Trading The Plan

B

Brandonf

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I would like this thread to be used to discuss the practical application of technical analysis using classical principles and common sense. So much of trading gets bogged down in complex things that work, but like most things in life, there is a simple solution. For myself, I look for continuation patterns in a bigger timeframe, and a divergance or reversal pattern in the smaller timeframe to generate trades. Some of my favorite tools include pattern recognition, moving averages, ADX, Keltner Channels, Volatility Constrictions/Contractions (Toby Crabel) and 2B Reversal Patterns (Trader Vic). Ideally there will be 1 to 5 trades for any given timeframe (so for example a daytrader would look to have 1 to 5 trades a day, a swingtrader 1 to 5 a week etc. I will post some lessons and ideas here on a regular basis. There are a lot of people with a ton of knowledge here on ET so my hope is that everyone can contribute and work together in a friendly way, and feels free to post idea's and questions.


Brandon
 
Flags and Pennants are continuation patterns. They are about the most reliable of the common continuation patterns and form the basis for many of the trades I take. For example, a bull flag on a 30 minute chart taken in combo. with a 2B bottom on a 1 minute chart would represent a very good trading opportunity. The most common mistake I see people make when using flags (this would probably apply to most patterns) is to trade them as though they occur in a vaccum. If you combine them with other things your results will be much better. Here is a good link to show you bullflags, bear flags and pennents.
http://www.chartpatterns.com/flagsandpennants.htm
Please note that I have no affiliation at all with this site, it simply is a good example of the pattern.

Brandon
 
A divergence can be a very powerful reversal pattern (again especially when combined with something, for example a 15 minute bear flag, and a TICK/SP or SP/Nasdaq Divergence). Here is an example taken from our chatroom of a play taken on a TICK/Nasdaq divergence. [09:13] <Brandon> we had the TICKs acting fairly strong
[09:13] <Brandon> higher highs
[09:13] <Brandon> higher lows
[09:13] <Brandon> but the indexes are at best going sideways
[09:13] <Brandon> and the DOW was getting kicked
[09:14] <Brandon> this was with a high TRIN
[09:14] <Brandon> we still have a very high TRIN
[09:14] <Brandon> so just little things
[09:14] <Brandon> Attention: TICKs on the outskirts of stupidsville
[09:14] <Brandon> aggressive traders can short Nasdaqs here
[09:14] <Brandon> there is no reaction here at all
[09:15] <Brandon> screaming at us to short the hell out of them
[09:15] <Brandon> 09:15:23 SELL SHORT ALERT : Nasdaq
[09:16] <Brandon> stops over 1453
[09:17] <Brandon> No reation at all in the nasdaq to speak of as the TICKs went totally crazy
[10:00] <Brandon> http://www.tradingfrommainstreet.com/img/charts/April2Divergance.gif
[10:04] <Brandon> black prints are the TICK
[10:04] <Brandon> Blue is the Nasdaq
[10:04] <Brandon> [09:31] <member> nyse tick worthless today
[10:04] <Brandon> [09:31] <member> steady uptrend in all this selling
[10:04] <Brandon> [09:31] <Brandon> yeah
[10:04] <Brandon> [09:31] <ganymede> albeit slight uptrend
[10:04] <Brandon> [09:31] <member> perfect
[10:04] <Brandon> [09:31] <Brandon> its a huge signal
[10:05] <Brandon> the key thing here to remember is the idea of confirmation
[10:05] <Brandon> and overbought oversold TICKs
[10:05] <Brandon> these two things will guide you easily to understand why this was taken as a trade
[10:05] <Brandon> first a point I talk about all the time
[10:05] <Brandon> is watch the relationships
[10:05] <Brandon> dont just trade the chart patterns
[10:05] <Brandon> coz if you do that
[10:05] <Brandon> you are leaving a lot of the potential on the table
[10:06] <Brandon> and leaving a vast area unexplored that is very lucrative
[10:06] <Brandon> and low risk
[10:06] <Brandon> one such relationship is the TICK to the market
[10:06] <Brandon> I like the NYSE TICKs the best
[10:06] <Brandon> why?
[10:06] <Brandon> they work better
[10:06] <Brandon> most of the buy and sell programs still take place on the NYSE
[10:06] <Brandon> and it shows up there on the print in the TICKs
[10:06] <Brandon> TIKI too
[10:06] <Brandon> but the TICKs are good enough
[10:07] <Brandon> so by watching the TICK
[10:07] <Brandon> you can get an idea of how things are flowing
[10:07] <Brandon> in or out
[10:07] <Brandon> now
[10:07] <Brandon> 99% of the time
[10:07] <Brandon> if the TICKs are strong like they are today
[10:07] <Brandon> the market will be too
[10:07] <Brandon> in fact
[10:07] <Brandon> as long as the TICKs stay strong like this
[10:07] <Brandon> we will be STRONG BUYERS this afternoon
[10:08] <Brandon> but
[10:08] <Brandon> we want to see confirms
[10:08] <Brandon> so on new highs in the tick
[10:08] <Brandon> we want it in price
[10:08] <Brandon> and in price we want it in the tick
[10:08] <Brandon> now the next idea is overbought TICKs
[10:08] <Brandon> the TICKs are very very strong above 700
[10:08] <Brandon> now
[10:09] <Brandon> any time you see a tick reading above 700
[10:09] <Brandon> the market better be making new highs
[10:09] <Brandon> and let me make an analogy here
[10:09] <Brandon> lets say you are running a race
[10:09] <Brandon> a 200 meter sprint
[10:09] <Brandon> one guy running on the track normal
[10:09] <Brandon> and another downhill
[10:09] <Brandon> if the guy running downhill cant beat the guy who is running flat
[10:09] <Brandon> he is pretty much screwed
[10:10] <Brandon> and not going to win the race period
[10:10] <Brandon> thats what we had here with these TICKs
[10:10] <Brandon> they are so strong
[10:10] <Brandon> they are getting way up there into overbought area's
[10:10] <Brandon> and the market cant do a damn thing
[10:10] <Brandon> it cant even win running downhill
[10:10] <Brandon> so
[10:10] <Brandon> whats the logical bet?
[10:10] <Brandon> well
[10:10] <Brandon> you say its a lousey sprinter for sure
[10:10] <Brandon> and dont bet on it to win

