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Question about very large, rapid whipsaw movement


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Question about very large, rapid whipsaw movement

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  #11 (permalink)
Dayton, Ohio
 
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mwtzzz View Post
Once in a while in gold (gc) or oil (cl) you'll see a very large, almost instantaneous movement of twenty or thirty ticks in one direction, followed by an equally large and rapid movement in the opposite direction. This isn't the normal trading movement. What is the reason for this?

I don't know what causes such things, but I've wondered the same myself.

The other thing that drives me crazy (and can cause a lot of lost $$) is a sharp dropoff, followed by a plateau, more drop, another plateau, more drop, etc. etc. until a price is reached one can hardly imagine.

Those are real stomach churners, and of course can be huge dollar losers.

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  #12 (permalink)
Market Wizard
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bulge View Post
I don't know what causes such things, but I've wondered the same myself.

The other thing that drives me crazy (and can cause a lot of lost $$) is a sharp dropoff, followed by a plateau, more drop, another plateau, more drop, etc. etc. until a price is reached one can hardly imagine.

Those are real stomach churners, and of course can be huge dollar losers.

It's called 'market rhythm".

That is a pattern you should learn to take advantage of.
A drop (trend) then consolidation (plateau) then drop (trend).
This is great if you are on the correct side of the market and know how to read the rhythm.

Watching volume is not bad but think about this:
Wide bars should naturally have more volume because they cover more price levels to take out.
You should temper the volume with a bar type that also shows the same time frame with a fixed candle size.
(i.e. Volume bars or Range type bars).
Many times you will see the volume is a little greater but not significant.

Especially lately, the volatility is causing a lot of thin markets and large moves because a lot of traders are on the sidelines just watching these crazy moves.

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  #13 (permalink)
Sunnyvale, CA
 
 
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bulge View Post
I don't know what causes such things, but I've wondered the same myself.

The other thing that drives me crazy (and can cause a lot of lost $$) is a sharp dropoff, followed by a plateau, more drop, another plateau, more drop, etc. etc. until a price is reached one can hardly imagine.

Those are real stomach churners, and of course can be huge dollar losers.

I came to the conclusion that the only possible way to consistently make money trading futures is only to trade breakouts in the direction of the breakout and hold it for a relatively short period. Many breakouts fail, but in the very short term they do succeed up to a point. You can limit losses to a few ticks if it stalls and reverses, or there is always a clear place to put a stop loss (at the start of the 1-minute bar that the breakout occurs in. This obviously is a 7- to 10-tick stop loss.)

I define a breakout in CL or GC as a 7+ tick move in one direction that occurs in the matter of a couple seconds, and that this jump is relatively more volatile than the previous minutes. Much of the time this type of move continues for at least another 10 ticks. To take advantage of this you catch the move at the initial jump - at that 7+tick mark where it first jumps to.

In fact this is the only thing I have observed that is predictable in the futures markets, and I have spent a lot of time observing, trading and trying different tactics. An eye-opener occurred to me years ago in the form of advice given to me by the manager of a quantitative trading department at Goldman Sachs. He told me not to bother trading because prices are not predictable seeing as how it has been shown that they follow a Brownian motion. So I looked into this and, indeed, found the literature, most of it dating from the 1960s onwards, where it has been demonstrated via statistical methods that financial market prices are unpredictable.

So at this point I did two things: I backtested a bunch of historical tick data to determine what kind of unpredictability was involved: complete randomness or something else? What I found was that it's not particularly difficult to design an algorithm that will consistently make money over the long term with manageable drawdown, through all types of markets, but the caveat is that it makes very little money - on the order of a 100 ticks for an entire year. What this shows is that the markets have a non-random component some of the time (if they were completely random no strategy would ever work), but that such trading strategies are pointless (spending an entire year trading to make 100 ticks is a waste of time). In any case, the markets are unpredictable but not totally random.

The next question is whether there's anything at all that's predictable, even say just for very specific circumstances, or is it simply unpredictable all of the time. What I found was that a strong breakout has better-than-chance predictability. In other words it follows through more often than it fails.

There main problem with it is catching it the moment it happens. If you are late, the chances of success diminish. The short term continuation of a breakout has a high probability. But further along you are in time, it diminishes.

