What creates spikes?

[redbaron1981]

Last post for sure this time as I was going to put this in a separate thread. So many guys on here get angry when the successful traders don't release details of an edge they are exploiting.

Let me make an example. I give you guys my trading style that says buy when x and y align exit when y and x disagree. This system normally makes 10 points.

What happens next is my edge will disappear and here follows my own opinion on this. All these traders whom I blabbed my edge to will start entering the market at the same time as me and also exiting at the same time. Due to the consumption of liquidity the price of the instruments increase when every one ET is buying. Like wise all the guys trading my edge also exit there positions and by selling they consume liquidity and price drops. The net effect is that what could have been a 10 point winner has now been reduced to ashes due to the consumption of liquidity caused by other traders taking the same entry/exit rules.

Liquidity is not infinite and hence the edge diminishes to nothing. A system that was once profitable has now vanished.

All the answers you need are out there on the internet in books and also quite a lot on ET if you look for the right posters.

 

[i am nobody]

What if a lot of "big" traders [your terminology] have their stops at a certain level. Will it hurt you to have a stop long with them at that same level? Or do they not trade with stops?

Clearly I don't know what I am talking about. So, I will shut up.

Best of luck with your trading.

Regards,
Monoid.

You should follow your system and not take care of where others do what. If you tested your system very well before going live this situations will also have appeared in your testing and are included in your testing results.
And if it creates sometimes a problem it is inherent to your system and also part of your system. If you change something to prevent this problem you should retest your system completely because it will be another system now.
And if big traders interfere with your trading I call this collateral damage.
The other option is to stop trading completely, then you will not have any problems anymore at all.

 

[i am nobody]

Last post for sure this time as I was going to put this in a separate thread. So many guys on here get angry when the successful traders don't release details of an edge they are exploiting.

The only way to become successful is by NOT sharing. Sharing results in competition, and that is exactly what you should try to avoid. And if people want to share it is better that they don't share and manage money from others, so that at least they will be financially compensated for their generosity.

Rich who would still be poor if they would have shared their idea:
Bill Gates, Michael Dell, Sergey Brin, Larry Page, Zuckerberg, every successful fund manager....

 

[VPhantom]

if price should happen to penetrate an important level via the spike, is it because there is no buying interest and hence price will continue to drop, so I should look to get into a short? Or is this penetration temporary, which will attract enough buyers to push price higher, and hence I should be looking for a long.

My $0.02: unless some "tell" in context gives you a hint of bias either way, the conservative approach if you're uncomfortable is to stand aside and let it unfold. If you don't know which it is, you literally need more information.

If it was just inventory changing hands from weaker to stronger (i.e. news, whales a.k.a. big players, or just time coincidence), price will snap back through and that'll be your tell that the level is probably still valid. If it was more of a value consensus then you can still look at pullbacks and the occasional full re-test from the other side as your tell.

(Not sure if you looked at the Morge stuff? But he causes such spikes in his favorite currencies, so I value his opinion. His presentation from April 2012, slides 14+ especially 29-35, illustrates breaks that you call temporary in a longer trend, distinguishing retail price "chasers" from trade "planners".)

 

[k p]

If it was just inventory changing hands from weaker to stronger (i.e. news, whales a.k.a. big players, or just time coincidence), price will snap back through and that'll be your tell that the level is probably still valid. If it was more of a value consensus then you can still look at pullbacks and the occasional full re-test from the other side as your tell.

Yes, I'm all about seeing and waiting for the reaction after the spike down, and as you say, if price should happen to re-enter, this is usually a good sign that the level is probably still valid. The re-tests are nice, but each time to wait to see something happen, you're always getting the worse price. Now if you get a worse price, but your trade is more likely to work out, this might be a fair exchange, but it all comes down to the numbers. I figure that if the trade actually costs you 2 extra points to wait, and all that you manage to do is increase the win rate from 50% to 60% or not get sucked into a few failed trades that don't figure, then perhaps this cost for confirmation might not outweigh the few times that it proves beneficial.

I seem to recall a similar argument with some types of medical tests or even genetic testing. Knowing you're a carrier of a bad gene might increase your risk of developing a certain cancer for example. But if knowing this doesn't really increase your survival rate, but instead ads to worry for the rest of your life as you're waiting to find out if you will in fact develop this cancer, then perhaps the cost to know, to have more information, doesn't offset the extra price you're paying by now always being worried.

 

[k p]

As a follow up, I guess this is also why I'm so curious about how other people actually trade and where their trades are. I'm not looking to steal their system of their setups, I'm just curious about how they "work" a level. Do they get in at the razor's edge and hold through unknown price action. Do they get out for very minimal loss? Are they quick to re-enter if they did take an initial quick loss? They may very well over state their trading abilities when sharing "how to trade", but with their own trading, perhaps having to "work a level" is actually the norm.

 

[VPhantom]

The re-tests are nice, but each time to wait to see something happen, you're always getting the worse price. Now if you get a worse price, but your trade is more likely to work out, this might be a fair exchange, but it all comes down to the numbers.

Remember though, I come from stocks (10 years ago), and in those, entering on breaks yielded horrible entry prices, hence the falling knife analogy. Say support is 50.00 sharp and I put a short stop on 49.89, I had to expect a fill at 49.70 or much worse, and my stop-loss still had to be above 50 somewhere. That may be why I'm not even tempted to look into entering initial breaks in other instruments as well, when I know I can still catch 50-75% of those moves by waiting for a much less violent entry on a pullback.

