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Incidentally, about those arrows. They are there solely to illustrate their relationship to subsequent hesitations, consolidations, swing highs and lows. They are not actually drawn, much less drawn in advance. However, when price reverses direction, as it does in the chart in which those arrows are drawn, one should at least be aware of those swing points so that if and when price stalls along the way, the reasons won't be a complete mystery.
Can you help answer these questions from other members on NexusFi?
This is a blowup of the very beginning of the earlier chart. This is what you see when you open up your program:
Ignoring all that went before, you see that price is declining before the open, then reverses. After the reversal, it settles into a range. It's a very brief range and a very narrow one, but it is enough to serve as a springboard. It is where traders are finding value just before the opening bell. Price hits 59, drops to 56, hits 59 again. At the open, traders search for selling interest down toward 50, but they find buying interest instead, so price turns back up.
It is here where you implement the decisions you've already made. As you've already made them and have a sizeable database on which they were based, you don't have to think about what to do. All you have to do is press the key. And the decision is how far above this range does price have to reach before you know that the move has genuine intent behind it and is not just somebody trading something because it feels good? A tick? Two? A Point? Two? Three? If you wait too long, you'll run into profit-taking. If you don't wait long enough, price falls back into that range and you're in the red.
It is next to impossible to make these determinations in static charts. Looking at that first "breakout" bar, for instance, you don't know whether price falls to the low and finishes at the high, in which case you'd be fine, or it starts at the high and drops to the low, in which case a tight rein would prompt you to exit (if you have access to tick charts, you can determine these dynamics by examining that, but it's easier and more dynamic to use replay). But in this case, solely for the purpose of illustration, you can see that if you were to enter a point or two above the upper limit of that little range, your trade would never be in trouble. The lowest that 0934 bar gets is three ticks above the upper limit of that opening range. Hypothesizing that an entry 1pt above the upper limit of that range with an MAE of 1pt would keep you in this trade. This is far too tight, of course, and your hypothesis would have to be modified by the time of the next trade, but it serves to illustrate the process (tight entries and tight stops are emblematic of the fearful trader, but the chief purpose of all this is to remove that fear and enable the trader to be rational and logical in real time).
Now you do nothing until price makes a swing point, at which time you can draw a demand line:
(Incidentally, I don't know if these charts are resident here or not, so if you want them, I suggest you copy them in the event that they disappear at some point)
This line is broken at 0940 by four or five ticks, so you already know that your MAE may have to be modified. When price then makes a higher high, you know for sure that your MAE has to be at least five or six ticks.
When it does make a higher high, the DL can be fanned:
This line is broken by the very next bar, but by less than 3pts. Two bars, later, however, it drops as much as 3.25. Is this acceptable? Is it too much? Price does rally, so perhaps staying in the trade is desirable as opposed to exiting due to an MAE of more than 3. You subsequently have a lower high, but you can't know that in real time. So the central question is whether or not you want to and can remain in the trade. Your MAE will tell you that. And if you are presented with a lower high, that's a separate tactical decision.
In this case, the post-midnight high was 74.5 and you're at 74.5. Therefore, a decision to exit at this lower high, even though the break of your demand line may not have been deep enough to prompt an exit (which remains to be seen after many more examples), is not only reasonable, but it gives you the opportunity to short at the next retracement (my choice of emphasizing retracements in the SLA was not accidental).
Which brings you to the next decision: where to enter your short? Are you going to enter some distance from the high of the 0949 bar? From the right tick? From the low? And what will that distance be? A tick? Two? Four? Eight? And what will be the allowable MAE? In this case, if you were to enter your short a point below the LH, your MAE would have to be at least 4pts to prevent the following bar from prompting an exit. But if after your research you determine that the probabilities are in your favor under circumstances such as these (the halt at the post-midnight high, the break of the DL, the lower high), an MAE of four points becomes an acceptable risk and you don't have to think about it, which, again, is the purpose of all this: once these decisions are made, you don't have to think about any of them again until market conditions change, which is less often than people think, and you'll know quickly enough if they do because of the change in the results you achieve.
So price falls and begins ranging:
Now you return to MAE analysis. How far can price rise above this range before it indicates a reversal? How far can it rise above this range and still resume the downtrend? In this case, it doesn't rise above the range at all, thus providing no reason whatsoever to exit (and if you have to go to the bathroom, just place a stop above all this at whatever your predetermined MAE is and do your business). In other ranges, though, traders will poke above looking for buying interest. Sometimes they find it, and price rallies. That can throw you if you're not prepared for it. But if you know probabilistically how far price can go above such a range and still result in a continuation, you again don't have to think about it.
This is of course only the first hour, and there are more than enough opportunities in the chart I posted above to determine your MAE along with the most advantageous entry levels for breakouts and retracements. Once you have all that, you become a manager rather than an anxiety-ridden gambler.
MAE is the maximum price moved against you, not "back toward your entry". It is the opposite of "toward your entry". It is in fact "away from your entry".
Thanks for the detailed response, I think I have a better understanding of what to look at and will attempt work out the numbers and apply it too the backtesting I need to do over the next couple of weeks.
