Solution to Impulsive Trades?

BarroMetrics Views: Solution to Impulsive Trades?

One of the most common refrains from traders is: “I lose money because I take impulsive trades. If only I kept to my plan, I’d make money!”

The implication is ‘I have to fix my psychology’. 

Sometimes this is true – there is a limiting belief that needs to reframing. I have found that most times, however, the solution is far simpler. By that I mean the trader fails to describe precisely:

  • The conditions that will trigger the trade.  And,
  • The conditions that will keep the trader in the trade.

Last week, I set Figure 1 as part of UIII’s preparation for the week.

Here’s the context to the assignment. UIII FX traders are asked to sell the weak currencies and buy the strong ones. Why? Because such pairs produce the biggest bang for the investment dollar. I have found two configurations produce the best results:

  1. At the start of a trending move – the corollary: when congestion has likely ended; and
  2. At the start of a parabolic move.

UIII’s who replied to the assignment took the for either:

  • The attached reply or
  • The AUDUSD is in congestion and accordingly, will look elsewhere for a strong or weak pair.

What do you think? I’ll post my assessment tomorrow.

2016-08-22 CSM AUDUSD


2016-08-22_09-50-22 GB HW

FIGURE 2 Sample Work

How to Apply The Ideas? (Success Series)

BarroMetrics Views: How to Apply The Ideas? 

Ideas? What ideas?

The topic we have been covering. How do we apply the Barros Swing and Ray Wave to identify the trend, and answer the question, ‘continuation or change?’

I have created a 9-minute video to illustrate their use.

Note that you will need to download the file to your PC.

The Proof Is In The Pudding

BarroMetrics Views: The Proof Is In The Pudding

It’s my belief that our trading plan ‘setups’ ought to be vetted for an edge. This is true even for discretionary rule-based (DRB) traders. Sure, the testing for DRB setups will be tested in the absence of context; and context is critical for the DRB trader. Nevertheless, the testing will, at least, provide an indication if there is validity to the pattern.

We need to appreciate what backtesting does and does not provide. It does tell us that the pattern probably has an edge. It does not tell us that the equity curve produced will be replicated.

A good example is the study I posted yesterday by InvestiQuant in yesterday’s blog, ‘System Research, for You?‘ If you watched the video, you’d have seen that the study suggested:

  1. A downside bias.
  2. The better setup: an open-gap up to sell into. 
  3. The secondary setup: an open-gap down. The strategy tested sell the open, cover at the close. 

So, the study outlines the edge. When it comes to trading, there is no way, I’ll just sell the open. When I trade, I look for bias, zone, setup, trigger (entry), stop and trade management.

Figure 1 shows the way I implemented the edge.

  • Bias: established
  • Zone: the 2nd and 3rd std of the linear regression bands.
  • Setup: last night, I entered twice. In each case, the setup was a neutral bar in the zone (green arrows)
  • Initial stop: above the 3rd std (black line)
  • Trade Management: I used a Market Profile idea to manage the trade, bringing the stop down above the ledges (Figure 2).
  • Exited all positions on the big bar’s close after the red arrow 

Backtesting is a tool – that’s all it is. The fact that a result shows a fabulous edge does not mean that on this trade, the edge will play out. It is over the large sample size that the proof is found in the pudding.


FIGURE 1 5-min ES


FIGURE 2 30-min Market Profile ES

System Research, for You?

BarroMetrics View: System Research, for You?

A received a couple of emails asking if backtesting helps our bottom line. My answer, ‘absolutely’! It also asked if I would recommend any services.  My answer: ‘yes, but I need to know what you are looking for’.

For example, if you are looking for a ‘tipping service’, then it’s hard to go past InvestiQuant or  Quantifiable Edges. For example, for today, InvestiQuant considered that:

“a prior unfilled down gap during similar conditions has not been bullish historically.”

In short, yesterday we filled a downside gap, if we gap up today, should we sell and hold to the close? Or should we buy and hold to the close?

Similar questions for a gap down.

The site provides a full set of stats: average dollar win, consecutive wins, win rate, etc.,  If interested in the full answer go to:

Trading Tip for Thursday: Though counter-intuitive, filling a prior unfilled down gap during similar conditions has not been bullish historically.”