Brandon
 
Proper Money Management and Risk Control means never putting yourself in a position that one bad trade, or even a series of 10, will put you out of business. Remember, your primary business objective must be to stay in business.
What is Money Management and Risk Control?
Money Management and Risk Control is the portion of ones business plan (trading system) that tells you how much you can risk on one trade. What amount of risk should you be willing to take? A proper Money Management component to your business plan not only assures your longevity simply by not allowing large positions, but also by removing significant psychological barriers in trading. Let us quickly quote Larry Hite from the book Market Wizards (which we would recommend you all read) by Jack Schwager. "Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical." Larry Hite. Mr. Hite manages futures, and the risk control modules used are slightly different, never-the-less the principles are much the same.

Incidently should you be thinking you can not make good returns taking such small risk you should know that when Market Wizards was written (1988) Larry Hites funds had a compounded average yearly return of 30%. This was done taking very limited risks. How many funds consistently do 30%, not many. If you can consistently make 30%, people will beat your door down begging you to manage money for them.


Brandon
 
All freely traded markets are trending at all times. There are four major trend timelines in effect at all times. The first is the the long term time frame. It lasts from months to years and is the domain of the investor. The second is the intermediate term time frame, this exists in a period of weeks to months. The third time frame, the one I am primarily concerned with, is the short term time frame, the domain of swingtraders. The fourth, a very minor time frame is micro. This exists in a period of seconds to a day or two. Daytraders operate in this time frame. Each of these can be moving in different directions at any time.
It is important you know which way the trend you are dealing with, and the trend one order higher, is going. There are uptrends, downtrends and sideways trends. We concern ourselves with uptrends and downtrends for the most part as these present the easiest opportunity for us to make money.

An uptrend occurs when a stock is making a series of higher highs and higher lows. It will consist of rallies interrupted by short term sell-offs, generally profit taking, which should stop the down move at or near the area of the last low. In the strongest of uptrends however, this sell-off will stop at the area of the last minor high, that being visible as the last peak on the chart.

Brandon
 
Volatility Contraction and Expansion
by Brandon Fredrickson


The class tonight, while I think it is really one of the most important I've given as far as technique or methods go, isn't very long. The principles of contraction and expansion is a market phenomenon were prices go from a period of rest (coiling) to a period of strong movement (uncoiling).


