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Catching Big Waves - a trader's journal of surfing the the markets
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Catching Big Waves - a trader's journal of surfing the the markets

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Catching Big Waves - a trader's journal of surfing the the markets

CATCHING THE BIG WAVE


Surfing is often used as an analogy to trading, and most traders dream of catching the big waves. But, similar to trying to surf monster waves, if you haven't acquired the necessary skills to do so, you 'll probably wind up smashed on the reef. Even expert surfers are going to take an occasional beating, but through years of practice and patience, they have a much higher chance of success than most.


Over a series of posts to this thread, I'm going to list some things that can help you catch a big ride, and show you a specific trades as they occur. Some posts will be in advance, and you might be able to try to catch a wave with me. I know from experience that trading can be extremely lonely and difficult, and you may find it helpful to watch someone with thousands of hours of trading and studying share their views on setups. Other posts will be the results of what just happened, and this will most likely be more common, as I do not initially make analysis to share with anyone, I make it to trade myself.


As I write these posts, my goal is that it helps you, and and the same time helps me. Training the mind requires repetition, and writing it out for someone else to benefit from it is an important part of my own conditioning.


My wave of choice is crude oil, or CL, known for big powerful moves and high volatility. Crude is not for the beginning trader. Similar to the Banzai Pipeline, it can tear you to shreds if you don't know what you are doing. But, if learning to catch big waves is your thing, crude oil produces them with high frequency.

Crude runs at a 10-day ATR of 250 ticks +/-. But, the odds of you catching the top/bottom are stacked against you pretty hard, and trying to do so will be financially painful. But getting closer to the bottom gives a higher reward-to-risk. What I look for are places where to opportunity is greater and the risk is less. Tough orders, but that is my approach.




Before we even head for the coast, so to speak, please take some time to consider a few things;




1) TRADING CAN WIPE YOU OUT


That was unpleasant, wasn't it? We were just about to make a lot of money, no?


Maybe.


But you should be aware of the fact that I have “blown up” more than one account, totaling more money than you want to know, and enough to make some men cry. This is not the wave pool at Disney World. You can and will get hurt.


Am I successful now? Yes. But it took a lot of work and a lot of tenacity. Had I had more patience, more understanding of myself, better discipline, longer training, I would be far ahead of where I am today. There are surely better traders than me on this site, but I can at least provide a lot of hard-earned knowledge.

If you are not already profitable on a consistent basis, my advice is stay in simulation mode. There are opportunities every single moment of every trading day. You are not going to miss anything by practicing. On the contrary, you will ultimately make more money (or lose less) by having the patience to really learn your market before you put real dollars on the line. When you are ready, the market will be there.


If there is one thing I should stress to you, it is that you need to protect your capital. Do not trade with high leverage, do not average into losing trades, do not take a trade just because the market is open. You might get away with some of that for awhile, but long term it does not work. To succeed at trading takes a lot of practice, a lot of patience, a thorough understanding of risk, and a thorough understanding of the market you choose to trade, and most important, a thorough understanding of yourself.


Your job as a trader is not to make money. Making money happens when your job is to NOT LOSE MONEY. Does that mean ridiculously tight stops? No. In fact, that can be the fastest way to lose. It means taking only the best opportunities.



2) YOU MUST BE COMFORTABLE WITH BEING WRONG


In big move trading, you are not going for high win percentage, and so you have to get comfortable with the fact that you will most likely be wrong more often than you are right. That concept is tough for a lot of traders, as many of us believe that to be profitable we need to be right more than we are wrong. Yes, for scalping that is true, but for big swing trading, with the proper risk to reward ratio, you can be profitable even if you are wrong more often than you are right.


You must have the patience to wait for a trade to come, and also patience to wait for a trade to work.


Unlike surfing, you don't get the luxury of knowing which direction the wave you are on is headed, but trust me, it is going somewhere and is not going to sit around in any one place for very long. I may spend days watching for a sequence of events, enter a trade and get stopped out in minutes. But, if I want a big move, I have to just get back up and start watching again. That is tough to swallow for traders that enjoy the adrenaline of a fast-paced trading environment. I may have to sit out for hours, days, weeks, depending on what size move I am looking for. Wrong. Wait again...




3) YOU MUST LEARN TO IGNORE INHERENT VOLATILITY.