On the other hand, if you are asking for a service that will test your ideas, Chris’ suggestion would be worth a try: Alan at  Chris’ comment:

“I know Alan personally, he trades his own funds for a living as well as now offering his services. Previously he traded his own funds only. He is a great guy and a very talented developer with trading expertise.” 

Final question posed: “What commission do you receive for your recommendations”? My answer, not a dime. I recommend sites because I believe they provide a service.

Oh, almost forgot…..a reminder if you want the updated backtesting system’s report with two new backtesting services included, please do drop me a line – here or at

Your Trading Plan 4 – Discretionary (Success Series)

BarroMetrics Views: Your Trading Plan 4 – Discretionary

Today, I want to talk about a topic dear to my heart.  But, before I do that, let me first apologise. Chris from Australia was kind enough to refer me to two services for testing systems. I have now included these in my ‘Backtesting Report’. Unfortunately, I goofed. I did not save the Excel file with all the names and addresses of those who requested the report.

So, if you want the updated report, please drop me a line here or to

Incidentally, here’s what Chris has to say about one of the services:

“I know Alan personally, he trades his own funds for a living as well as now offering his services. Previously he traded his own funds only. He is a great guy and a very talented developer with trading expertise.”

Thanks Chris for all your help.

Turning to today’s blog…..

I could not do a better job than the one done by  Stock Charts “The Wyckoff Method: A Tutorial“. If you want to take the subject further, there are three excellent instructors:

  1.  The Wyckoff Stock Market Institute. Jim O’Brien has an introductory e-book. He used to have an introductory course which was you need if you weren’t trading stocks. Some time ago, he took the product off the market. If the e-book is half as good as the course, it will be a great buy at USD 279.00 (Wyckoff Strategies and Techniques)
  2. Dr. Gary Drayton, Trading Psychology Course. Gary has a few courses. He focuses on futures and was the one who introduced me to ACT. His book Trading Mindfully is an excellent read.
  3. Hank Pruden, Ph.D. His book ‘The Three Skills of Top Trading” is a low-cost intro to Wyckoff.

Why do I love Wyckoff? Because it fits hand and glove with Market Profile. Pete Steidlmayer turned my trading around. I’ll be forever grateful that I flew to Chicago to take his course. I like to think of Profile theories as an adjunct to and an advancement of Wyckoff’s ideas.

I have included three charts that outline the Wyckoff model. Do read the intro by Stock Charts. And, if you don’t understand the charts, feel free to drop me a line at the blog – no emails, please.


FIGURE 01 Wyckoff Process


FIGURE 02 Wyckoff Schematic 01


FIGURE 03  Wyckoff Schematic 02

Your Trading Plan 3 – Discretionary (Success Series)

BarroMetrics Views: Your Trading Plan 3 – Discretionary

Once we have identified the trend of the timeframe we are trading, we need to the question:

“Continuation or change? ”

That is, is the trend likely to continue or change?e can seek to answer the question with reactionary or forecasting tools. Reactionary tools are tools that take place after the event has taken place. For example:

in a Head and Shoulders pattern, the change in trend confirmation does not happen until there has been acceptance beyond the neckline. 

In the Barros Swing method, there are four lagging change in trend patterns. One of these for patterns must appear whenever there is a change in trend.

The other type of tool is the forecasting one. An example of this is the Elliott Wave. In the Barros Swing approach, there are two main forecasting tools

  • Statistical inference
  • The Ray Wave

Statistically, we can determine if the higher timeframe line swing is overextended. When this occurs, the traders timeframe trend is positioned to change.

The Ray Wave is a type of objective did Elliott Wave. The form and structure of an impulse wave provide substantial clues about the possible change in trend.

It’s now appropriate to consider the differences between impulse and corrective waves. In the Barros Swing approach, we have a unique way of distinguishing between the two.

Let’s consider Figure 1. The question is whether waves BD, EF, and GH are impulse waves. What do you think?

I consider waves BD and EF as corrective and wave GH as tentatively impulsive. The reason waves BD and EF are corrective is because they have re-entered the boundaries of the previous corrective wave. For me, this occurs whenever there is acceptance beyond the primary zone.

For example:

Wave EF I am treading as tentatively impulsive unless it crosses above the primary buy zone.

