Why I won't trade patterns

First, I really do appreciate your taking the time to formulate these long responses. I know how long it takes.

I want to say that for the duration of this conversation, however long it might be, I believe that there is a lot of value in what you say for the average trader entering the intraday markets. I understand very well the concerns that the others have voiced with regard to your approaches but as I read your posts I find a lot of stuff in there that resonates with me in terms of what I have been observing. I am going to ask some pointed questions but it doesn't mean that I am denigrating your approach at all.

The first question I would want to ask you is this. You said that 95% of traders lose so if the markets are falling, we should be buying.

Actually, I am not sure that the losing trades made by traders in falling markets are sells. Let us look at this action from Oct 19 2007



Now on a day like this, how would you approach your trading. Clearly, being a buyer would be very difficult trading on this day. On the other hand, being a seller would result in profits for any trader who has an ability to follow basic money management rules.

I do believe that there are many traders who traded this day from the short side and lost money. This is because they are noobs who get scared out of their trades.

However, what volume of this day is made up of noobs who are making noob mistakes? I wonder about the other market participants and what they are doing, what their motivations are.

An interesting question is this - who lost more money on this day - buyers or sellers?

More to come...
 
Quote from Anekdoten:

See, this is where we disagree.

I don't want it all, I dont even want be first second or third. I just want a chunk of it with low risk,preferably near the middle.

Anek
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I've found that area to be the best as well.

If people are selling...I want to be there. We're little fish in the big pond. It's stupid to take the opposite side of everyone. You're going to get burned, and burned in the most relevant market condition. A trend.

On a side note, this thread has become WAAAAAAAAAY to abstract with this bullshit.
 
Quote from ProfitTakgFool:

The wonderful thing about trading is there is no <i>one</i> way. There are as many ways to trade as there are traders. You just gotta find the groove that suits you. I'm always interested in <i>how</i> other traders <i>do it.</i> The market is one big puzzle with a whole lotta solutions!
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Ok now we agree !

:)


Anek
 
Quote from traderNik:



The first question I would want to ask you is this. You said that 95% of traders lose so if the markets are falling, we should be buying.

Actually, I am not sure that the losing trades made by traders in falling markets are sells. Let us look at this action from Oct 19 2007
More...

TN,
Look up a distribution of strikes (traders) against contracts traded and you will see that a small proportion of strikes account for the majority of the volume.

regards
f9
 
Quote from ProfitTakgFool:
<b>Side note:</b> If you take all that data from the high of 1573ish to 1565ish it would form a normal data curve with a very high peak and very flat tails. Where are my orders to open positions? You bet, in the tails.
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I was actually a little surprised when I saw the chart of your trades. I guess I was expecting to see these perfectly formed traditional chart patterns (since that's essentially how this conversation started) and then the typical move out of those patterns followed by reactions against those moves and I figured I'd see you in there against the crowd. However, in looking at the first 4 trades, it's a bit tough for me to clearly see the patterns that formed up, the ones that would have resulted in a pocket of normally distributed price, and would have subsequently provided a tail-type event which you could trade.

However, you specifically talk about the 4th trade in these terms. This is getting to the meat of what I want to understand. So that move from 1573-ish to 1565-ish is the pocket of normally distributed price events? Okay...

Now forgive me because I can't translate the graph move there with an X-Y axis and a depiction of a distribution of data points. Can you tell me specifically where the very high peak near the median would be in terms of the price movement? Let us look at only the move between 10:35 and 12:30 chart time. Ideally if you could superimpose the distribution of on the chart, it would be perfect. Price goes down from 1572.75 to exactly 1568. It then retraces to 1571. It then continues down to 1565.25.

So the bottom of that move is the tail??

Am I asking a logical question here? Do yo understand what I'm trying to ask? I have this bad feeling that I am asking something which doesn't make any sense but am really keen on understanding how a series of price events (i.e. 3 minute bars) can be distributed in the way you are looking for.
 
Great question, great example.