The extreme volatility of crude most likely whipsaws anyone who trades it. It typically has 20-30 tick swings that can feel frustrating when you are going for a longer move. It can be hard psychologically to be up 30 ticks per contract and then watch it disappear, and harder still to have your stop hit a few minutes later. But if you are going to ride the big wave, you have to learn to see that volatility as nothing more than the nature of the wave. Think of it as an exercise in endurance, and train your muscles (mind) to push past the pain as you maintain your balance. This could be a long ride, and you are going to have to find your second wind if you expect to be able to hold on.




The next posts will show a specific trade setups and discuss the tools and patterns that were used in making a trading decision. I plan to update this thread as new trades develop, and to continue to emphasize the factors that contributed to the trade being succesful. Until then, stay safe.

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  #3 (permalink)
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When you are looking for a big wave, you first must know where to expect the move to start. When I am trying to expect ( a key element ) a larger move, I use several factors, preferably in combination;

1) Fibonnaci clusters on higher timeframes. If I can find an area of overlapping fibonnaci ratios, that is also potentially the end of an ABC correction, or the end of wave 4, or the end of a 5-wave move, or a consolidation area with double tops/bottoms. That is step one in getting prepared to catch a big move. When I have defined a zone that has the potential to be a major turning point, its time to paddle out and watch for something to happen.


I don't personally like the automatic fibonacci indicators, but they may work fine for you. What I use for my analysis are simple fibs pulled from 3-directions; an alternate projection of a previous wave, plus an extension of a recent wave, plus a retracement of the larger picture.

2) Volume exhaustion on a 1 minute chart. When the support/resistance areas establish, and then crude takes those out by just a few ticks (or 30), and during that move extreme volume come in but the price does not move much, or even reverses. You have to understand the difference between volume that is confirming continuation versus volume that is stop losses blowing versus volume that shows support/resistance. That takes time, practice, and some preparation to be aware of what could happen. But for me, this has been one of the most powerful observations I can have in successfully identifying support/resistance.

3) Trendlines. When price gets near a higher timeframe (60 minute / daily) trendline, this is where the larger traders are watching.

4) Divergence on a higher timeframe. I like a 21-28 period Momentum on a 30 minute chart, but there are others that work as well.


5) Overbought/oversold areas. This type of indicator can produce many wrong signals. When something is “oversold”, that does not mean anything by itself. But, when watching it within the context of the higher trend, wave structure, and volume analysis, it can provide a good place to consider being a turning point. For crude oil, I use a 2-period RSI on a 93 minute chart, (as taught by Jerry Simmons of ATW).

And to me, the most critical part of selecting an entry point is;

6) Some sign of trend reversal. This can be taking out the high/low of the previous x bars, or a moving average crossover, or a channel reversal, or a MACD crossover, or whatever looks right to you. I use more than one, and use range bars and wicked renko bars as my trigger, not time based bars. Currently I watch a 9 range with a Holt 89/144 and a 6-range with a T3 144. When price breaks out crossing both, (and assuming crude has possibly confirmed something in 1-5 above, the more the better) that is the direction I am looking to trade in.


But possibly the most important factor in catching a big move, assuming you have done everything else to stack the odds in you favor, is to BELIEVE IT WILL HAPPEN. Without that you will worry, you will want to limit your potential by locking in profits. Your win percentage can be 25% if you risk 30 ticks to get 150. But those moves take time, typically whipsaw back and forth, and if you are watching it happen will find every way possible to make you doubt yourself. We all have the potential to take those longer swings, but the question is, are we personally wired to be able to? Relax, believe.


Next post will be an actual trade.

 
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Yesterday, when the crude oil market opened at 8:30, this is the chart I was watching to determine what the plan might be. No decisions made yet, just getting familiar with the current structure of the market. The prior strong move up (highlighted with a yellow line), coupled with a series of higher highs (I'll show in another chart) had me looking to take a trade in the long direction. For a swing trade, there were two possible stong entry points. I've circled them in white and labeled "Zone 1" and "Zone 2". By this time in the morning, Zone 1 had already been slightly penetrated, but could still be valid area. But trying to get into this trade where it was would put me in a position too close to an area where stop loss orders were most likely concentrated (just below the pivot of Wave A) Therefore, for a long entry in this zone, price would need to breakout above the prior 15 minute high around 99.20. We wait and watch.



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By 9:15am, the stop losses had been triggered, sending crude oil quickly down into Zone 2. Still no trade trigger, but another place to be watching for a reversal.


