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Trading spot fx euro using price action

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  #71 (permalink)
 Adamus 
London, UK
 
Experience: Beginner
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Finally made it over the brow of the hill in my struggle to digest Reading Price Charts Bar By Bar.

Chapter 2 just gave me mental paralysis everytime I tried to read it. My solution was to go through it sentence by sentence ("Reading Al Brooks Sentence by Sentence") making sure I understood it and looking everything up in the book, on the web, on futures.io (formerly BMT) before I moved on.

I also made notes in the form of a wikipedia article - Price action trading - Wikipedia, the free encyclopedia - which was really difficult because it had to be structured in a proper 'encyclopedic' way, so I really had to think about the introduction and the section titles.

More here on the book thread.

As far as my trading progress is going, now that I've got through the quicksands of chapter 2, progress will speed up. I'm looking forward to finding more about H1s and L1s and trends generally in the next couple of chapters and maybe then I'll have enough to go on to start another sim trading test run.

I've got a lot to choose from to put on my decision matrix just to improve the H1 / L1 setup that I'm concentrating on now:

  • test Brooks exits one tick below entry for initial stop
  • let one lot run after reaching the profit target
  • variations of H1/L1 to filter for / avoid
    • countertrend bars = bad with-trend signals?
    • maybe single bar pullbacks before an H1/L1 should be considered a seperate type of setup from multi-bar pullbacks. Single bar pullbacks are v. useful for entering strong trends but a killer on quiet days.
    • does microtrendline break make H1/L1 better?
  • don't use an H1/L1 signal if it's not triggered (choose):
    • immediately
    • within 2 bars
    • within x bars
    • if market crosses EMA
  • choose a trading session (definitely not the Asian session which is the doldrums for the /$)
    • 95% of days see good movement at 06:00 or 07:00 GMT - maybe that's the time to start my trading day
    • sometimes the Asian period was tradable and looked just like the London / NY sessions
    • need to define market characteristics of the quiet Asian session periods - e.g. extended runs of v. small bars
  • try to spot trading range days in the making, because they seemed to be rubbish days for H1/L1 trend continuations - whipsaw city.
  • was my test period comprehensive enough? it felt like a year of two distinct parts - May through August was distinctly different, more laid back than Sept through April.
Other things I'll need to keep an eye on in testing to try out later:

  • second or third leg of trend
  • approaching round numbers
  • support and resistance levels
  • longer timeframe trend as a filter on top of EMA
  • double tops / bottoms & double top / bottom twins
  • reversal bars
  • opposite twins / up-down & down-ups

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  #72 (permalink)
 Zwaen 
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Wow, did you write the whole wikipedia page?
It seems that you really go deep in it, good! You have a very thorough and structured approach.

Btw, how do you perform your backtesting? I mean, do you use some software?

The way I did test "the setups" was just looking and studying the charts of the past 6 months, and asking myself the following questions:
-When will the setup most likely fail? How do the failures look?
-When wil the setup most likely succeed? How do the succes trades look?

And next, which I consider very important:
-How do I recognize when I'm in a trade which will fail?
I do this by looking how the succes trades "look like". For example I found that in most setups (trading 3min chart) I could:
- put my SL at entry after 3 1-min candles ( some sort of time-stop)
-just simple trail the timeframe candles. E.g. trail the lows of the (3-min)candles when positioning long.
-when a candle forms which is showing incoming counterpower, the move will likely be over. E.g. when long
and a shooting star, candle with uppertail, dark cloud cover, bearish engulfing forms -> put SL under this
candle or immediately take profits.
Sometimes price will go just 1 pip under such a candle, trap shorts and moves again higher. So you can also choose to trail the candles with a 2-3 pip Stoploss.
- strangely enough, when a trade will " jump" at my entryprice instead of " gradual moving "
( you must see this realtime) succes changes will be lowered.. I think maybe this is because it is a stoprun.

Greetings!

One of my worst enemies are my own false assumptions
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  #73 (permalink)
 Adamus 
London, UK
 
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I think 95% of the wikipedia article to date is my work. Going into Brooks's book thoroughly is a really good way to learn it.

For the backtesting I'm doing, I'm just going forward bar by bar using the right arrow key on my laptop and scoring the results on a decision matrix. It took ages just to do one run from May 2010 to end of April 2011 on a 5 min timeframe. I'm just about to start another bactest with more rules for the setup.

When I start, I'm going to mark the trades on the chart quickly and try to complete the backtest as soon as I can, and then go back over the trades to examine what they look like in the same way as you.

Thanks for the info - I will watch out for those occurences while testing and if they seem to be valid for me, I'll incorporate them on the 3rd test. I have already noticed that I seem to know what will happen next in some situations - although it's not an infallible intuition - without realising what it is that tells me so unless I think about it. Generally speaking it seems to be good when the market acts in a regular fashion! Nothing more complex than that.

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  #74 (permalink)
 Adamus 
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Adamus View Post
As far as my trading progress is going, now that I've got through the quicksands of chapter 2, progress will speed up. I'm looking forward to finding more about H1s and L1s and trends generally in the next couple of chapters and maybe then I'll have enough to go on to start another sim trading test run.