We have looked at the concepts of a trend day very often and it's one that, if used properly, leads to great profits for traders. A trader who knows nothing at all but how to trade on a trend day would be ok so long as they know how to identify them.


On the flip side though, there are coiling days and we have not often discussed how to trade them and that will be the topic tonight. Some of the key things we will look at are NR7 (narrowest of the last 7 ranges), NR4 (narrowest of the last 4 ranges) Wr7 (widest of the last 7) and WR4 (widest of the last 4) days.


I am going to start this out by simply sharing some statistical research.

Here is a study:

The first step in the project was to find NR7 and NR4 bars, and WR7 and WR4 bars, and compare them using the same strategy -- these are daily bars.
Now the following day after the first stretch (and the stretch used here is 4 points), a buy was placed if that high was taken out or a short was placed if that low was taken out.
160 SP TICKS, after the first move of 160 SP Ticks, a trade was initiated on a break of either side of this IN THE DIRECTION OF THE BREAKOUT.
In 7313 trades beyond the morning range (buying or selling the breakout) a profit of 7.6 times more was produced from highs to lows going with that move than in 7524 trades of the same type following an WR7 or WR4.
Now the measurement taken was from peak gains.
The peak profit potential in the trades taken GOING WITH THE MOVE was 7.6 times greater following the NR bars than the WR bars (note that both will show some sort of ""profit"" since the study is setup from peak gains, but we are simply using the study to gather sample info)
There were 7313 times that the NR trades setup above or below this range (following NR7 or NR4 days) and there were 7524 times that the WR bars setup above and below these bars (following an WR7 or WR4 days)
The peak profit potential in the trades taken GOING WITH THE MOVE was 7.6 times greater following the NR bars than the WR bars.
Now, from a simple standpoint of just looking at this data what does that tell us?


- NR days lead to more likely chance of trending moves, or at least of greater follow through.


Now we take the same sample of trades but we change the strategy: instead of going with the move, the move was faded – faded means to go against the move. Faded is that if a new high is made, you go short, if new low is made, you go long.


When the stretch was broken to the upside a short was placed and when the stretch was broken to the downside a buy was placed and measured from the point of entry to the best possible price before the close.

Fading the move after a WR bar was 19.1 times more profitable than doing so after the NR bars (again, note that both samples, but not necessarily every trade in the sample, will show some sort of ""profit"" since the study is setup from peak gains)

Ok, so using this study what have we learned? What observation can we make about the character of days following WR bars?

Since we have covered trend day topics to death, let's go over how to approach the day following a WR day (please note that WR day does not always equal trend day.)


In most cases the day following a WR is a classic fading day. When tests of prior (intraday and prior days) highs are made you will want to go short. When tests of prior (intraday and prior days) lows are made you will want to go long.

The TICKs are also useful following a WR. When they make new highs, and new relative highs short trades are to be taken and when new lows, and new relative lows are made, long trades are to be taken.


The most important thing though to know is that profit expectations following a WR day need to be diminished you need to approach the day in as a ""scalp mode only, and you should reduce your size because of the whipsaw nature of the moves.


The idea is that for me, just due to how I think, my odds are better on the potential trend day, rather than the fader's dayand I want to exploit my strength, and minimize my weakness.


On an average day I will use a margin requirement of 10K per contract for myself. On something I deem to be a trend day, I will use 7K and following a WR bar I will up it to 15K.


I did tell ya'll this one would be short :) and that's the info I have to share with you I hope you guys find the info useful or at least thought provoking and interesting as you come up with your trading plans.


One more thing: which is just interesting to me, is that in most cases: Novices tend to be out of the market following NR4's and NR7's, thinking ""nothing is going on, I'm getting killed" and they tend to be very active after the WR4 and WR7 thinking that, things are hot again, and inevitably they get caught up in the whipsaw nature that follows a wide range and it's very easy to understand from a psychological point of view it's the easiest most comfortable thing to do and that's what people do what is easy and comfortable and in the market, that costs you money.

Any questions?


Q: Does an NR7 indicate higher probability of upcoming volatility than NR4?

A: The NR7 is better than an NR4 but both are valid
 
Excellent Brandon. I used excel to generate a list of NR7's and NR4's. I also copied the volatility formula used by Linda R. and the other guy.

