Chop & Not- A Different Take On Support/Resistance.

During my time spent studying Technical Analysis, I've been taught/learned about many forms of S/R- Pivot, Congestion, Whole number, Moving Average, Gaps (or windows in Candlestick jargon)....but there's one type that I haven't seen much of, if at all, in any of the learning material I've gone through.

It's what I've called "chop & not"- when price changes structure at a given point. It may be from trend to chop or vice versa.

I've just randomly picked out a chart that demonstrates this type of S/R. You can see how price went from longer bars with little overlap to the reverse. It also decreased drastically in pace- it took 9 bars to travel 78 pips compared to the 150 pips travelled by the previous 4 bars. You can see further confirmation of the pivot point by the activity in the third blue circle, which is seperated from another period of chop created by the three small waves of downside out of that high.

There are many ways in which this technique can be incorporated into a trading approach.

The other chart, shows how one of today's trades played out. You can see how my exit was the beginning of a trending market after the chop. Confirmation of the support I had used as a target.

Self-Talk And Edge.

Excerpt from "Trading For A Living" (Dr Alexander Elder):

"Dr. Shapiro describes a test that shows how people conduct business involving a chance. First, a group of people are given a choice: a 75 percent chance to win $1000 with a 25 percent chance of getting nothing-or a sure $700. Four out of five subjects take the second choice, even after it is explained to them that the first choice leads to a $750 gain over time", (!?!...lol), "The majority makes the emotional decision and settles for a smaller gain."

My knee-jerk reaction was to go with option 2...I made the same choice as the 80% majority! Of course, after I actually used my brain, it was obvious to me that option 1 would be most profitable over time (not made clear in the text, but I'm assuming that's what was meant).

So how do we avoid these edge-blunting, emotional decisions?? My answer is Positive Affirmations, specifically related to the ideas of edge, probabilities and trading in general.

Some of the leading questions I've been asking myself in the 2nd person (...all a bit weird!):

"Is the fear of allowing this profit to become a loss greater than the fear of skewing the risk to reward ratio by not staying in the trade until target?" (When considering emotion-based exits).

"Can you risk losing money when correct about the market direction if that puts the probabilities more firmly on your side over the long haul?" (When thinking it's safer to keep a wider stop, despite actually losing money by doing so)

"Do you have a statistically proven edge? If so, why would you get angry/upset about any influence luck has had on any series of trades??" (When getting stressed out over missed trades, being stopped to the tick etc)

One of my favourite general affirmations is:

"Fear of pulling the trigger is warranted when you don't have an edge...fear of NOT pulling the trigger is necessary when you have one"

These are examples of the crazy things I've been telling myself any time I consider deviating from the plan. They are tailor-made for my particular difficulties.

It's had an enormous affect on my results :D

Follow-Through.

Autumn (for everybody apart from UF, that's "Fall" *attempt at american accent* to you!) is here. With it comes the alleged volatility that makes successful traders more profitable and, I guess, the less successful even less so...

While going through my the past couple of weeks of data (not including this week), I'm noticing that my winners (always scaling out...all-in to begin with) are becoming smaller relative to the all-in, all-out distance that those winners run for. The average win divided by the average distance gives me 51%, meaning on a, say 6R market move I can expect to typically get 3R from it, using my method of scaling out at various s/r.

This week that's now become 39% (after 19 trades...same relative frequency of trades as prior weeks). I'm also seeing more small wins/losses with a Maximum Favourable Excursion,MAE's cousin, of 200%+...this tells me that the market, at least on the level I'm interacting with it, is choppy.

I'm struggling compared to last week but have made the necessary scaling out adjustments (taking off in thirds/more at the 1st target etc)to right the ship. Currently, I'm up for the week...

Most importantly, I am enjoying the opportunity to practice adapting myself and my strategy to the ever-changing ebbs and flows of the market.

"DayTrade"

8 days, 47 trades & +11.17R after my MAE- assisted light bulb moment, I thought I'd quickly share a few statistics and the possible implications these may have;

* 27 winners (35.91R), 20 losers (24.75R)
* The above means Avg winner= 1.33R, Avg loser= 1.2375R
* 57% (0.574468) win rate
* 0.2374466 expectancy.

First impressions are good. The only number that really matters to me is the expectancy...considering Roulette gives the house a 5.26% edge (0.0526 expectancy), I'll definitely settle for the above!

However, the other values can cause problems of adherence to/tolerance of the edge. One potential problem that was obvious to me was the effect of any decent drawdown. If the system is making a little more on it's winners than it's losing on the losers, then, (assuming a random distribution of wins and losses) would it be more likely to chop it's way up the Y axis, opening up the possibility for a pretty severe drawdown relative to the slow but consistent collection of R's??