I've got a lot to choose from to put on my decision matrix just to improve the H1 / L1 setup that I'm concentrating on now:

  • test Brooks exits one tick below entry for initial stop
  • let one lot run after reaching the profit target
  • variations of H1/L1 to filter for / avoid
    • countertrend bars = bad with-trend signals?
    • maybe single bar pullbacks before an H1/L1 should be considered a seperate type of setup from multi-bar pullbacks. Single bar pullbacks are v. useful for entering strong trends but a killer on quiet days.
    • does microtrendline break make H1/L1 better?
  • don't use an H1/L1 signal if it's not triggered (choose):
    • immediately
    • within 2 bars
    • within x bars
    • if market crosses EMA
  • choose a trading session (definitely not the Asian session which is the doldrums for the /$)
    • 95% of days see good movement at 06:00 or 07:00 GMT - maybe that's the time to start my trading day
    • sometimes the Asian period was tradable and looked just like the London / NY sessions
    • need to define market characteristics of the quiet Asian session periods - e.g. extended runs of v. small bars
  • try to spot trading range days in the making, because they seemed to be rubbish days for H1/L1 trend continuations - whipsaw city.
  • was my test period comprehensive enough? it felt like a year of two distinct parts - May through August was distinctly different, more laid back than Sept through April.

My original plan involves taking only signals where the market is trending strongly enough that the bars don't touch the EMA, however Brooks flags up the price action for H2s and L2s around the EMA as good signal material.

When the H or the L signal bar or its immediate prior bar (actually he might mean 2 or 3 prior bars but he doesn't specify) is on the EMA, this is - quote - particularly reliable - unquote. I wonder if that applies in the EUR/USD as well as the Emini.

One caveat that throws a bit of ambiguity into Brooks's message is that the description is in the middle of his text about H and L counts in non-trend days, so whether it applies to my favourite - H and L counts in trend pull-backs, I'm not sure.

This is typical RPCBBB Brooks mystification at its worst. He's describing H and L counts in the chapter on pull-backs, but with regard to trading range days and not pull-backs at all anymore, and to add spice to the mix he is counting Hs and Ls on two charts simultaneously, not just the Emini, but also the SDS which is the inverse of the Emini. I suppose I shouldn't complain - if you can't stand the heat, you'd better get out the kitchen. To mix my metaphors, I feel like the Sorceror's Apprentice.

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  #75 (permalink)
 Adamus 
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I'm looking at p128 now in RPCBBB and Brooks is talking about variations of Hs & Ls.

He really likes H2 & L2s. Everything has got to be twice, otherwise he doesn't trust it, if it only happens once. He hasn't given it a name, so I'm going to. I'm calling it his "two attempts rule". As he says almost every section, when something has happened twice (an attempt to go lower or higher), if it doesn't succeed, then the market's liable to go the other way. He refers to it as 'second entry' sometimes, or confirmation.

So in this section, he describes how to spot 'missing' H1 and L1s in the chart, which you want when you are watching an H1 or L1 build, since then that would make your H1 or L1 actually an H2 or L2 and would give it more reliability due to the two attempts rule. The hidden H1 or L1 that you find would also represent the seperator between two legs down in a pull-back, the end of which is the ideal point to get back in on the original bigger trend.

He also uses his other favourite maxim - if something looks similar enough to your chosen Brooks pattern, then the market will probably behave as if it *is* your chosen pattern.

These are the rules, and this is how to bend them....

Anyway, he's talking about bar 2 in his chart from his book, attached. I assume that's not breaking anybody's copyright.

In words, what's he saying is that a bull bar in a bear pull-back is good enough for an H1 when you need it, even if it doesn't make a higher high than the previous bar.

In other words, he's looking inside the bars while they're building and seeing the price action on a shorter time scale. This is going to be fun testing. I think it might slow me down a bit too. I'm going to have to think

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  #76 (permalink)
 TheTrend 
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Brooks made me have a lot of thinking too

Always wanted to test H2 / L2, will do that soon.

Even more powerful but less frequent is Failed H2/L2.

I find failed patterns even more powerful.

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  #77 (permalink)
 Adamus 
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TheTrend View Post
Brooks made me have a lot of thinking too

Always wanted to test H2 / L2, will do that soon.

Even more powerful but less frequent is Failed H2/L2.

I find failed patterns even more powerful.

Yeah, but when? If you're in a pull-back, it seems you need good evidence that it's going to continue pulling back more, not just a failed H2. And where do your entries, targets and stops go?

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  #78 (permalink)
 TheTrend 
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I consider the Failed H2/L2 as a reversal pattern.

Let's try to simulate a failed H2 with a EUR/USD example from tonight.

1/ The trend is up above EMA20 like our dear Brooks or above TL as in my example.

2/ You have a pull back, price starts to trade below previous bars low.

3/ The high is higher than previous bar, you have a high 1, 1st possible entry in previous trend: 1st blue arrow.

4/ High1 fails to make a new high, the price continue to pull back below the low of your setup bar.

5/ The high is higher than previous high for the second time, you have a high 2, or simply a 2 legs pull back within EMA, very good entry within the current trend: 2nd blue arrow.

6/ Now either it makes a new high (it doesn't) or the trend might be over and you can look for a signal to go short . You can enter either on a failure to make a new high (1st red arrow) or on a trendline / previous pivot low break out (2nd red arrow)

The main idea from Al is: "When the market tries to do something twice and fails both times, it is a reliable signal it will likely succeed in doing the opposite"

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  #79 (permalink)
 Adamus 
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Alright I'm with you on the logic, but for my newbie tastes, the trading range in-between is too many bars afterwards for me to remember - I would take your first sell signal as a failed break-out.

I would have got stopped out 3 bars in after the H2 for 4 ticks.

There's not much warning that you should have avoided the straight H2 buy. What would have made you think it was good to short?

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  #80 (permalink)
 TheTrend 
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No warning, the H2 was a decent Long when it happened (maybe the previous bar was a strong red trending bar, but it's subjective...)

It is a good short when you see LHs after the H2 and a lack of follow up instead of a strong push to a HH.

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