Actually what the formula does is focus your attention to stocks that have been consolidating for N days, versus the NR day that occurs following a strong move.

An interesting study might be a comparison of those two concepts. Hey, I just subscribed to TS6, maybe I'll do it myself.

Although, the idea is probably well documented in Linda's book, hence her decison to include volatility as a filter. But I don't own the book and I would like to see for myself anyway.

One of the beauties of the NRB is the decreased risk involved relative to stoploss / reverse management. The narrow range by definition helps to minimize risk.

Again, as so many trading methods do, NRB's boil down to buying support and selling resistance. Remember that a breakout is nothing more than violation of S/R which then become R/S, respectively.

While not every trade will work out, one trading concept that is always true is....
 
I don't use that many technical indicators in my trading because I find that price, volume and moving averages generally tell me what I need to know. One indicator that I do find to be fairly valuable though, is the Keltner Channels. This is a relatively unknown indicator, but one that I have found very good for confirming trends. The following is taken from an intraday lesson in our Live Trading Room. http://www.tradingfrommainstreet.com/member/class/kelts.asp

Brandon
 
The following is a transcript from our chatroom.


[13:55] [primelaw] B, do you think it worthwhile to specialize in one stock while learning the ropes?

[13:56] [Brandon] well I dont like the idea much of one stock
[13:56] <Brandon> but its valid if you do the QQQ, NQ, SPY or ES
[13:56] <Brandon> simply because its a broad represenation
[13:56] <Brandon> what I do strongly thing people should do
[13:56] <Brandon> is specialize in ONE SETUP
[13:56] <Brandon> here is an example
[13:57] <Brandon> we have a member who is on vacation right now
[13:57] <Brandon> but he sent us his trade logs and was very frustrated with his results
[13:57] <Brandon> and rightfully so
[13:57] <Brandon> but as we started to look over them
[13:57] <Brandon> we noticed that he picks the pheonix setups out very well
[13:57] <Brandon> and trades them excellent
[13:57] <Brandon> so we said why are screwing around with this other stuff?
[13:57] <Brandon> just trade the pheonix
[13:57] <Brandon> there are a few of them a day
[13:58] <Brandon> and your making $400 to $500 a day on them
[13:58] <Brandon> and then pissing that away on everything else
[13:58] <Brandon> now he just trades the pheonix setups
[13:58] <Brandon> and he has gotten even better at picking them
[13:58] <Brandon> and is pulling out $600 to $800 a day
[13:58] <Brandon> only trading the pheonix
[13:58] <Brandon> and just getting a few day
[13:58] <Brandon> but he knows that setup inside and out
[13:58] <Brandon> I think that for a new trader
[13:59] <Brandon> that is the best way to go
[13:59] <Brandon> and as you get better with it
[13:59] <Brandon> maybe try adding an indicator or filter to it
[13:59] <Brandon> and as you improve there
[13:59] <Brandon> then SLOWLY
[13:59] <Brandon> move on to another setup
[13:59] <Brandon> SLOWLY
[13:59] <Brandon> dont risk everything you are making on your bread and butter
[13:59] <Brandon> but slowly get into another setup
[13:59] <Brandon> expand your revenue streams
[14:00] <Brandon> and once you have done that and gotten comfortable with two
[14:00] <Brandon> see if you can combine that to one
[14:00] <Brandon> if not fine
[14:00] <Brandon> move on to hte next
[14:00] <Brandon> but become an expert in a few (2 to 5) setups
[14:00] <Brandon> and thats all you will ever need to a successfull market player
[14:00] <Brandon> so many people, thier heads are just full of noise
[14:00] <Brandon> and it leads to much confusion and losses
[14:01] <Brandon> and its not helpful to profitable trading at all
[14:01] <Brandon> they just end up running around like willy wanker in circles
[14:01] <Brandon> and nothing productive comes of it

Brandon
 
Brandon,

I couldn't have said it better myself. All a "day trader" needs is 1 maybe 2 set-ups that they like and are comfortable with. That's it. Find some stocks you like to trade and apply your selected set-ups. It's not fancy, it's not exciting but it works. I would rather build my account up slowly EVERY DAY then make 10K one day and lose it the next.

I am enjoying this thread. Please keep it up.

BTW this is just my opinion. Don't verbally kill me if you like to trade hundreds of set-ups on thousands of stocks. What ever works for you.:D
 
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