Improving performance in between strong trend days
After virtual trading and studying price action for about 6 months now, I've come a long way from the days of trading with no idea as to what to do and losing consistently. I've been keeping a trade log and journal, reviewing every night, writing down / testing my short-term market forecasts, and working to understand/fix all my shortfalls. But the last one is much easier said than done and one of the shortfalls that I would really appreciate help with is trading in between the 1-3 strong trend days that allow for easier trading. It's not that I incur terrible losses during these days; the issue is that my performance is absolutely unsatisfying (I average a 1-2% return trading stock options during each of these days as opposed to an average 13-17% return on strong trend days).
I make it a priority to review my trades during the "in-between" days like trading/trending range days where price action is choppy, difficult to understand, and prone to reversals and breakouts which are preceded only by very subtle hints (or subtle to me at least).
My current approach to these types of days is to do the following:
-Reduce position size and scale in when the trade shows better signs.
-Put emphasis on observing price behavior around S/R levels and the moving average (I use the 20 period EMA).
-Enter trades using bar counting with scalp targets if they are not at an extreme of the range. (I never take high/low 1s in trading/trending range days and I never take high 2s near the top of a range / low 2s near the bottom).
-For trading range days, I fade range breakouts that I think lack adequate strength.
-For trending range days, I look for entries with-trend and I fade moving average tests.
-I keep an eye out for developing patterns like sym. triangles, wedges, pennants.
-I keep track of bar size and try to recognize climaxes / vacuums
Although the list goes on, these are more-or-less the dominant elements of my trading strategy for the in-between days. If you have any feedback or advice, please do not hesitate to tell me.
Attached is an example to you an idea of what I mean by choppy, difficult to understand, and prone to breakouts/reversals preceded by very subtle hints.
Making the gains you describe you are already streets ahead of most traders, no need to change anything except just be happy and keep on doing it consistently. I think a big lesson for me came from someone who said 'not every chart is understandable, and not every chart needs to be traded'.
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You are not going to make the same level of gains in a ranging market that you can have in a trending market, that's the simple reality.
1. The moves will be shorter
2. It will be harder to get a good entry, and entry is more critical for a small leg in a range than for a big trend
3. You have to switch mental gears quickly from expecting a trending day to recognizing a range day (and the opposite is also true when you get a trend and you expected a range.)
The things you listed make sense in terms of adapting to the change from a trend to a range, but the issue is always going to be recognizing which type of market you have. Then, using the right strategy would be easy....
Sort of Catch-22.
Now, there are people who specialize, in effect: some will just assume they should fade the extremes as if it were always a range day, and they get out when they are wrong. Others will always look for a trend, and they will try only for the larger move. They tend to get chopped up, but with good loss management can do well anyway from the big swings.
If you want to do well in both types of market, which is an ideal but hard to achieve, you may just have to find a compromise that fits how you read the market, knowing that it cannot work perfectly.
Basically, if you're keeping your head above water, and even making some gains, during the days when your trading is less successful, you probably are doing OK. Change things slowly, if at all, and seek consistency for each of the market conditions.... not necessarily a fool-proof method for always recognizing the ideal strategy....
Just a thought or two. Hope it works out well for you.
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Thank you for that lesson. It's actually an eye-opener. An experienced trader that I am close to has often told me that same thing in different words which went along the lines of: "trading is not about making money, it's about not losing it. Remember that not trading is also a viable option and that most of the profit made in the business is made only in a few of the days." I haven't truly internalized that fact but your bringing it up has put me one step closer to that. Another thing is that I cannot take too much credit. I am strictly virtual trading until I turn 18 at which point I begin live trading. I'm doing my best to treat my paper money account as if it were real and to facilitate the pressure of real trading but as you know, nothing can rival the pressure of having your real hard-earned money on the line. My goal is to perfect or at least try to perfect my virtual trading to point where when I start live, I can put more focus on the psychological aspect as opposed to the technical/mechanical aspects.
"The things you listed make sense in terms of adapting to the change from a trend to a range, but the issue is always going to be recognizing which type of market you have. Then, using the right strategy would be easy.... "
haha, I'm mindblown; that's so incredibly true.
In retrospect, my greatest problem in trading (which probably extends to most if not all traders) is accurately interpreting what kind of market it is. My losses on choppy days often come from expecting a larger swing and thus having to exit a trade with much less profit when the scalp that I should have taken passes me and the price action goes against me.
I guess this thread is more-or-less finished.
This is going to be off-topic from what the thread originally meant to ask but if you don't mind,
Could you give me a few insights as to how to better recognize market type from charts?
Based on what you said, I'm thinking of putting in the time and work to go through each stock on my watch list, find choppy days, and to record how many ticks each tradeable leg is to determine an average leg size which I can based entries and exits off. Although it won't necessarily help recognition, it will probably come in handy with what comes after.
Last edited by GreedIncarnate; August 12th, 2014 at 03:57 PM.
Reason: grammatical errors and content missing
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There are really no magical insights that I know of. You can work on your understanding of price action, and see what you can see from your charts. It will not always work, and definitely will not be perfect.
From what you wrote, it appears that you may be familiar with some of the price action ideas of Al Brooks. If not, his books do give good guidance into the different characteristics of different market conditions, although they can be difficult to wade through. He recently published a 3-book set; I would try the first book of the series and see what you get out of it.
Otherwise, it is just practice, and patience, and feeling your own way.
One comment I would make is when a chart looks too choppy to make a decision sometimes it works to look at the chart with a longer time period in mind.
However when I look at your "choppy" Twitter chart...I wonder how you are looking at your Resistance/Support lines. Are you looking at only horizontal lines and not diagonal??
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the numbers 1-4 show points where resistance and support lines can be drawn...it is clear there 2 breaches of the
the bullish rise at 10:25 and the bearish fall at 3:35....note also how that resistance is now a support shown at 5.
There are other R/S lines possible but I would wait for macro ones to see major changes. Personally I think perhaps you are trying to form R/S lines in too fine a manner...be patient and watch them develop.
I also wonder how you are using the 20periodEMA...
Hope this helps
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