You will recall that the primary zones are calculated by:

  • Taking the range of the boundaries of congestion dividing by eight.  
  • The Primary Sell Zone is is the high of the boundary of congestion and the high minus one eight; and 
  • The Primary Buy Zone is the low of the boundary of congestion minus one eight.

The distinction between impulse and corrective waves is important for  statistical inference and the Ray Wave.

Your discretionary trading plan needs to encompass a set of change in trend tools. Without them, you’re likely to be surprised when the trend changes.

Tomorrow I shall consider the final tool in the Barros Swing method for answering the question: “continuation of change”. 



Your Trading Plan 2 – Discretionary (Success Series)

BarroMetrics Views: Your Trading Plan 2 – Discretionary

Yesterday we were talking about trend and timeframes; we said that our trend identification needed to identify both.

To identify a trend, let’s start by defining them:

  1. Uptrends are higher highs and higher lows.
  2. Downtrends are lower highs and lower lows.
  3. Sideways trends are traditionally about equal highs and lows ( I prefer to say that if we don’t see an uptrend or downtrend, we’re probably looking at a sideways trend). 

Next, let’s have a look at Figure 1. It’s the daily AUDUSD. What would your answer be if I asked:

“What’s the trend?”

My answer would be:

“Of what timeframe?”

The chart as it stands does not provide the necessary info. But, would it make a difference if we added:

  • the weekly swing (blue line)
  • the monthly swing (red line) and
  • the quarterly swing (black line)

[Note Figure 2 shows the same data as Figure 1 (with the candlesticks hidden) except that we have drawn in the Barros Swings.]

We can now say that:

  1. The weekly trend is up. We see higher highs and higher lows. 
  2. The monthly trend is probably up (because the quarterly swing line is up), and
  3. The quarterly trend? Too soon to tell. We can say that it is no longer in a downtrend, having breached the prior swing high (A). We need to see what it will do from here.

We need to identify the trend we proposed to trade because it’s the first step in taking a high probability, low-risk trade. So, if we are trading the weekly or monthly trend, we’d be looking to go long; if we are trading the quarterly trend, we’d be standing aside.





The next step in our quest for a low-risk trade, I’ll consider next week.

Your Trading Plan – Discretionary (Success Series)

BarroMetrics Views: Your Trading Plan – Discretionary

Today we will be dealing with the discretionary, rule-based trading plan (DRB)

The best DRBs are those that based on a view of how the markets work. Examples of these theories are, for example, the Elliott Wave, Gann method, etc.

Now, speaking for myself, I have found that Wyckoff and the Market Profile (Market Auction Theory) provide the best explanation of price action. 

And aside here…………..

when I say Market Profile, I mean that theories upon which Market Profile is based. For example, the Profile principle that “the function of markets is to facilitate trade”. 

This principle is like Wyckoff’s “The Law of Supply and Demand”. I mention this because many newbies confuse the Market Profile visual graphic with its principles. 

Some traders call these principles Market Auction Theory.

So, why we need an underlying theory?

An underlying theory is important because… times it will explain why markets are behaving in a certain manner. For example:

  • After QE, US stock market indices did not respond to the volume analysis so favoured by Wyckoff and Steidlmayer.  
  • Understanding the underlying principles, we discerned that QE had placed a floor under the stock market. 
  • As a result, we knew that the low risk, high probability, trades were longs in the ES or other stock indices.

A theory explaining market action is then the first rule for a DRB. Next, I want to consider the various elements that comprise a robust DRB.

Firstly, the DRB needs to determine our strategy (i.e. determine if we are to initiate long or short positions). We start by asking two questions:

  1. What is the trend of the trader’s timeframe? And,
  2. Is the likely to continue or end?

Notice that we first have to determine the trader’s timeframe. In other words, we have to define the timeframe we are trading. ‘Definition’ can be done in any number of ways, for example using percentage swing charts. I prefer to use Barros Swings: these are swing charts that use both time and price as a variable. Their goal is to define the calendrical trend – we define trends as yearly, quarterly, monthly, etc.

More tomorrow 

Elements of A Mechanical System (Success Series)

BarroMetrics View: Elements of A Mechanical System

Assuming a mechanical system is ideal your personality, the questions that arise are:

  • What are the qualitative elements of a reliable system?
  • Where can I test my system?
  • What are the quantitative measures to be aware of?

