How to Defeat the Dreaded “Ebb” III

BarroMetrics Views: How to Defeat the Dreaded “Ebb” III

Yesterday I said that part of the solution to the problem is to use qualitative stops – exiting trades because the structure, not price, suggests an exit is in order. Why is this more difficult that it sounds?

Paul provided the answer in his posted question; and, we find the solution when we solve this query: why do some traders fail to use price stops?

Answer: we want certainty that if stopped out, the market will not then proceed to move in our favour.

Since we are trading the right-hand edge of the chart, there is no such certainty possible. Indeed, the opposite may be true – it will almost certainly happen that, if we trade for long enough, our price stop will be hit, and the market will then move in our favour. The solution is not to avoid using price stops but to formulate a strategy for action when that does occur.

Now, if fear and regret raise their ugly heads when using price stops, imagine how much stronger their impact is when using qualitative stops?! It is ‘fear’ that stops us from doing what we know we need to do……

In that sentence, we have the two barriers to implementing the insight:

  1. We need to KNOW what to do (knowledge); and
  2. We need to DO what we know (skill).

In respect of the former, that comes with observation, reading and study; in respect of the latter, it comes with managing fear and anxiety. In this regard, I have found ACT to be immensely helpful, especially the ‘acceptance’ and ‘diffusion’ aspects.

I wrote about ACT last year in “It’s That Time of Year II“.

I’ll leave it to you to investigate the theory and apply to your trading. What is important is to know that for ACT to help, you must not only “learn”, you must also “do”. Just reading ACT’s concepts will not make you a better trader – for that to happen, you must also apply the ideas.

How to Defeat the Dreaded “Ebb”II

BarroMetrics Views: How to Defeat the Dreaded “Ebb”II

Yesterday I laid out the context of the problem, defining “Ebb” and “Flow” and why the problem arises. Today, we’ll have a look at the solution. To understand that, I have one more distinction to make: the difference between a strategic initial stop and a tactical initial stop.

A strategic initial stop identifies where my definition of the timeframe’s trend is proven incorrect. In Figure 1, let’s say we are trading the 18-period swing on the 15-min chart. The strategic stop would be “B” – breach of “B” violates a prior 18-p swing high, invalidating the current 18-p downtrend.

A tactical initial stop identifies where the reason for the trade is invalidated.

In Figure 1 let’s say there was a ‘Death Zone” setup and trigger (there isn’t but let’s pretend there was). This means:

  1. once we see acceptance below Value Area Low (in this case, 33% retracement), we should see a breach of A before we see a breach of the Value Area High (in this case, 67% retracement).
  2. So, for the Death Zone, once we see acceptance below the 33%, the initial stop can be placed above the 67%.
  3. Violation of 67% before that of “A” would not invalidate the sideways trend, but it would violate the reason for the trade: the Death Zone Setup and Trigger.

In addition, tactical stops can be qualitative. For example, in a Triangle continuation:

  • after “E”, we should see an explosive move.
  • Let’s say we are looking at a triangle downside continuation, if we see a move after  “E” that is down but on shrinking range, the likelihood is (a) “E” is incomplete or (b) we don’t have a triangle.

So, the reduction of range after ‘E’ would suggest we should exit the trade because ‘E’ is either incomplete or we don’t have a triangle.

Penultimately, strategic and tactical  stops can be at same price. For example in Figure 1, let’s say we took the trade after “B” because there was a contraction at “B”. The initial stop could be above “B” (once the swing line turns down) – that stop would be both strategic and tactical.

And finally, I lean to placing strategic rather than tactical stops.

Now we are ready for the insight: during my ‘Flow’ stages, the distinction is irrelevant. Because a ‘Flow’ trade moves to the first-third exit as a matter of course, at worst, my trades during ‘Flow’ are breakeven. But, in ‘Ebb’ stage, placing a strategic initial stop is a mistake. In ‘Ebb’ few trades move to the first-third exit price, and most trades take out the initial stop. This pattern is what causes the losses – the profits fail to cover the losses.

So what did I do differently in Feb? All my exits were tactical and of the 6, 4 were qualitative exits. True, all the exits could have been at better prices – with hindsight I could have improved the exits in 4 of the trades by 29 -46 pips. But, in 2 of the losses, I would have taken a 1% loss (2% total). That would have been enough to send Feb into the red. This insight provides the first clue – for me to turn ‘Ebb’ phase into ‘Normal’ phase, I need to use qualitative stops.

That is more difficult than it sounds, we’ll see why tomorrow.

audusd-15-min.png

FIGURE 1

How to Defeat the Dreaded “Ebb” I

BarroMetrics Views: How to Defeat the Dreaded “Ebb” I

First off, thank you to all of those that sent in ‘get well’ wishes. I appreciate the thoughtfulness. Thank you.

Secondly, at last, flu free!

It was one of the strangest occurrences:

  • Low temperature
  • A truck load of congestion
  • Cough
  • Runny nose, and
  •  Strangest of all double vision if I spent more than 30 -min or so reading, in front of the PC or TV.

Anyway, all cured now. I can turn to the emails that have accumulated over the past fortnight. If I owe you a reply, you should have it by week’s end, if not earlier. Turning to today’s blog….

It’s said it’s an ill wind that blows nobody any good. The forced sojourn gave me loads of time for reflection.

The interesting thing I noted is the pattern for the 2014 trading results is being replicated in 2015. ‘Flow’ in the last quarter and Jan, Feb experiencing ‘Ebb’. But whereas, Feb – Mar 2014, saw a -15% result, Feb 2015, saw a +.31%. The question I asked myself ‘why’ such a difference? What was I doing differently this year?

Before I turn to answering the question, let’s define “Flow” and “Ebb”.

When in “Flow”, I experience little stress in a trade (“I can’t do anything wrong”):

  • The market moves into my ideal entry zone, and provides the needed ‘trigger’.
  • The open loss after entry stays within my Maximum Adverse Excursion.
  • The trade allows me to exit my open position’s first-third fairly quickly,
  • Most trades see a second-third profit target.
  • A majority of trades, see the last-third target.
  • Stop outs, if they happen at all, are few and far between.

“Ebb” is the reverse (“I can’t do anything right”).

  • Entry into my zone is filled with ‘fakeouts’
  • Triggers are less clear-cut.
  • After entry, I see open losses that are greater than my Maximum Adverse Excursion.
  • A minority of trades reach the first-third target.
  • Few if any reach the second-third target.
  • Stop outs are common.

What this means is when in ‘Ebb’, I experience full losses i.e. the majority of my trades suffer 1% to 2% losses, and I don’t make enough in the profitable trades to compensate for these. That being the case, how did I manage to stay in the black in Feb this year?

The answer tomorrow……