I know DP jumps on some breaks though so I'll have to research: maybe there's a lot more liquidity in futures than what my (old) experience with stocks taught me, and half a point's the worst slippage on small market orders during crazy breaks? Tough for me to imagine, but that could make me give initial breaks another look...

perhaps having to "work a level" is actually the norm.

I like that expression for some reason. Clear image.

 

[k p]

You're funny VP because I can't quite figure you out. I'm not sure if you're new to the game or not. On the one hand you're still learning you say, on the other hand, you sound like you really know what you're talking about!

Taking the initial breakout has for sure taught me this is the worst entry strategy as well. If anything, fading the breakout I think is almost better if you are just going to blindly bet on a direction. But getting positioned before the breakout is best IMO.

In terms of working the level.. this seems to be the key and what I can't figure out. llHeroic mentioned a couple of weeks ago this very same thing, how he was prepared to take a few trades around a level, which gave me the impression that he was going to keep tight stops, but be prepared for a quick re-entry.

40D also talks about having very tight stops, but when I look at what happens at some key levels, given what he has shown to be his entry criteria before, I can't help but wonder how many "failed starts" there would have been there. He also talks about how he doesn't even really count a scratch as it makes no difference to him. So what I gather this means is that he might take a trade, and exit very quickly, but that this somehow almost doesn't count unless the loss is a few points, or it really goes into profit. Now I'm really just speculating here of course, but this makes a huge difference I think if certain bits and pieces are left out, like having to scratch quickly and re-enter quickly. If you end up reporting that you took a short at a certain level and managed to get 30 points, it makes a huge difference if you perhaps first went long and then quickly switched sides, or if you went short once already, scratched, and re-entered. To only report that a short was taken is quite misleading. Now there of course is no obligation on his part to report any more or any less, I'm just saying that all those people who try to help think they are helping, but when they leave little bits out, sometimes those little bits are the most important.

Db also I've seen mention a few things here and there about trades (he hardly talks about his actual entries), where if one had entered here, the risk was only 1 point, or things like this. So all of these pieces of information lead me to see that although the educational help seems to point in the direction of a trader needing to figure out what is going on first and somehow have a very clear picture before entering, what is actually happening is they are "working it" a little more so than just taking the one perfect trade and sitting back.

Furthermore, to very quickly be able to reverse your trade means that you are more focused on just following price versus actually developing a very clear view. I mean if you see so much information that points to the line of least resistance being down, if you try a short and see its not working and very quickly switch to a long, this almost tells me that you're not so much trading some masterfully thought out plan, but rather, just following price. The education that is provided makes it seem like everything is so carefully thought out, but if a trade happens to be reversed so quickly, I think this points more to just playing the odds of what is happening in the very moment. Its of course important to not be so married to your bias that you can't see what's actually happening, but I just still think that this shows that what they are doing with their own trading is a bit different than what they are teaching.

This of course all comes back to my tired point about asking to see all trades. It would be more helpful to see how a trader trades, not for them to tell me how they think they trade or what they think is important, etc. What they actually do and how they do it is I a better teaching tool. (kind of like how I'm learning from my own very very crappy trades. I might have the best intentions for what I'm going to do, but I have to actually work on fixing what I'm doing, and not what I think are the problems in my strategy)

 

[viktor_k67]

Spikes are the result of panic when everybody wants to get in ( or out) through the same narrow door.

I would add, panic selling when a trader or a group of traders are placing big orders (that is why you see increase in volume) to sell. You see strong drop in price, because those who wants to buy cannot satisfy this panic selling. That goes to the moment when those who in panic get exhausted - those who wanted to sell already sold and there is no new panicers. At this moment there is strong drop in selling orders and bullish traders may take over by pushing price up.

It is all about supply and demand. Very simple and nice explanation about it
http://www.marketvolume.com/advance_decline/overbought_oversold.asp

 

[monoid]

But why does a trader want to help in the first place? Why are they spending hours on here typing away? Some say they are bored, because trading is lonely and boring, so perhaps the conversation is providing some company, so there is an exchange of services so to speak.

I can only speak for myself. When I started out, I had no one to even talk to about TA. I was surrounded by bright people who believed in EMH. Imagine being a lonely TAer in midst of EMHers. I made a lot of mistakes -- paths I pursued thinking they were useful in my quest when they were not --, blown-up accounts, and eventually, by trail and error, found something that worked for me. When that happened, I realized that many books that retail traders rely on to help with their trading (which included me) were either out-right BS or assumed so much background knowledge that the author's intent was lost in "translation". Moreover, as I began to converse with other profitable traders, I began to realize that we are all doing the same thing even though our methodologies were not necessarily the same (this could be the reason why you think DbPhoenix and I seemly say very different things on the surface. Since our methodologies are different -- not that I know what he is doing --, our comments makes sense only when view within our frameworks. By comparing the two methodologies, you are comparing apples to oranges; you then go on to say, one says the skin of the fruit is red, while the other says the skin is orange. You then wonder who is right! You keep making this mistake, and I have pointed this out to you a few times, but to no avail.)

I come to ET, and I see aspiring traders make the same errors I made. It is out of a desire to lessen the learning curve, and to help them sift the wheat from the chaff that I post. I know how hard it is to break through in this business without any guidance. I have no desire to preach a trading methodology to anyone or to teach them my way of thinking. However, for aspiring trader who are willing to do the work, I would be more than happy to guide them so that they don't pursue a path that they think is important when it is not.

My intentions are no more or no less.

With that said, I will have to sign off from this thread. Thank you for giving me an opportunity to share with you the very little I know about markets and trading.

All the best with your pursuit.

Regards,
Monoid.