Markets essentially only ever do one of two things: range or trend. They do this all the time, across all degrees of time. You can subdivide trends and ranges into a few more categories if you like (for example, you can classify trends into fast-moving-impulsive-trends, slow-moving-choppy-trends, wide-swinging-trends, and so on), but basically there is only a small handful of "types" of movement that the market will ever do on any given degree of time.
Given that the market is moving in a certain way (let's say, moving rapidly in an impulsive uptrend, or moving slowly in a choppy downtrend), there is always an indicator or set of indicators that will capture that movement and allow you to profit from it.
The problem arises in the transition between range and trend, or in the transition between different types of trend (for example, a choppy downtrend accelerating into a faster more impulsive one). The real trick to making money is to be able to identify these "market condition" changes as quickly as possible, and adapt your mind to trading correctly with the current conditions. You need to be able to adjust from a mind-set of selling highs and buying lows in a range to simply shorting or buying and holding as a trend develops, as soon as it starts to develop. That is something that cannot be programmed into an indicator, and that's where most traders fail. They want a magic indicator to tell them exactly when a market is going to change from trending to range-bound mode and vice-versa, and that does not exist. It can't exist. The market is nothing more than the sum of all actions taken by a group of human beings trying to maximize their profit, and that is not something that can be predicted by a simple formula, any more than you can predict exactly what is going to happen over the course of the next 10 years in world politics with a simple formula. Human behavior cannot be modeled accurately like that 100% of the time.
If you learn to read "price action", then what you are essentially learning is how to read the transition between range and trend. That is not easy to do, and generally takes many thousands of hours of staring at the market. But if you can learn to do it and can learn to adapt your mind quickly when you notice the market changing its trading conditions, you can be successful. If you are looking for a magic indicator that will allow you to make money under all market conditions by following a simple formula, forget it. You're better off making a few different sets of indicators for each different market condition and then training yourself to recognize the right time to use each one.
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First question is : how to subscribe to all posts you are writing ? I'm 100% each of them is usefully.
Second questions is : should be time frame changed with regards to mentioned market changes or better to keep 1 time frame for all market conditions.
Sub-question 2 : do you use different time frames for different markets or have usiversal time frame/frames for all markets ?
(I'm not mentioning daily chart for strategic look on market and then scaling in, but time frames used exactly for trading)
I've heard in a lot of sources that 5 minute chart become more and more popular, but have another opinion about that.
Andrew, thanks for the kind sentiment - not sure how you would subscribe to a person's posts... that may not be available as part of the forum software, but I'm not an expert.
As for time frames, in my opinion it is critical to use multiple time frames. Of course there are some people who only trade from one chart, but I find that to be limiting... so if you can successfully process multiple time frames in your head simultaneously, it is a definite advantage. What this can mean for example is that you are simultaneously keeping a long term, a medium term, and a short-term chart in your head at all times and can visualize where the price is at on all three. Some people can keep more than three in their head at one time, some can only work with one. The more you can work with, the better off you will probably be.
Personally, I keep daily, 4 hour, 1 hour, 10 minute, 2 minute, 20 second, and 5 second charts up, with most of my attention focused on the 10 minute, 2 minute, 20 second, and 5 second. You would be surprised at the amount of very useful data available on a 20 second and 5 second chart, especially when the market is moving quickly. I have a few moving averages and some bollinger bands on these charts that identify trend direction in multiple time frames. Generally I use a 50 period EMA on the 2 minute chart (which corresponds to the popular 20 EMA on a 5 minute chart) as my long term trend, a 45 SMA on the 20 second chart as my medium term trend, and a 50 WMA on the 5 second chart as my short-term trend. There is nothing special about these time frames or MA lengths, it's just what works for me. I use these settings for all markets, although I also know through experience exactly how each market will react under certain conditions to these MAs. Gold does not move the same as crude, which does not move the same as the British Pound... each has its own unique character, so you need to get used to the same settings with different instruments.
