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Why I won't trade patterns
- Thread starter ProfitTakgFool
- Start date
One thing I've never done in the fut's market is reverse. I used to do it all the time in the equity markets. I'm not really sure why I don't because there are times when it would have worked nicely.
Quote from Trayo:
That nasty long trade I reffered to was 3:40 ET. (I am in SF).
A reversal would have done nicely...
Trayo, and anyone who is interested in using this method, there is a very important concept I haven't discussed. The last thing I want to see is to have someone jump on this thread and say, "I tried your method today and destroyed my entire account."
You should never average into a move that is either corrective or has the potential to be corrective. I am typically taking profits into those moves. For example, let's look at the action from today.
Have you ever been in a trade that went against you and you decided to hold? Obviously, I know the answer to that so let's talk about how it went. You go long, for example, and the market falls. It starts to come back and you believe you'll get a chance to get out even or close to even. You don't get that chance and we go to new lows. At this point, you're pretty much a deer in headlights and you do nothing. The market comes back and you start saying, "Pleeeeeaaase, just this one time, just this one time let me get out." And, of course the market goes to new lows and you get that <i>sick, sick</i> feeling as you puke out your trade. The market goes parabolic down because you're not the only one who has just done that. That is exactly the type of event I'm looking to buy. When I see it I will buy it aggressively. I've puked out a few trades before and I know what it feels like. So, when I sense that is happening (there's just a feeling to it that you just recognize) I fade it. If you're flat and you find yourself going OMG.....that's when you should be buying. "Holy freaking Cow, this beast just won't stop falling." Buy!
On the fourth red arrow on this chart that's exactly what happened. I will buy a move like this aggressively. Remember, a penetration of a downward sloping support line is very bullish!
Now, let's talk about what you <u>shouldn't</u> average into. You see all those blue arrows? As those tops were unfolding you don't know if that is a corrective move (i.e. we're heading back down to new lows) or if it is the beginning of a new move up. If it is corrective or even has the chance of being corrective I will not average into a move like that. Now, as the market comes out of that blue box you have your answer. It's not corrective. That was the beginning of the next move so, now, <b>after the fact</b>, you know the move was not corrective and you also know that it's highly unlikely the market will continue into the stratosphere without presenting another corrective opportunity. At this point you are dealing with facts -- actual facts -- you aren't guessing about the direction of the market. It's up and it should correct. That's all I need.
This is another reason I won't trade patterns. Patterns require that you "catch a move." I don't want to have to rely on being right about that. If a 10 point move has <i>already</i> occurred there is no guessing involved. It's a matter of fact. Now that I have that fact I will fade it because it's highly unlikely it will continue up without correcting.
Or, think of it this way. Can the market fall 20 points without correcting? Obviously the answer is yes, so the real question becomes, is it <b>likely?</b> The answer to that is no. Go back to this chart attached. The market fell from roughly 1474 to roughly 1464. Did it go straight down there without any bounces? No, there were several bounces along the way and these bounces are tradable using my method.
Once the market bottoms and you find Fibs become useful DO NOT average. Had we gone to new lows and the trend continued down then it becomes another fadable, averageable setup.
Don't average corrections. It has to be an original move.
You should never average into a move that is either corrective or has the potential to be corrective. I am typically taking profits into those moves. For example, let's look at the action from today.
Have you ever been in a trade that went against you and you decided to hold? Obviously, I know the answer to that so let's talk about how it went. You go long, for example, and the market falls. It starts to come back and you believe you'll get a chance to get out even or close to even. You don't get that chance and we go to new lows. At this point, you're pretty much a deer in headlights and you do nothing. The market comes back and you start saying, "Pleeeeeaaase, just this one time, just this one time let me get out." And, of course the market goes to new lows and you get that <i>sick, sick</i> feeling as you puke out your trade. The market goes parabolic down because you're not the only one who has just done that. That is exactly the type of event I'm looking to buy. When I see it I will buy it aggressively. I've puked out a few trades before and I know what it feels like. So, when I sense that is happening (there's just a feeling to it that you just recognize) I fade it. If you're flat and you find yourself going OMG.....that's when you should be buying. "Holy freaking Cow, this beast just won't stop falling." Buy!
