Once we have identified the trend identification of your timeframe, we have your strategy. The next event is for us to identify a low risk entry. I see low risk entry comprised of three factors:
Our zone will be a function of whether we are taking a breakout trade or looking to trade responsively (buy on dips in an uptrend, sell on rallies in a downtrend). Here the Barros Swings again play an important role. Breakout zones are the important highs and lows created by your timeframe e.g. the Turtles would buy a breakout above the highest high of the past 20 days and would sell the breakdown of the lowest low of the past 20 days. The problem with this definition is the ‘breakout or breakdown’ zones may not represent critical resistance or support zones.
Figure 1 is a good example of what I mean.
FIGURE 1 AUDUSD 1-m Swings
(Click on Thumbnail for Full View. Click again for clarity)
Figure 1 shows a 1-period monthly swing (the equivalent of an 18-d swing). I used a 1-m swing for the sake of clarity. Notice that after a prolonged uptrend (Sept 1 2001 to Feb 1 2004), the market formed boundaries of congestion at .8002 to .6771. The breakout occurred 33 months later. During the 33 month period there were numerous breakouts and breakdowns of 20-day highs and lows; these were trades that at best would have resulted in small profits and at worst they would have resulted in losses.
The point is this: if we are to be breakout traders, then the identification of our timeframe’s resistance and support zones is important for our win rate. Barros Swings do the job.
The flip side of breakout trading is responsive trading. The tools I use (in order of priority) to identify the zone where a correction may end are:
Statistical Time-Price Zones of the 18-d corrective swings
Statistical Time-Price Zones of the 5-d corrective swings
MIDAS (download free lectures from www.tradingsuccess/freestuff)
Various Fibonacci relations
(See the Nature of Trends, available from Amazon)
The Ray Wave (forthcoming book) indicates whether we should expect a complex correction or simple and thus indicates the boundaries of the Statistical Time Window (i.e. whether we are looking for a price correction greater than mean + 1 stdev or – 0.5 stdev). It also identifies the maximum boundary for the correction. Within the Time Window boundaries, I look for a confluence of support zones.
Notice what I have done. The Statistical Time-Price Windows have two components, an input of corrective data of the swings in my timeframe (18-d) and an impulse input of the first lower timeframe (the 5-d). The reason is a correction in one timeframe is an impulse swing in the first lower timeframe. I then look to other tools to reduce and zoom in on the zones of this window.
The idea that a correction in one timeframe is an impulse move in the first lower timeframe is an important concept for the newbie to grasp.
Once I have my zone, I look for a pattern that tells me a zone will hold (setups). I have three types of patterns:
I’ll deal with aspects of the patterns in later blogs.
A setup pattern comes with its entry bar. Generically I am looking for evidence that not only has a zone held but also that the market has resumed its trend. If we have only end of day data, I’d be looking at a candlestick bar that shows strength for a buy and weakness for a sell. Again we’ll consider the idea of what denotes strength/weakness in later blogs.
Nowadays I have access to intra-day day data and for this reason I use the information provided by Market Delta (http://www.marketdelta.com). This software identifies buying and selling volume and allows me to enter near the start of a move rather than at the end of the day. In this way, I am able to reduce the size of my stop without substantial adverse effects on my win rate.
All entries require exit strategies. I use two types. A stop placed with my broker: a stop that represents a price beyond which I am not prepared to accept further losses. This stop is technically based.
I also have qualitative stop. Whenever I enter a trade, I ask myself three questions:
What does the market have to look like for me to remain in the trade?
What does the market have to look like for me to exit the trade?
For how long am I prepared to hold the trade without the market moving mean +1.5 Standard Deviations in my favour from entry?
If I am trading well, I’ll exit trades before my stop is hit and most of the time, this will prove to be the right decision in that had I not exited earlier, I’d have been stopped out.
Well we’re almost at the end of this theme.
In the next post, I’ll deal with Subsequent Trade Management, a subject that will complete this section in Trading Plans. After that I’ll have a look at some aspects of Winning Psychology. By the way, one of the better sites for psychology and ideas on trading the e-minis is Dr. Brett Steenbarger’s:
Pay it a visit, you’ll be well rewarded