As it goes, that question got answered on Tuesday 13th September :)- 6 wins, 10 losses (!), 6.23R down. 62.7% of the prior 5 trading days gain...(9.93R)

If that day's excluded, we have the following stats;

* 21 wins (29.92R), 10 losers (12.53R)
* Avg Win= 1.4248R, Avg loss= 1.253R
* 68% (0.6774193)win rate
* 0.5609936 Expectancy.

There's two main choices that I see: choose to ride out those ugly days or try to limit them. I've noticed that the other days huddle quite nicely around that 0.56R expectancy while that Tuesday is sitting all on it's own at the edge of the bell curve (-0.389R)

So I'm thinking, what if I apply the same concept of MAE to the WHOLE trading day, effectively treating it as a "trade"? Maybe below -XR my odds of making money are reduced enough to warrant cutting the "DayTrade" loose?

I'll continue to trade/collect data and see what picture it paints me...

MAE & Me- Using Data To Hone An Edge.

S0 after much struggle, it seems there could be light at the end of this particularly dark tunnel.

I've been trying to do something that I believe Know I can do. I just need to figure out the, umm, technicalities (ie how to do it...lol).

The chart shown demonstrates what I've always thought I could do but never had the conviction (or is that the data...?) to do. Even with a Sim account. This experiment came about by my study of the last 100 or so trades.

It quickly became obvious that my entries were so accurate, my Maximum Adverse Exposure, MAE, so small- 90+ % of winning trades never going into the red before showing a profit- that I had an untapped resource which could hone, if not stand alone as, my edge. What I was looking for was hidden in randomness- stops that were too wide to harness the strength I have at pin pointing short market sprints from fairly accurate entries...

Another obstacle is the tendency to watch dollar amounts rather than return on risk. If further along the trading path, you might watch return on risk but artificially cap it rather take profits at logical points. I suffered from this in particular and am still working on it. Eg I'd take half off at a predetermined R/dollar amount because I "couldn't risk giving back so much"- whatever that means!

The above problems of "giving room" with stops for such trades, watching where you are in a trade rather than where the market is in a move, result in no edge (gambling!). Fixing the risk will also leave less to chance (but will aggrevate any tendencies to watch dollar amount rather than the chart)

Crutches, Crotches And Common Sense.

Do all traders need another source of income? I've been asking myself this question recently due to the slightly disturbing fact that I've always made money consistently in the markets whenever I've had a "normal" job (IE one where it's impossible to work all day and lose money!)This security has allowed me to be more bold in seeing my ideas through to resolution. Perhaps it also helped me to stay objective too...

On the flip side, I've found it difficult to sustain the same momentum whenever I've abandoned my job after several months of success which I felt proved my ability to provide for myself through trading. Some might argue, "why don't you just continue to build a nice account whilst working?", but that was never my intention.

"He's able to perform the most complex tasks but sometimes struggles with the simpler tasks which he tends to overlook" was the gist of one school report. That sentiment has resurfaced from time-to-time throughout various endeavours in my life. I know that I'm pushing a door that needs to be pulled...or devising a complicated way to clutch a stone in the palm of my hand, face down, instead of simply letting it sit there, palm up! *wink@UF*

Einstein's definition of madness: "Doing the same thing over and over and expecting a different outcome" (don't quote me word for word on that...but the meaning is the same)

A few fragmented thoughts at 02:30am.

"Beginner's Luck" & Technical Analysis.

Personally, I think the term "Beginner's Luck" is inaccurate. It suggests that the positive results that some traders achieve as soon as they begin their trading journey is some how a fluke, that, by chance, the market has just happened to give them an easy time. After all, newer traders know alot less about technical anaylsis than the more experienced trader...how else can they achieve such success?

More appropriate terms for this common occurrence might be "Beginner's Belief", "Beginner's Spirit" or maybe "Beginner's Ignorance".

Fresh out of the seminar/course or any other serious introduction to trading, the eager student follows the rules and reaps the benefits of successful trading. This is, of course, assuming they have the discipline to learn and follow the rules they've been taught.(let's also assume the rules/methodology stack the odds in your favour) What they've been taught isn't magic...it's just a way to identify an edge and use it. The irony is, the edge usually isn't anything special...it seems so effective because the trader hasn't experienced anything to instill doubt or knock confidence...yet!

When they do eventually bump into that excruciating, but completely normal, losing streak, their future as a trader will be determined by how they deal with it. If a trader starts looking for ways to improve their understanding of TA to try to prevent further losing streaks (exactly what I did some 20 months ago) their in for a long, painful journey. If one can recognise that the application of the skill of TA in a consistent and objective manner, regardless of what's happened recently or what one feels is going to happen, is far more important than the potency of the edge, they just might make it...

Jules highlights the value of spirit in a recent post....I know from personal experience that a faulty trading mindset will trash the highest probability edges and quickly turn what would be a nice modest earner into a way to slowly drain money from your account. Spirit is our most valuable resource for sure....