On the fourth red arrow on this chart that's exactly what happened. I will buy a move like this aggressively. Remember, a penetration of a downward sloping support line is very bullish!
Now, let's talk about what you <u>shouldn't</u> average into. You see all those blue arrows? As those tops were unfolding you don't know if that is a corrective move (i.e. we're heading back down to new lows) or if it is the beginning of a new move up. If it is corrective or even has the chance of being corrective I will not average into a move like that. Now, as the market comes out of that blue box you have your answer. It's not corrective. That was the beginning of the next move so, now, <b>after the fact</b>, you know the move was not corrective and you also know that it's highly unlikely the market will continue into the stratosphere without presenting another corrective opportunity. At this point you are dealing with facts -- actual facts -- you aren't guessing about the direction of the market. It's up and it should correct. That's all I need.
This is another reason I won't trade patterns. Patterns require that you "catch a move." I don't want to have to rely on being right about that. If a 10 point move has <i>already</i> occurred there is no guessing involved. It's a matter of fact. Now that I have that fact I will fade it because it's highly unlikely it will continue up without correcting.
Or, think of it this way. Can the market fall 20 points without correcting? Obviously the answer is yes, so the real question becomes, is it <b>likely?</b> The answer to that is no. Go back to this chart attached. The market fell from roughly 1474 to roughly 1464. Did it go straight down there without any bounces? No, there were several bounces along the way and these bounces are tradable using my method.
Once the market bottoms and you find Fibs become useful DO NOT average. Had we gone to new lows and the trend continued down then it becomes another fadable, averageable setup.
Don't average corrections. It has to be an original move.
Attachments
Ahhhh.... I got a PM that brings up a very useful question. Why don't you just stop out and re-buy at a lower price?
This is what I started doing. The more I traded fut's the better my timing became. I found I'd buy, set my stop 2 points away, it would get triggered at or near the EXACT bottom/top. I was putting in tops and bottoms with my stops. I would be forced to buy higher or sell short lower, which I did.
I noticed this was happening consistently so I made an adjustment. My first trigger would be a smaller position and instead of stopping out at 2 points I'd buy more. I haven't looked back but I would suggest you start with the strategy I began with.
Take the trigger and put in a stop. If you stop out get ready for the next trigger, with a higher line if the prob of that subsequent trade has a higher prob. If you find your stops are getting triggered at the tops/bottoms of the market then you have something to work with and you just need to make an adjustment. Average instead perhaps?
This is what I started doing. The more I traded fut's the better my timing became. I found I'd buy, set my stop 2 points away, it would get triggered at or near the EXACT bottom/top. I was putting in tops and bottoms with my stops. I would be forced to buy higher or sell short lower, which I did.
I noticed this was happening consistently so I made an adjustment. My first trigger would be a smaller position and instead of stopping out at 2 points I'd buy more. I haven't looked back but I would suggest you start with the strategy I began with.
Take the trigger and put in a stop. If you stop out get ready for the next trigger, with a higher line if the prob of that subsequent trade has a higher prob. If you find your stops are getting triggered at the tops/bottoms of the market then you have something to work with and you just need to make an adjustment. Average instead perhaps?
Quote from ProfitTakgFool:
Ahhhh.... I got a PM that brings up a very useful question. Why don't you just stop out and re-buy at a lower price?
Or SELL and then BUY at the lower price to close. But then this goes against the thread title "Why I won't trade patterns" and gets into "the trend is your friend".
thanks PTF, and by the way, Happy New Year!
Quote from ProfitTakgFool:
If you're flat and you find yourself going OMG.....that's when you should be buying. "Holy freaking Cow, this beast just won't stop falling." Buy!
On the fourth red arrow on this chart that's exactly what happened. I will buy a move like this aggressively. Remember, a penetration of a downward sloping support line is very bullish!
PTF, I beleive I understand your point here. In other words ES was WAY oversold at that point, so take the ride up?
Now, let's talk about what you <u>shouldn't</u> average into. You see all those blue arrows? As those tops were unfolding you don't know if that is a corrective move (i.e. we're heading back down to new lows) or if it is the beginning of a new move up. If it is corrective or even has the chance of being corrective I will not average into a move like that.
