect my 5 minute DL (trend line) And, this also happens to be where the apex of that huge hinge is. Given the hinge, the apex is the level at which traders find equilibrium, so it makes sense that later, traders would find equilibrium here again.

O - As we open, we even have a higher high so in a way we have permission to go long. But I want to wait to see what happens a few minutes into the open.

We go straight up and through the 5 minute SL. Ok.. time to start looking for something.

B - The bar before my long entry opens and closes above this SL, so I think this is giving me permission to go long and I enter just two ticks above that high it seems. Honestly, just after my entry, price dropped a bit and I had that sinking feeling.

C - The exit is here unfortunately. Yes I was a bit desperate to get out, but at least I was in the positive now. The exit is 50% based on emotions, but also because I didn't want to mess with the overnight high. Too often price can bounce off, so I figure I would exit and look for an entry based on the direction that price continued to go.

D - These two bars here might have provided the necessary retracement, but I think I want to look for something better. It ends up being pretty much the high of the day.

E - We come down and I'm expecting it to stop somewhere. No way do I want to short a nice trend up. I think perhaps this overnight level might provide the stop but we essentially go through easily.

F - This looks like it would be the 50% level of the up move, but this too is breached.

I was waiting for a solid RET in the 1 minute chart, you know, where price dips down 3 or 4 points over a few minutes before coming up again nicely, but it never came.

G - Out of nowhere, we start dropping. Here I'm thinking ok, lets test the breakout level from that 5 minute SL. Is it even still in play since price went up so high? No problem breaking through here.

H - So now we even break below what was our DL overnight and also through the apex of that hinge.. So yes, I entered short, feeling left out, but of course at a stupid place given the huge drop already of 8 points, but at least we broke through some areas that could be support. Here is the thing though. The drop looked nice and orderly to be honest. It wasn't cascade like, although I guess it looks like it on the chart. It seemed to me as if it was neat and orderly. Sure someone pulled the fire alarm and everyone was running for the exits, but its like they had practiced it many times so there was no chaos.

Anyway, I was thinking we might at least test the overnight low, but given a slight bit of hesitation, I was out for a point, having gotten out just in time it seems.

I sit at +$52, mostly just dumb luck I guess. (first trade was hopefully solid based on the line break and waiting for the bar to stay above)

I - Its no surprise here that it ended up being an area of hesitation given that its where that apex was, but given that I see ever so slightly higher highs and higher lows, I think a long here makes sense. (too bad its only marked in and not taken)

In the back of my head I also wondered if we could retrace that quick move down.... surely there must be some trades there within that 8 point drop that we want to complete.

J - Its a thing of beauty. We came up to practically exactly where drop started accelerating.

K - Price started to move quite erratically, and yes, there was a news report, should have known in advance. Here I am also starting to draw a trend line, SL, to see how well it holds up, but you can see it breaks below, only by a poke though.

L - Just before this actually we also have a bar to the left that opens and closes on the high, but the bar above opens and closes on the low. Man this is all quite erratic. (should be surprised... its the 1 minute chart as ND would say!)

M - So we make it to the OL and penetrate. This is the worst type of action here around a level I've marked in. No reversal, but no continuation either. (this is why I gave up with looking for something solid here. Its works when it works, but would chop me up bad when it doesn't. Its best to first see what traders do rather than anticipate and enter a trade. If I was 80% right this would be fine, but only 50% of the time or less do we have a solid reversal, and when it does penetrate, it often stops after only 3 or 4 points, so getting into a continuation trade is just as tricky as taking the reversal)

N - Perhaps we are starting an up trend now with the higher low and then a higher high above?

P - Nope, we break through, but a quick rejection of 33 here. It sure looks like a nice down slopping channel now.

Q - And of course the channel breaks apart right when it becomes quite obvious.

I'm clearly not looking for any trades given the erratic nature and I have no idea what levels or trends are in play. We pretty much went above and below the opening level by the same amount.. what a funny day.

Looks like I end at +$52.

 

[k p]

After price broke above the SL close to the open, I wondered if we can take that DL from the bottom and move it up to the previous high and use this as an area to look for a target. This would give us a nice wide channel as illustrated. How does this look ND? We ended up going 3 points higher and then turned back down, but its interesting.

 

[k p]

Looking at an hourly chart, I sure do wonder if this might be a bottom and a climb back up of at least 60 points. That last bar of today essentially opens and closes near the high. The bottom was rejected and forms a higher low. The SL that I can draw in was also broken, so unless price goes lower than 27, we cannot fan the line. Its a shame we aren't closer to the bottom at 4004, but it sure does looks like the drop has stalled and there is reason to go long based on the hourly chart.

Don't ask me where or what my stops would be though

 

[BonScott]

Nice work with the 5 minute chart k p. I think there were no easy trades for us today. Maybe later.