I was away from my computer today and unable to trade, but I noticed something interesting looking back over today's charts. There were several moves today that I would characterize as a "price surge." By this I mean a movement that travels quickly in one direction for farther than you'd normally expect, without any meaningful pullback.
The first pic below is today's YM chart, with the price surge sections highlighted. The simplest explanation I can think of as to why these moves occurred today is that many traders were positioned short throughout the day, and the price surges represent areas where the shorts were squeezed.
What's the significance of the price surge? Price surges are noteworthy in my opinion because they are examples of price acting in an unusual way. The "normal" price action during a trend move is the with-trend setup I've discussed in this thread: price travels some distance in one direction, then profit taking sets in and it retraces back to approximately the SMA, then makes another move in the direction of the trend, etc. The envelopes help you visualize how far a move in the direction of the trend is usually expected before the profit taking motive takes over.
During a price surge, price can extend quite a ways beyond the point you'd normally expect. The best explanation for why this occurs is that traders have become trapped, and are basically "forced sellers" or "forced buyers": too many traders are caught leaning in one direction, and when the market goes the other way, these trapped traders have to unwind their positions to stop the bleeding. (The reaction to significant news will look like a price surge, but may be more extreme.)
The second pic below shows a good example of two "price surges" occurring in close proximity, one to the upside and one to the downside. In both cases it could be argued that the surge resulted because traders were trapped. That is, the price action preceding the move had led traders to expect the opposite of what actually happened. In the first surge, many traders may have been short as price made a descending channel; when the upper trendline broke, a price surge to the upside occurred. Then came a classic example of a failed breakout, where price initially seemed to be setting up for an uptrend and then quickly reversed, triggering a wave of selling that led to a price surge in the opposite direction.
One of the trickiest aspects of the trading method I am teaching is trying to anticipate when these price surges are likely to occur, which allows you to avoid getting on the wrong side of runaway trades and also helps you set appropriate price targets (if you think a price surge may be coming, you'd want to use a larger profit target than normal). There is unfortunately no easy, formulaic way to anticipate price surges. You really need to think like a contrarian and figure that when price action has been signaling a likely move in one direction and then abruptly changes course, a price surge in the opposite direction is possible.
The setup from Question #3 in my last quiz is another example of a price surge. Someone (trendisyourfriend?) pointed out that this might have been a good place for a long trade, but that post seems to have been deleted as I don't see it anymore. I actually think that's a good point although that's not an easy trade to take, as it requires you not only to correctly anticipate that a price surge will occur but also to enter the trade well beyond the point where you'd normally want to take a long trade, so it will feel like "chasing." I guess the overall lesson is that the price surge is a tricky situation to trade but can be tackled by advanced traders.
I haven't seen much of interest in YM today but did want to point out something from CL. Today has been a narrow range day for CL (relatively anyway; a narrow range day in CL would be a wide range day in a lot of instruments). A few trend moves have started, giving maybe one chance for a with-trend entry, but then fizzled without any follow-through.
In my opinion, this is probably the most difficult thing about trading: trying to figure out when to expect follow-through and when not to. As I've pointed out in this thread, trend moves basically all look the same: upleg, retrace, upleg, retrace, etc. What you never know for sure is how many uplegs you can expect, which also means that every retrace could be the end of the trend and the beginning of the reversal for all you know. Every trade is a gamble.
To make matters worse, the markets can change on a macro level very quickly. Sometimes the market is in a "trendy" mood where trends tend to run a long distance with many uplegs before reversing. Other times the markets are quiet, with narrow ranges, false breakouts, and no continuation to speak of.
I'm not sure exactly what to say about this other than that drawdowns are inevitable. You can have the greatest trading system imaginable, and still hit a string of losers serious enough to start eroding all confidence. In my opinion, this is why most traders fail: all traders will experience drawdowns, and most people are far more likely to quit during a drawdown than to quit on a new equity high. The confidence disappears which causes people to quit before they can dig themselves back out of the hole.