PTF, Not sure I follow you here.
Take the 1st blue arrow: I would relish this setup, because it would look to me like an upward correction running out gas, with movement starting back in the same direction as the deeper trend (down). Are you saying don't average-in short at that point? If so, why??
There's nothing wrong with taking those blue arrows as shorts but if they don't work you have to stop out, not average. The reason is because of what eventually happened. Let's say you sold 1 contract on all of those tops for a total of 3 contracts and now your position is set and you believe we will correct down. It doesn't so you will have to stop out on all three of the contracts at a considerably high price.
Look to the far right of this chart. You see that drop from 1475 to 1466, or so, that is exactly the kind of drop I'm looking to buy. I could take that trigger because it occurred at the end of the day. Had it been in the AM I'm all over it. The eventual correction that comes out of that bottom is not a move I'll average into because that could be the start of a move back up to the 1475 area and I'm going to get fried.
The best way to view it is this....average and fade into a monster move, after you believe that move has ended. The example from the early AM, late PM, and just before the last 1/2 hour are great examples. The corrections of those moves are where you generate your profits.
Look to the far right of this chart. You see that drop from 1475 to 1466, or so, that is exactly the kind of drop I'm looking to buy. I could take that trigger because it occurred at the end of the day. Had it been in the AM I'm all over it. The eventual correction that comes out of that bottom is not a move I'll average into because that could be the start of a move back up to the 1475 area and I'm going to get fried.
The best way to view it is this....average and fade into a monster move, after you believe that move has ended. The example from the early AM, late PM, and just before the last 1/2 hour are great examples. The corrections of those moves are where you generate your profits.
Quote from Trayo:
thanks PTF, and by the way, Happy New Year!
Quote from ProfitTakgFool:
If you're flat and you find yourself going OMG.....that's when you should be buying. "Holy freaking Cow, this beast just won't stop falling." Buy!
On the fourth red arrow on this chart that's exactly what happened. I will buy a move like this aggressively. Remember, a penetration of a downward sloping support line is very bullish!
PTF, I beleive I understand your point here. In other words ES was WAY oversold at that point, so take the ride up?
Now, let's talk about what you <u>shouldn't</u> average into. You see all those blue arrows? As those tops were unfolding you don't know if that is a corrective move (i.e. we're heading back down to new lows) or if it is the beginning of a new move up. If it is corrective or even has the chance of being corrective I will not average into a move like that.
PTF, Not sure I follow you here.
Take the 1st blue arrow: I would relish this setup, because it would look to me like an upward correction running out gas, with movement starting back in the same direction as the deeper trend (down). Are you saying don't average-in short at that point? If so, why??
Quote from ProfitTakgFool:
It's not my intention to criticize people who trade patterns, just to share my experience with you why <b>I</p> personally will not.
This chart sets up as a simple pennant. One guy will look at this chart and say buy a breakout up because the bottom is in and we are going to breakout from a higher low -- that's bullish!
The next guy will say, heck no, the market is weak, it's gonna break support and head lower -- that's bearish.
So there is dilemma one -- which way will it break? The odds are 50/50.
Dilemma two -- the odds of the next tick being higher or lower is also 50/50. If you combine the two probabilities you are looking at a strategy that has a, best case, 25% win rate. .50 x .50 = .25.
The guy who took this short has a nice loss. Had it broken up the same thing could have happened.
If you guys are winning trading patterns, more power to you. I won't touch them with a ten foot pole.
If you are <i>not</i> winning on patterns ask yourself... why would I choose to trade a strategy that has a probability of winning that is approximately 25%?
I have mention this before from time to time but let me repeat once again that patterns are shadows of patterns from higher time frames.
For instance, head and shoulders and reverse HS are simply a 3 bar pivot from time frames about 8 time higher, i.e, 5 min head shoulders is a pivot on the 40-45 min chart.
Penants, flags are inside bars from higher time frames.
If you see a pattern change go to a higher time frame and look at what is happening. Trade in the direction of that higher frame.
If you like a flag make sure that the inside bar on the higher frame supports the direction you wish to go. etc.
John