For starters, you have to consider what the mood of the day is. Are banking announcing write downs? Are earnings poor? Has unemployment spiked? Is there fear in the market. If the answer to any of these question is yes then I have to be careful fading what could be the beginning of the end for me. I pay very close attention to economic news and try to assess the reaction because it tends to last the entire day, at least in this climate.

So...to answer your question I went and looked up my trading log for this day. I finished the day at +5.50 points. In the morning I took a few losses and started the day down. My best trade of the day was on that double bottom with lower lows 11:30 ET. That brought me back into the green. I typically switch gears after lunch and try to ride a move, rather than fade a move because the most volatility tends to occur in the AM and trends tend to occur in the PM. In this case a trend basically lasted all day with the exception of that double bottom period. My best trade of the day was my short just past lunch. After I covered that I didn't get a trigger the rest of the day.

Now, the first time a saw a day like this I got absolutely slaughtered. No kidding here.....I lost 1/3 or my account in 1 day. I was new to the futures business and I'd never seen a day like this. I got my royal ass whipped. I didn't forget it. The next time I saw a day like this my losses were minor. The 3rd time I won. There's no substitute for experience.

Quote from traderNik:

First, I really do appreciate you're taking the time to formulate these long responses. I know how long it takes.

I want to say that for the duration of this conversation, however long it might be, I believe that there is a lot of value in what you say for the average trader entering the intraday markets. I understand very well the concerns that the others have voiced with regard to your approaches but as I read your posts I find a lot of stuff in there that resonates with me in terms of what I have been observing. I am going to ask some pointed questions but it doesn't mean that I am denigrating your approach at all.

The first question I would want to ask you is this. You said that 95% of traders lose so if the markets are falling, we should be buying.

Actually, I am not sure that the losing trades made by traders in falling markets are sells. Let us look at this action from Oct 19 2007



Now on a day like this, how would you approach your trading. Clearly, being a buyer would be very difficult trading on this day. On the other hand, being a seller would result in profits for any trader who has an ability to follow basic money management rules.

I do believe that there are many traders who traded this day from the short side and lost money. This is because they are noobs who get scared out of their trades.

However, what volume of this day is made up of noobs who are making noob mistakes? I wonder about the other market participants and what they are doing, what their motivations are.

An interesting question is this - who lost more money on this day - buyers or sellers?

More to come...
More...
 
I was actually a little surprised when I saw the chart of your trades. I guess I was expecting to see these perfectly formed traditional chart patterns (since that's essentially how this conversation started) and then the typical move out of those patterns followed by reactions against those moves and I figured I'd see you in there against the crowd. However, in looking at the first 4 trades, it's a bit tough for me to clearly see the patterns that formed up, the ones that would have resulted in a pocket of normally distributed price, and would have subsequently provided a tail-type event which you could trade. --------->>> I'm not fading patterns per se, but that is one strategy that I use. That head and shoulders example on that chart was a fairly good example. Patterns actually don't form that often on the futures market, partly because of the tick size. One of the things I'm trying to get across.....I don't want to have to rely on being right. If you take a b/o up you have to be right about the direction of the trade or you lose. I suppose you could say you could reverse down and stay flexible and win without being right. But don't you have to be right about the short trade then? IMO, trading patterns requires you to be right and, while that's important, it's not mandatory.

Now forgive me because I can't translate the graph move there with an X-Y axis and a depiction of a distribution of data points. Can you tell me specifically where the very high peak near the median would be in terms of the price movement? Let us look at only the move between 10:35 and 12:30 chart time. Ideally if you could superimpose the distribution of on the chart, it would be perfect. Price goes down from 1572.75 to exactly 1568. It then retraces to 1571. It then continues down to 1565.25. ------------>>>>> The median would be about 1569 with one tail at 1573 and the other at 1565. The only problem with this analysis is that it's pretty clear after the fact. When the market is moving you don't know the other tail will be at 1565 because you don't know that curve will finish looking normal. This does require some judgment, as all trading methods do.