One note of caution: when it comes to these recoils, there are going to be times when you really have to clench your teeth and let the trade play out instead of exiting the trade immediately. Part of the difficulty lies in the entry. You have to know this almost perfectly. If your entries are sloppy, then you may face one stopout after another, whether automatic or manual (if manual, you may be tempted to give the trade "a little extra room", which would be even worse). That will not be calming.
Therefore, you will have to thoroughly understand trend and retracements at least. Ranges and breakouts can wait. You will have to be very clear of what you mean by "retracement" and test only that. If you use two bar intervals to define a retracement, you'll have to test both.
But even once you've found a workable limit for these recoils, you're going to have to place your stop -- automatic or mental -- where it should be regardless of where you actually enter. IOW, if you find that your best limit is 5, and you enter at N, and the entry should have been at N-1, your stop is going to have to be placed behind N-1, not N.
For example, if you enter a short at "85" and the short should have been entered at "84", your 5pt-stop is going to have to be placed at 79, not 80. That makes the stop 6pts behind your entry rather than 5. But that's not the stop's fault. It's the result of your having entered a point late.
What is more important is entering correctly, not the stop. If you enter correctly, the probability that the stop will be triggered is slim. Yes, it will happen. But that's trading. Losses are unavoidable. Just make sure that the losses are necessary.
I believe I understand the concept, stop should be based on ideal point of entry rather than actual entry if said entry is mistimed, but, I am not sure if I am misinterpreting the example, the way I read it, one would be stopped out of a short after a 6 point drop. Should the example be based on a long trade rather than a short?
I am assuming that different market conditions may have an affect on the MAE and these will have to be checked and tested on an ongoing basis. By different conditions I mean around holiday periods or over the summer months, I would suspect there might be more recoil when price finds itself around the mean of HTF ranges like the weekly or daily.
Should context be a consideration or would this be overkill as one will never know exactly when they will start or how long these periods of what seem like malaise will last.
I was just testing you to see if you were paying attention
It's been a long day. It should read "for example, if you enter a short at "85" and the short should have been entered at "86", your 5pt-stop is going to have to be placed at 91, not 90." (sheesh)
As for the other, a good PA system is self-correcting and self-adapting. Therefore, when you find that what you're doing isn't working, whether your retracement tactics or your entries or your exits or whatever, back off for a while and go back to observation. Conditions will change throughout the year and throughout the cycle, but they aren't going to change as much as if you were to switch to another instrument. It's all part of the characterization process, but the chief objective of the process is to tie oneself to reality, i.e., verify the map.
There are only two people who are trading this in public. Everyone else avoids posting due to the trolls, so I can't say what "others" do because I really don't know. But I do know that Gringo avoids "middles", whether ranges or in trend channels. He'd rather wait for the extremes. But then he's learned a level of patience that is only dreamed about by most traders. 40D also prefers extremes, but as far as I know he has no rule about ranges. He's comfortable enough with reversals so that trading ranges is not out of the question.
For myself, I avoid ranges and I avoid middles, like Gringo. But I trade a far smaller interval than he does.
So your answer I suppose would be to determine what yields the most profit with the least effort. If you can make two or three trades a day and you're pleased with what you earn, then the hell with it. If you find yourself getting sucked into fifteen or twenty or thirty, it's time to do a little post-trading analysis and see exactly where your greatest profits lie, then ignore everything else.
In a bid too find a way, or rather a reasoning to hold onto trades on a day where price might be trending, certain ideas need to be explored.
To start off with, a trend would need to be identified and understood, for that, we will need a straight line . When price is trending it will head in a general direction either up or down, but, price does not head straight up or down, instead, the move up or down is interspersed with counter trends, pull backs or retracements, the depth and time of these counter trend moves can vary but if the overall direction is intact and there is no HTF context to think about one can let the trade run.
Unfortunately, trends don't often behave as one might think they should and what I am going to look at is what happens when the line is broken, this is where the straight line comes in, it merely tracks the behaviour or stride of supply and demand and is referred to as SL (down) or DL (up). A break in the stride only indicates a change of behaviour and there are 3 possibilities that might stem from this change, reversal, range or continuation, I included a range as opportunities may arise in those ranges, but, eventually price will breakout and either continue in the pre-range direction or move against it creating a new trend.
The point of this exercise is to work out how far the stride can be pushed but allow the trend to remain intact or at what point an exit is justified given the unfolding PA, the intention is to get myself into a position where I can be confident in handling adverse PA by better understanding what I am dealing with and take the actions needed that were decided prior to the trade being opened.
I will measure from the line at breaking point in the example below, work out the average break value and see how it picks up on the change as I found a day where price trends up for a stretch, flattens out and drops later in the day. Second chart is a representation of what I might have done or thought as the day unfolded if I had been trading, there are also a number of trades in there that would not have been triggered, I left them out to avoid clutter.
Average MAE in rally was around 3.5 with the outlier going into the HOD, could this mean something? The lower high created after the HOD deviated below average, and from this aspect alone there was no heads up on price doing anything different. However, price flattening out is one hint that something is changing, plus the HOD is a point shy of the previous days high-low MP, whether or not this means anything will have to be worked out in further testing.
