Vince -- great response.
1. I'm not 100% sure what you mean by "tractable" but the dictionary says "easily handled/managed" so I'll assume that's what you mean.
Tractable, in this context, means easy to test. It's kind of a math-y phrase I suppose.
These formations apparently indicate that some people are taking profit during the move, and there are indicators that can let you know that the move hasn't run out of steam, particularly the volume of the pullback. Because so many other traders are looking for these same formations, it adds to the probability that these formations will lead to a further breakout, as so many other traders will also be jumping in for the ride.
What is your evidence of that? A good example would be -- "I analyzed over 5k trading days using 5 min bar charts and have identified price patterns that are signals of subsequent price moves. The average return of a long or short trade based upon is 0.20% per trade, with a standard deviation of 0.35%, and a hit rate of 64%".
Regarding the different time frames, these formations are most common on 1 and 5 minute charts, but can also appear to an extent on higher time frame charts. It seems that the higher the time frame, the more substantial the move can be. Multiple timeframe confirmation apparently increases the probability of these formations leading to big moves.
How did you arrive at these conclusions? Your general thesis seems to be momentum trading, and AFAIK, the best way to analyze that is through the convexity of gemoetric average chg and volatility.
As far as holding period, that's basically until my stop loss is hit. As I mentioned, I usually use key levels like EMAs or support levels.
Why those? Why not a std move given the setup?
2. Regarding my mosaic theory, I haven't done much fundamental analysis nor does it seem to be all that necessary for my style of trading. It seems that usually a good news catalyst is all it takes for big moves to be made.
There's a theory that volatility in prices are driven by investors over or underreacting to news. So having a view of the news and a view of the move is helpful for a discretionary trader, no?
3. I had to do some research to answer this one. Let me verify that I understand these terms. Beta neutral is a strategy in which the stock's value is uncorrelated to the overall market's value. A dollar neutral strategy invests the same amount of money long and short without accounting for the volatility of either side. Is that right?
Beta neutral means for every long you jump on, you are shorting another security to hedge market risk, using the beta spread to dictate the amounts (e.g. 1k long, 500 short). Dollar neutral means you do the same but on a dollar basis (1k long, 1k short).
I've honestly never heard of the concept of "isolating momentum" until now, nor had I known about beta and dollar neutral strategies. But I am very interested. I would love to hear how you personally incorporate these concepts into your trading. Perhaps you could give me some insight or link me with some resources where I can learn more?
I'd recommend taking a look at what CTAs do. These are hedge funds that trade short-term trends all day (and spend $$$ analyzing and researching). Most trade on a theory of mean-reversion and momentum, and will be constantly searching and testing for signals (this is where applications of machine learning and AI come in -- for example, what is the optimal timeframe, what is the optimal sequence, etc.)
When you're trading a stock there are lots of orders coming through. These orders are coming from a variety of sources -- ETFs, active funds, other traders, mom & pop, etc. Some of these are more or less sensitive to price, and more or less sensitive to macro. Hedging out macro is important because it can give you a more clear assessment of what the trade actually is. A good example is a ratio spread of STOCK/SPX.
