Quote from peterfigliozzi:
What do you think about this:
A discretionary trader still needs to think about what might happen, so he can be in before it does. (Ambush.)
THEN, after entry, he should switch to "not knowing" what will happen as you say, and focus on "what's happening now." This is what is so hard for most traders. To get out when those first signs that it might not happen poke up their little heads.
There is a fine line between thinking about what might happen, and then entering just as it starts happening (Ambush) and thinking about what might happen, and entering BEFORE it starts happening (Anticipation). The difference for me is often when the ambush strategy is employed, I am there stalking an entry and it just doesn't show up. Or I am stalking an entry, I enter then I exit very quickly because after reevaluating the setup - it just hasn't set up (fully). When I anticipate - I see a possible setup, I enter about where the pattern *should* show up (typically fading strength) and then look for the pattern to show up on my chart. When it doesn't my loss is much greater than what it should be if I were using the ambush mentality. I think this is true because there is often not a well-defined support/resistance established because I anticipate a turn rather than letting it happen naturally and then reacting to the turn. This is a fine line of difference (at least to me) but I hope this makes sense.
Let's look at a *hypothetical* example of a simple line in the sand type of system. The system buys on bar close when it crosses above the line, and sells on bar close when price crosses below the line (on a closing basis). A chase parameter is set of say, 1 point above/below the line where entries may be taken via limit orders.
Now let's assume for the sake of argument that a given line is typically crossed 5 times per day on a closing basis, and that of those crosses, on average only 1 of those crosses makes money - but enough to cover all the other small losses and secure a small profit (on balance).
Now after trading this system for some time the trader begins to see unfilled entries (where the bar closed more than 1 point beyond the line and didn't look back) that would have been profitable had they been taken. Now bear in mind that the original system is profitable - just not as profitable as it would be with those missed entries. Can you see where this is heading?
So the trader changes his rules - he starts anticipating the fact that the bar is going to close beyond the line - so he takes a preemptive entry. The first thing the trader notices is that the vast majority of these anticipated entries are false signals. He starts noticing just how many bars actually poke through this line on a non-closing basis that never trigger a signal based on his original rules. He finds that his total number of daily trades more than doubles on average, and that almost all of the newly added trades are losses. But these small losses are really adding up now (because there are so many of them). The trader further notices that his method is now losing money because he has taken too many losses to be made up by the 1 or 2 big winners on a given day. The trader also starts to notice that he is hesitating in executing some of the trades now, and that those trades that he is missing are turning out to be overwhelmingly profitable. So the trader starts to work on self-discipline (follow the rules - including the anticipated entries). (I hope you see the irony of wishing to follow the anticipated entries in a disciplined manner). Meanwhile he starts looking at various filters to know when a poke through the line is valid or not, and so gets into various oscillators, moving averages and other technical indicators. Before long the trader has a complex trading system that might make money if he could only follow all the signals, but in the end is only marginally more profitable (or even not as profitable) on paper than his original simple system.
Pete,
I'm not saying your AMBUSH mentality is invalid or wrong, but I wanted to present a semi-realistic contrast to your view - showing how sometimes when AMBUSH turns into anticipation it can lead to bigger problems than it solves. I think the concept of Ambush is a good one insofar as it tends to make you more alert to the trading opportunities that are occuring (rather than chasing the market). But if you find that your profitable expectancy is eroded by taking too many trades that really don't meet your criteria it may be time to get back to your core method. Also if your results are worse than your method backtests, it may also be possible that instead of Ambushing you are actually Anticipating, but in the proces you may actually be eroding your edge. If this is not the case, just keep this on file for future perusal, since I'm sure you will need this advice, as I have and do from time to time.