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Here is another view of what I was watching on a 93-minute chart. The series of higher lows I mentioned are marked by blue arrows, which was the main reason we were initially looking for a long. The 2-period RSI entered into the oversold zone on the move down, which is never a trigger to enter a trade, but is often a place where crude oil finds exhaustion. A trigger to actually enter needs to occur first. But, look back across the chart at the areas where the RSI turned cyan. Note that the majority coincided with a major turning point. This is something I learned in a paid trading education, and it has proved to be incredibly accurate, IF I waited for a reversal confirmation to follow. Not waiting for confirmation typically lost me money. But, if you think of this as being a signal that A BIG WAVE IS COMING...


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Now, we watch for volume. Volume analysis confuses a lot of traders, and a lot of conflicting volume signals can look the same. Notice the 2000+ contract bar around 9:01am. Even with the large wick at the bottom shoing some upward pressure, this is not a sign to enter. That volume was the result of the stop losses that were placed below Wave A. That type of volume can be a signal to enter a short trade. But, we were not looking for a short trade as the trend was up. We may scalp that move down, but this focus is on big wave trades. What we want to see is, will supporting volume come in and scoop up the low prices that the blowing of stops just gave us? The next major low pivot is a good distance down, so the fuel that stop losses provides for a down move has been somewhat removed. later I hope to show a setup where a domino effect of pivots can be the catalyst for a good move, but that is not what the structure gave this time. The green high volume bar around 9:10am actually shows selling pressure as price came back up and tested the breakout pivot where the stops blew. But the next high volume bar at around 9:15am gave us something we were looking for. Fellow surfers, get ready. We have possible support in a high confluence zone (Zone 2)


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Now, for the final step; The Trigger.

The red/green moving average in this chart is a Holt moving average set at an 89-period and a 144-trend. When price breaks out strongly above that, we are TRADE READY. Our goal is to enter in the zone of a pullback (I use the donchian channels shown, set at 21, 34 and 55). There is no specific place, and sometimes crude will spike up and not look back, but more often than not it will come back to at least one of these DCs. Entering a long position anywhere in the blue box in this chart is fine. Your stop loss will be the previous pivot. Why are we not concerened about blowing stops there right now? Because that pivot just formed and volume showed possible acceptance for buying at that price. A trade entered anywhere between 98.60 and 98.80, with a stop loss at 98.40, gave us a risk of between 20 and 40 ticks. Buy in, set your stop, and wait for the close (or the 2pm rush). At 1:59pm, price hit a high of 100.19, a potential of 139-159 ticks, in a few hours. Over a few days, who knows. Since it was Friday, that is never a time I feel good about holding after the close, but also because it was a Friday, I knew we had a good chance of shorts wanting to be out of the market before the end of the day after seeing such a stong ABC pattern combined with supporting volume.


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Did I catch 159 ticks on this trade? No. I took 76. With more upside potential, why did I get out? It was Friday, and psychologically I want to finish up on Friday. But, following all of the steps I just outlined gave me a good chance of catching a turn. And I did. Riding big waves does not mean you can't get on and off at various points in the same move. There will be another opportunity Monday morning. And you can trust I'll be there, watching and waiting, measuring the flow, surfboard nearby...


This type of motion happens very frequently in crude oil. There is another example on a higher timeframe that set up recently and turned out to be a $10,000.00 move per contract. See a previous post.


https://futures.io/commodities-futures-trading/11731-high-degree-confluence-cl-crude-oil-futures-contract.html



I'm going to try to post a setup in the next week or so that gives an opportunity in advance.


Practice, learn, patience, stay safe!


Good Trading!!

 
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The long term trend in crude oil continues to be up, and that direction has recently been given additional support by the forming of a major double bottom. Price just barely breached the left shoulder pivot area, but is not far enough yet to consider that area of resistance invaild.


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Zooming in, but still on a daily chart, a near perfect ABC formation may be in place. Adding to the upside argument; price blew through resistance at the prior low breakout pivot, and is approaching an area of potential domino-effect stop losses from traders on the short side.


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None of this necessarily means trade confirmation at this moment. But in my search for a big wave, the long side still has my attention.

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No trade yet...


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At roughly 9:30am EST, crude re-ested "Zone 2", found support, and rallied again roughly 140 ticks so far.

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Stay away from the long side until we see a breakout on the trend filters. Here is the current 9 range trend.


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And the 6 range trend...


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But, the long term trend, shown here on the daily, is still up.


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The 93 minute is in the oversold zone. watch volume and watch for a trend filter reversal.

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