Here is how I tend to trade:
1. Establish general trend direction. If it is essentially trendless, you can still take a trade, but keep in mind that you are in a range and it will only go so far.
2. Wait for a pullback against the trend, and enter on a scalp in the trend direction when it resumes.
3. As soon as it reaches a few ticks beyond breakeven, move your stop up as soon as possible without putting it too close to the level of random noise, and let it ride as long as it will go. Exit conditions are very dependent on how fast the market is trading, various S/R levels, market geometry, etc... I use a lot of discretion in my trading.
You can use the combination of long, medium, and short MAs to pinpoint your entries like this. Of course what I do is a little more complicated, because it also involves reading a lot of price action and a few other things, but that's the basic idea. Enter every trade as though it was a scalp with a tight stop loss (4-8 ticks on CL for example), but enter where it is very likely to continue into a longer trending move. If it does, great - you make 20-30 ticks. If not, you might make only 5 ticks. Worst case, you lose a few ticks. You can do this relatively well if you study the price action on very short time frames like the 5 second chart.
I have found that looking at the standard 5 and 15 minute charts is not very useful for me, since everyone else is looking at that, and there may be some games being played right before each bar closes. The way those particular time frame candles form just doesn't help me to visualize the market very well. I don't know if that's because everyone else is trading them, but I don't personally like them very much at all. (You should always look at the 15 and 5 minute 20 period EMAs however, even if you put them on different time framed charts... the market will often pause at these points because everyone and their dog is looking those MAs and placing orders.)
It's nice to be able to "zoom in" on the action on a 20 second or 5 second chart to see which way the market is leaning, especially in consolidation zones.... but it takes some practice to get good at it. If you look at things like this that most other traders are ignoring, it will help you in finding an edge.
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Thank you a lot for your insight ! It tells a lot about market behavior which is at my opinion extremely important to know !
I've heard a lot that some pro traders really like a lot 2 minute, don't know yet why.
5 second - seems just perfect as it shows market activity almost on "tick level"
With regards 5 minute chart, I do not have anything against it, but I've noted that when "interesting" movements starts they usually starts just 1 minute before 5 minute bar close, also when it come to open of 5 minute bar price starts "to think", i.e. stands at one place and "think", then somebody finally enters and gives "initial impulse" to price movement.
Not clear yet, why some traders "like" EMA more than SMA, I'm really eager to know it.
MAs I really like them as well, I like to see on chart (just for reference) following MAs :
I've found that I really like 50 MA and entry on price pullbacks to it (price crossed 50 MA when it pulled back to 50 MA enter)
But unfortunately not clearly defined yet which pulls better to avoid as they actually new MA cross. May be that point of view is completely wrong, I'm studying that now.
Anyway I found that when price above 50MA better to go long when below 50 MA better to short.
I also noted that there is some "logic" in price/volume "divergences", so I try to study it more and then use it.
Any your comments/corrections as always for than welcome
I have tried and investigated all different kinds of charts including Renko, Range, Tick, Volume, 2 Second, 10 second, 30 second, 1 minute, 3 minute, 5 minute, 8 minute, 15 minute, and so on... none of which I currently use. They all have their individual characteristics, but it's important to find the right combination that works for you. I wanted a setup that was relatively constant across multiple instruments yet still allowed me to see tick-level data pretty clearly under all market conditions, that's why I chose the setup that previously described. You might find that something different works for you however, so spend a lot of time and go through all those different chart types to see what is best for you.
All market information is fundamentally non-visual, which is why our choice of charts and time frames is nothing more than a personal filter to organize and summarize that information on screen. Everyone who trades is getting the exact same data streamed to their computers, we are all just choosing to look at it in an extremely personalized way that makes sense to us as individuals. That's why taking someone else's advice on a chart or setting is only partially useful... you really need to look at every single type of chart you can think of to see what "clicks" with you. Those people who just put up a 5 minute chart because everyone else is doing it are actually cheating themselves by not spending the time to see what else is available out there.