Overall the long term the idea then is to have your gains outweigh your stop lossses (and commissions) and have this be worth your time. So this is the second "problem" for many traders: it is not glamorous, nor is it big money.

But try it for yourself. You'll feel better because you have a clear plan and because there's no thinking or guesswork involved. You trade in the direction of the breakout and you set a clear stop loss point. That's it. When it finishes you wait for the next one to happen and repeat. You'll be pleasantly suprised that things move in your favor more often than in your current strategy. And the worse case scenario is that you slowly dribble your money away over a long period of time instead of losing big chunks all at once like what's currently happening to you.


And to get back to the original question of the thread. I have no idea why those very volatible whipsaw actions happen. I'm curious about it, but I've never bothered investigating and it doesn't affect my trading strategy. I feel the only people who know what's up with it are the people in the trading houses who are maintaining the trading systems.

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  #14 (permalink)
Market Wizard
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on the ES ...it seems to happen around the lunch hour on light volume days. i think its fixed ...when a group of traders think they can go stop gunning with little risk.

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  #15 (permalink)
Dayton, Ohio
 
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mwtzzz View Post
I came to the conclusion that the only possible way to consistently make money trading futures is only to trade breakouts in the direction of the breakout and hold it for a relatively short period. ...

I trade the breakouts just fine - it's the breakDOWNS that give me stomach pains!

And, I don't short because it's over-the-top stress inducing.

I'll try the indicators that @DavidHP mentioned (volume bars/range type bars) and see if they're helpful in determining if a drop is going to continue, or if the price is going to level out.

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  #16 (permalink)
Market Wizard
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bulge View Post
I trade the breakouts just fine - it's the breakDOWNS that give me stomach pains!

And, I don't short because it's over-the-top stress inducing.

I'll try the indicators that @DavidHP mentioned (volume bars/range type bars) and see if they're helpful in determining if a drop is going to continue, or if the price is going to level out.

@mwtzzz @bulge

I hope I did not mislead you.

The biggest problem with breakouts is that they often fail and the new trader is trapped.
It takes a bit of experience to see when it will continue and when it will not.
Candles and charts show history of where the market has been but only the current candle shows anything about the present. New traders tend to put a lot of weight on the past candles and should be learning to see the future.

I think the easiest way to see the breakouts and consolidation is by reading the tape (Market ladder / DOM)
It is difficult at first but really the best way once you learn to 'see' the action.
Here is a video of what I mean:

This was a webinar on Futures.io

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  #17 (permalink)
Sunnyvale, CA
 
 
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In crude oil, when you see a 5+ tick breakout that happens in a one-second period, there's about 90% probability of follow-through for another 5 ticks given the following:

* the breakout does not overlap prices from the past few minutes
* the breakout has more volatility than the prices have shown in the past 10+ minutes

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  #18 (permalink)
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DavidHP View Post
@mwtzzz @bulge

I hope I did not mislead you. ...

No, not at all. Thank you @DavidHP.

I've been licking my wounds for a few months now, and think I have a better handle on things.

Only time will tell, however...

Thanks again.

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  #19 (permalink)
Dayton, Ohio
 
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mwtzzz View Post
In crude oil, when you see a 5+ tick breakout that happens in a one-second period, there's about 90% probability of follow-through for another 5 ticks given the following:

* the breakout does not overlap prices from the past few minutes
* the breakout has more volatility than the prices have shown in the past 10+ minutes

@mwtzzz

What do you mean by "has more volatility than the prices have shown in the past 10+ minutes"?

By 5 ticks, I presume you mean (in /CL) you mean 5 cents?

Thank you.

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  #20 (permalink)
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bulge View Post
@mwtzzz
What do you mean by "has more volatility than the prices have shown in the past 10+ minutes"?

i mean that you're not seeing a bunch of 5+tick breakouts in a row. You're waiting for the first one to happen within the past 10-20 minutes or more.

Quoting 
By 5 ticks, I presume you mean (in /CL) you mean 5 cents?

A tick is the smallest movement of price. In CL if you trade one contract and make a 1-tick profit, you make $10.

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