Turning to the qualitative elements…..whenever I am creating a new system, the first question I ask myself is what assumptions will the system be making? For example, in the system that is currently taught in Ultimate II, the underlying assumption ‘is the market is producing directional momentum’.

The next question is, what are the elements of the system? Then I ensure that I structure the system correctly so that it flows. Essentially the system has to answer four questions:

  1. The instrument to be traded
  2. The entry criteria
  3. The initial stop criteria
  4. The target criteria

Once the qualitative measures are completed, the next step is to have a system tested.

When I first started trading, there was limited software for testing and innumerable services that would do it for you. Now, the shoe is on the other foot. When I googled “back testing for mechanical trading systems”, I found innumerable referrals to testing software, and none in the way of testing services. I’m sure some there are some services, but you may need to perform some deep searching to find them.

Back testing and forward testing are not my areas of expertise. I am lucky enough to have the services of an excellent programmer who is well versed in probability theory. 

It looks as though if you are mechanical traders, you will need to acquire the programming expertise. One piece of advice I can pass on, my programmer says that all back testing and forward testing should include a Monte Carlo simulation. In this way, the testing will ensure that the result has not been caused by a favourable sequence of trades that understate the risk.

If any reader knows of back testing and forward testing services, please do drop a comment.

Once the back testing has been completed, you will need to analyse the results. Some of the things I would look at are:

  • The probability of risk of ruin
  • The number of consecutive losses
  • The number of consecutive wins
  • The average dollar win
  • The average dollar loss
  • The win rate
  • The loss rate
  • The average percentage return (on Capital)
  • The average percentage loss (on Capital)
  • Return divided by drawdown

Next week we’ll look at a discretionary trading plan and answer Baz’s questions on stop placement.  Tomorrow I’ll reply to Wenda’s query

Your Trading Plan (Success Series)

BarroMetrics Views: Your Trading Plan

Mind x Money x Method is the foundation for long-term trading success.

Why have I emphasised ‘long-term’? Because the random nature of the market can deliver success (or failure) in short-term bursts that tell us nothing about the viability of our success in the future. And, it is the future that we care about. Think about it, if we want to become full-time traders, are we concerned with a two-week result, or are we concerned with a two-year result? Clearly, it is the latter.

The problem is the market provides a random dispersion of profits and losses. We may experience consecutive winning trades. As a result, we often confuse being lucky with being competent. I make a point of this because there is so much hype about incredible systems that will make ‘only 5% per week’. Assuming, that we trade 40 weeks a year, that will give us 100% per annum. I know of no one that has attained 100% per annum over a large sample size. It is important that we keep our expectations within realistic bounds.

The ads do the newbie a disservice by raising their expectations that lead to overtrading in terms of size and/or frequency. In turn, the overtrading leads to ruin. If the trader is to succeed, he needs to keep know that the name of the game is firstly preservation of capital and then attaining superior returns (thanks Trader Vic!)

With that in mind, let’s turn to a discussion of Method.

A Method’s objective is to provide a positive expectancy return.  To do that it must provide:

  1. Entry, 
  2. Exit – Initial Stop or exit strategy to limit losses
  3. Profit target or profit-taking strategy 
  4. Position Size

The question is, how do we get there? That depends on our personality.

There are three types of traders:

  • full discretionary (gut, all intuition)
  • rule-based discretionary, (where one has rules, but the rules permit deviation)
  • systematic trading (where one follows the rules without deviation)

The only full discretionary traders that I have encountered were the pit traders of old. I understand that now order flow traders are in this category, and this is a class of traders with whom I am not acquainted.

If you are a full discretionary trader, I invite you to do a guest blog, telling us how you arrive at your decision-making.

The next category a trader I want to consider are the mechanical traders. Mechanical traders spend their intuitive moments designing their system. Lacking the expertise to backtest, some traders rely on services. Two of the best are Robert Hanna (Quantifiable Edges) and InvestiQuant. Both have free downloads that serve as primers.

Once the rules are in place, the objective of the mechanical trader is to execute them.

Tomorrow – the nature of Mechanical Trading…..