The reason for this is that 80% of daytraders out there use a 5 minute chart, because everyone else does so it must be the "best". What actually ends up happening is that the big players know that everyone is looking at that chart, so they play games with it. They'll let a bar _almost_ finish closing, right before they ram price the other way, thereby catching some people who were "jumping the gun" on a candle pattern that hadn't formed yet. By looking at shorter term time frames you avoid this problem. I can guarantee you that nobody is playing any games on a 20 second or 5 second chart, because nobody is looking at it. 5 minutes is way, way, WAY too long of a time frame to be able to trade at peak efficiency, because there is a heck of a lot of very useful information available at much lower chart settings than that which can really improve your performance - if you know how to read it. If all you use is a 5 minute chart, you are at an extremely serious disadvantage against people like me.
I have found that MA lengths around 50 tend to work fairly well, but it's not 100% exact... no MA is going to be perfect all the time. And each MA type has their advantages and disadvantages, I wouldn't say that an EMA is "better" than an SMA, as they work differently and in certain types of trading conditions on certain types of charts one will work better than the other. I would definitely check out JMA as an indicator (I think it's around somewhere on this site), as it is a good noise filter... you can also filter other indicators with it to smooth out their signals without introducing too much lag. I do also use a MACD that I have customized for my own use on both the 5 second and 20 second charts. MACD is actually a pretty good little indicator if you know how to use it properly, but you can't just apply it blindly without knowing and studying how it works. I also use something called Ed's Level 2 which I found on the NT forums, which is extremely useful in giving me information about the market at price levels beyond the bid/ask. You can use the DOM for level 2 info, but it's much more helpful to see it on the chart with that Ed's indicator I mentioned. Also, people do play lots of games on Level 2, but it is possible to see through that and get some useful information if you study it long enough.
There is no magic way to tell when an MA is going to end up being penetrated or bounced off of. All you should do is note that when price approaches an MA that you have chosen to use, that is the time to be especially vigilant about reading price action. Focus on the level 2, look at the micro-patterns formed on the very small time frame charts, see the way that the bid/ask movement is acting, look at some correlated markets, and so on. MAs and other indicators can serve as good signposts for areas that you should pay attention to when price approaches them, but the actual decision to buy/short/hold/exit should probably be based on price action. In my case, I just use all my indicators as an easy way to "frame" the price action, as there are times when I need to pay very close attention to it, and other times when I am just about 100% certain of market direction (for example, in a trend when we have hit a trendline and price briefly stopped and is now accelerating back in the trend direction). Multiple times throughout the day, the market will hit what I call "decision points" - very small price areas where it pauses, and is literally 50/50 in terms of which way it's going to go (many of these times occur near certain MAs that I use). I find that my indicators help to identify these areas more easily, but they won't tell me which way it's actually going to turn. At these points I then "zoom in" by looking at individual trades, level 2, and so on, but even then sometimes there is no real "lean" for one direction over another... which then means that it's time to stand aside. Sometimes the market is easy to read, and other times it is more or less random... so just avoid the random times and learn to recognize when you are seeing the market at a decision point.
Last edited by FBJS; January 7th, 2010 at 09:31 AM.
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Thank you for your info.
I used 4,8,3 MACD or PPO together with slow stochastic with standard periods 14,3 and watched their "common crossover", but it works better of all on ES which I don't trade
Also I had another "set" apart from below consisting of 2 fast stochastics based on certain "cycles", but again it works good on gold, which I don't trade now too
Regarding 50 MA I figured out as already mentioned to enter on pullbacks to it when price already crossed it, but don't know yet how to determine whether it pullbacks or price will cross 50 MA again.
RSI as certain indicator of market strength not helps to determine that.
I've noted that when 100 MA is near price often "pays more attention" to "older" MA.
Do you know by chance where to find more info on price action, preferably of "old school" ?
I've heard about John Hill, but can not find him