Success in the markets requires a plan with an edge. But no matter how profitable our plan, we need to consistently execute it. And, we are more likely to consistently execute our plan if it fits our personality. Accordingly, because I am predominantly visual, my plan tends to focus on the visual aspects of trading. In this post, I am going to review my approach to the markets.My methods have their foundation in the Tubbs Model. It is a model that is widely followed by technical traders. At the end of a downtrend, the market accumulates; at some point it breaks up and starts the markup phase. In that phase the market experiences consolidations and corrections but as long as the market forms higher highs and higher lows, the uptrend remains intact. In turn, at some point, distribution takes place and is followed by a breakdown. The mark down phase begins and so the cycle continues.
The Tubbs Model
The practical problem with the model is that the market is fractal. You have the model rippling through different time frames making it difficult to define the trend of your timeframe. To isolate the trend of a time frame, I use the Barros Swing. So, I define an uptrend as higher swing highs and higher swing lows; a downtrend I define as lower swing highs and lower swing lows, and a sideways trend about equal swing highs and swing lows. The advantage of this definition is that we always know at what price a trend for a specific timeframe will end.Take the S&P, for example. In the 13-week swing (quarterly trend), we have had higher swing highs and higher swing lows since Oct 11 2002. The current swing low is 1370.60. If the market breaches that low, then whatever you have in the 13-week it is not an uptrend (we would no longer have higher swing highs and higher swing lows).The swing charts also help in defining the trend of the next higher time frame. By doing so we can form an opinion on whether the lower timeframe trend is likely to resume. For example, the 12-month swing (yearly trend) on S&P shows a possible Upthrust sell signal. Because of this, a breach of 1370.60 in the 13-week would likely signal a 13-week bear market. On the other hand, had the 12-month showed that a turn down was only a 12-month correction in an ongoing bull market, the 13-week would likely continue a new uptrend (once the 12-month correction completes).
The Barros Swings then define the trend of a timeframe.
The first port of call of my analysis is to pose the core questions: what is the trend of the timeframe I am trading and is that trend likely to continue or change? To provide the answers I look at the First and Second Higher Timeframes using the Barros Swings (Nature of Trend material), Ray Wave and the Market Profile. I also use a number of price projection tools, and Sentiment Indicators. The answers to the core questions provide my strategy.Once I have a strategy, I look for a support or resistance zone to implement it. As a responsive trader, I buy corrections in an uptrend and sell corrections in a downtrend. The same tools that I use to define the probable zones where a trend may end help identify where corrections are likely to end. Unless a market reaches my zone, I pass on the trade. Once in a zone, I look for setups and entry patterns. This approach of using context and zones to filter my setups is a distinguishing feature of my style of trading. The setups I use aren’t all that unique. But my insistence that the market must first reach my zones allows me the luxury of being able to exit some trades that are ‘wrong’ without loss. These trades Pete Steidlmayer called ‘free exposure’ trades. It is the knowing (over a large sample size) of how a trade ought to behave after entry that provides me with my edge. Once I am in a trade, I ask the three questions:
- What does the market have to look like for me to remain in a trade?
- What does the market have to look like for me to exit immediately?
- What does the market have to look like for me to stop and reverse? In this case, the stop out would tell me something about the trend of my time frame.
I also have a hard stop in the market at a technical level; the stop is set at a price beyond which I am not prepared to continue losing money - irrespective of my interpretation of market activity. When I am trading well, I don’t get stopped out: way before the stop is hit, I have recognized that I have made a mistake and I have exited the trade. Once the market starts to move my way, I employ the Rule of 3: this ‘rule’ smoothes out my equity curve. I’ll write on this in another post.
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