So the bottom of that move is the tail??----------->>>> Yes, even though you don't know for sure at that time. You have to trust your tools and give yourself a margin of error.

Am I asking a logical question here? Do yo understand what I'm trying to ask? I have this bad feeling that I am asking something which doesn't make any sense but am really keen on understanding how a series of price events (i.e. 3 minute bars) can be distributed in the way you are looking for.----------->>> Think of it this way. How frequent are the price movements in the 1569 area -- that consolidation in the entire move we're referring to. The market spent a lot of time in that area, relative to the rest of that move so it has a high frequency, or becomes the mean after it's all said and done. Now, as price goes back to trending the frequency of the time it spends on any one price falls rapidly. It's falling with a fair amount of momentum so the bell curve is collapsing from the mean extremely rapidly. As we approach the tail section the curve becomes very flat because the frequency of price becomes more evenly distributed. When that happens you have a VERY high probability of being in the tail. Add the volume pattern to that and you have a tremendously good setup. I wasn't waiting for this to reverse. I was buying before that even happened -- i.e. I want to be ahead of the curve, not on it or behind it.
 
Quote from fearless9:
TN,
Look up a distribution of strikes (traders) against contracts traded and you will see that a small proportion of strikes account for the majority of the volume.

regards
f9
More...
Quote from ProfitTakgFool:
the 1569 area -- that consolidation in the entire move we're referring to. The market spent a lot of time in that area, relative to the rest of that move so it has a high frequency, or becomes the mean after it's all said and done.
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Aha!!

Light bulb.
Quote from ProfitTakgFool:
As we approach the tail section the curve becomes very flat because the frequency of price becomes more evenly distributed. When that happens you have a VERY high probability of being in the tail. Add the volume pattern to that and you have a tremendously good setup. I wasn't waiting for this to reverse. I was buying before that even happened -- i.e. I want to be ahead of the curve, not on it or behind it.
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I have as many questions as anyone else about how one avoids getting hammered when prices continue to move against you as you average down. This is the biggest question I have about these methods. However, there is no doubt in my mind that the above quote represents a viable way to trade the markets.

Thanks PTF. And by the way... do you ever look at Market Profile Charts, because they seem to be a graphic representation of the distros you are talking about
 
Quote from traderNik:

I'm keen on seeing the distribution you're talking about but Google searches didn't turn anything up. Can you give me a link if you know of one?

I think you're talking about Market Profile, aren't you? Isn't that essentially what MP shows? Value Areas?

Care to expand just a bit on this? I said that I wasn't sure that the the majority of losing trades on that downtrend day were made from the sell side. Are you saying that the distribution you're talking about would indicate that they were?

No... you're saying that on that down day, selling wasn't spread out evenly along the entire down move, that there were certain areas where there was a lot more activity and that's where money was made and lost, right? Care to state explicitly what you mean here? A small number of strikes account for the majority of the volume... allright, I would have to see the strikes to be able to take that information and figure out what it means.

Thanks if you can post a link. If it's MP you're talking about, just let me know and I'll find my own.
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TN,
No it is not MP. It is a distribution I had run some time ago, but if my memory serves me well I think that Brett Steenbarger may have something on his site. Basically a small number of Traders account for the majority of the contracts and they do not scare easily.

In fact this is not how the market works at all.
The price is propelled across your screen by orderflow and it turns on itself at horizontal lines which you would know as s&r.
Watch these points very carefully and watch your time & sales. Set your filter to say >99 for the ES.
This is not because the smaller strikes do not know what they are doing, in fact there really is not much difference between the big strikes and the small strikes in terms of direction. The difference lies in how the game is played.

Just watch these horizontal lines with the T&S and gradually you will see what is happening.
Dont worry too much about very large strikes > 500 as they can be hedges off the cash market and that is another game.

regards
f9
 
traderNik,

Check this out. This may help you see what I'm doing with regard to fading patterns. Here we have a head and shoulders (red support) along with something that comes close to a bear flag (blue lines). I'm fading the moves out of these patterns but only when all the other conditions I'm looking for have been met.
 

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