In CL at least, if you're persistent with taking with-trend setups, you'll usually be rewarded with one or two good moves a day. There are exceptions of course, but on the typical day the opportunities for profit are there. The real key is how much you're losing at each failed trade, versus how much you're allowing yourself to collect on the winning ones. I've generally found that larger profit targets are rewarding with CL over the long run, but you have to have the discipline to actually allow those targets to be hit.
Well, sticking to that theme of persistence, CL finally did show a decent trend move by the end of the day. This could have been tradeable as a long with-trend trade using my setup by point 3 in the attached pic, although I wasn't watching at the right time to take the trade.
I am much happier when this kind of move occurs early during the trading day, so I can get one or two good trades and then call it quits while I'm ahead. Can someone please arrange for that tomorrow?
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I have been traveling the last couple of days and unable to post. I hope at least a few people were able to take something of value from this thread.
To recap, the tick chart setup that I've described is a tool that can be used to help analyze the state of the markets. I do not use this setup as a mechanical system, but rather as a lens through which I can view price action and take various kinds of discretionary trades.
I do think that it would be possible to turn this setup into a mechanical system. Here's what I would recommend:
1. Pick a "trendy" instrument (like CL or a forex pair) that is prone to make nice directional moves.
3. Trade only when the instrument is trending. This means, at a minimum, that the last time price touched the SMA (and preferably the last two or more times), it reversed at or near the SMA and proceeded to make a lower low or higher high.
4. The next time price touches the SMA, set an entry stop order one tick above the high (for uptrends) or low (for downtrends) of the current bar. Move the stop entry order as necessary if other bars are formed before an entry is triggered.
5. Cancel the entry order if price touches the outer envelope before triggering an entry.
6. If an entry is triggered, set the initial stop just beyond the swing high/low preceding the entry.
7. Set an exit target a few ticks beyond the swing high/low preceding the pullback that triggered the entry.
This method may not have a terribly high success rate but will produce a very favorable risk:reward ratio that will trigger nice gains during a trend move.
Thanks for reading, and if you enjoyed the thread please consider casting a vote in the ipad contest thread.
Thanks for starting this post. I hope my writing on 28-Aug is not too late for you to see.
I'm trying to learn trading and have been using simulated trading with a live data feed from the ES since May this year. I've been trying to understand indicators for their usefulness and what they mean mathematically. Here's my experience so far:
Without using indicators and just looking for uptrends, after about 2,300 simulated trades my 100 trade moving average win percentage was about 70%, average gain was almost two ticks, and overall gain was minus one tick before commission. This is a formula for losing money, my conclusion is that intuitive trading needs an edge, and indicators make sense as the place to look for that edge. (Assume that no one can predict the future, then a "trend" means a repetative behavior and an indicator is a "signal" to pay attention that a "trend" is coming up).
I studied indicators and applied SMA, MACD, Buy/Sell Volume and Buy/Sell Pressure. I also tried several techniques like 3/3 ticks sell/stop and my average win percentage went down to 20%. By returning to my previous "intuitive" approach and watching the SMA indicators only, I have increased my average win percentage to 45%.
I found the same behavior in the SMA that you did, that it acts as Support in uptrends and Resistance in downtrends when the trends were clearly established. So I am affirming your experience with the SMA.
Further, I experimented with a second SMA with a very short period to suggest a more immediate behavior of the ticks. So to build upon what you said above, this second SMA, in a strong trend, is between the ticks and the long average SMA. As you pointed out in your graphic above, waiting for a couple of "touches" by the ticks to the SMA give you confidence that you may have a strong trend and not a "choppy" area. (The length of the SMAs is done by trial and error until they behave as your SMA does). The inclusion of the second SMA shows a trend by the second retrace. That means that with the two SMAs there is further confirmation of a trending condition. I have found no immetiate help from the other indicators, they may offer help later when I figure them out.
I appreciate that Mike has made this forum and that I found your thread. Traders can share their "secrets" without worry of affecting the market because a) not everyone will understand what we are talking about and b) not everyone will apply "these secrets of the universe" at the same time. We could get every trader using the same techniques and the market would still behave as it currently does! So I would like to build upon your thread and examine the behavior of SMAs and eventually find other indicators to reinforce the SMA. Does that work for you?