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Research: trading pullbacks in CL
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Research: trading pullbacks in CL

  #31 (permalink)
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Are you going back from the beginning of the year to today?

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  #32 (permalink)
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Robert, I'll see how far I'll go. Ideally yes, but don't count on it

1/29/14 Wednesday: INVENTORIES DAY

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Technically if there was news at 10:00 am, as there often is on inventories day, there would be no valid stop entry signal here (A) as it occured exactly at 10:00. If there was no news, we would have gotten triggered, but the rather uninspired movement afterword would have merited aggressive management and a small loss would have likely resulted.

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  #33 (permalink)
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1/30/14, Thursday

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1. We have been generally in a bullish situation, and after yesterday's inventory day there's still an upward bias. Market gapped up.
2. Definitely a strong trend leg up, no doubt about bullishness here.
3. A medium strength retracement, which is fairly tight.
4. Here the first signal bar triggers, but only after a neutral inside bar after it. Thereon after the next bar shrinks to a bearish stance and the next bar would have tagged us out if we had our stop one tick below. The next entry bar does the trick, this is a form of double bottom if you will. We see the exact same scenario on the 512 tick chart on the right, see i and ii.

A may have looked like a tempting entry, and it would have completed (albeit with reluctance), but the problem is the very strong bearish bars during the retracement after such a powerful trend up. Besides, this is not technically a pullback, it is already a range reversal of sorts.

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  #34 (permalink)
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1/31/14, Friday

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This (A) may for some be a viable setup. To me this is really a breakout pullback, which is also a valid setup, but what I dislike here is the tight 36 pt range and the fact that this breakout (likely news related), while strong, only doubles the size of this small range. The move is still okay for 16 pts. I'm just thinking this may belong in a slightly different box.

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  #35 (permalink)
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January 2014: overview

So far we've analyzed 21 trading days. As we can see, during this month out of those 21 days, 16 had some form of potentially tradable pullback or pullbacks. That's about 75% of days, which is pretty frequent especially since we've limited ourselves to the first two and a half hours of trading.

There are some remaining questions which we have to still answer:

1. We have no idea what the other months will be like and how much variance we'll experience.
2. We still haven't categorized our entries into our respective boxes of A|B (valid signals) and C|D (invalid signals), though we have begun the discussion.
3. We haven't defined how we're going to treat the 512 tick chart versus the 5 minute chart for entries, nor have we begun a proper discussion on trade management.

To do all these things, we have to look at a larger sample size so we can see more variations of these patterns, which in turn will help us come to some sort of conclusions as to what to do.

We've already seen several interesting variations:

1. Overall trend picture: We've seen situations where the overall trend was swinging in one or the other direction predominantly, as well as more neutral situations.
2. Preceding trend leg: We've seen very strong trend legs, and weaker ones.
3. Pullback quality: We've seen pullbacks that have different shapes, some start strong and weaken, others start weak then strengthen, some stay the same. We've seen tight and deep pullbacks (which of course are only apparent once we've been triggered into the trade and it completes or fails). We've seen simple and complex pullbacks.
4. Signal bar: We've seen different shapes of entry bars, as well as different thicknesses, starting with the ideal (a bar that has a close in the direction of our desired trend, and a long tail pointing away from the trend), and ending with the least ideal (a bar with a long tail in the direction of the desired trend, and a close away from the desired trend). We've seen signal bars that are hanging out in space and those that align with levels of support and resistance.

We've also seen how checking Globex levels helps see a fuller picture, and may at times even give us a contradictory idea of what is happening.

We've seen how a shorter time frame gives us higher resolution information for entry, but can also fool us into entering prematurely or entering when we should never have bothered.

To make sense out of all this information we have to continue looking at more examples as well as ask ourselves which problem do we want to have more: a wider stop, more frequent entries but more stopouts, etc. All of this will help create our RULES, which we need in order to trade this or any other strategy successfully.

A final note. Some people may be thinking "Man, if I really start applying rules and filtering setups, what if I can only make one trade every two or three days? How I am I going to be that guy who averages 10 points a day in CL?"

Let's start by saying that our main goal is to settle on a strategy that has a positive expectancy. Remember our first mission is to trade profitably, not to trade often.

Next, we have several other points.

a) If you don't have enough opportunities, there are other markets you can try to apply this idea to. Granted, you will have to test them again because each market has its own personality.

b) Most futures traders develop more than one setup. Fairly often I hear of people who trade up to seven setups (some of which are variations of a particular setup). In doing the research for this setup, there are chances you can develop ideas for other setups.

Lastly, the more you focus on a setup, the more you learn its nuances and the better you become at it, thus increasing your expectancy. That is why it is a good idea to focus instead of being all over the place.


Last edited by Georgii; September 9th, 2014 at 01:20 AM.
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  #36 (permalink)
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Today (9/9/14) we had an opportunity that I was able to take advantage of for 20 pts...

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1. The market has been higher lately, but just at the pit open a sell off began that wasn't exactly strong but was determined.
2. The trend leg is decent, in between medium strong and weaker.
3. The pullback is of medium strength and is complex, there are a number of bars here but they most all have some form of tails on them and overlap.
4. The entry bar is almost perfect, a bearish close would have been better but overall this appears quite acceptable.

If we take a look at the 512 tk chart, we see that we had several false triggers, namely i and ii. Both of these offered a crummy risk reward if our target is the extreme of the trend (especially i). Only iii offered a good enough risk reward to warrant an aggressive entry.

This trade completed right away, almost ideal - just one pullback. Unfortunately as we've seen, not all of them are like that and we're going to have to start thinking more about how we want to exit these trades. How much pain do we tolerate and under what circumstances? There are many who argue that exits are even more important than entries, so we're going to need to start having a conversation about how to manage these trades.

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  #37 (permalink)
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@Georgii

How did you settle on the 512 tick chart? And how do you think it compares or works with the 5 minute. Great work. I'm following along.

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  #38 (permalink)
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Georgii View Post

This trade completed right away, almost ideal - just one pullback. Unfortunately as we've seen, not all of them are like that and we're going to have to start thinking more about how we want to exit these trades. How much pain do we tolerate and under what circumstances? There are many who argue that exits are even more important than entries, so we're going to need to start having a conversation about how to manage these trades.

Astute observation. Had you held on to an iii entry and tolerated 6-10 ticks of pain the rest of the day would have worked out. This is a question I am trying to settle with; how much pain and under what circumstances. I think in this example at point iii the overall trend was still down so that is one argument for holding on.

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  #39 (permalink)
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Let's take just a few moments to think about entries, so we can also begin talking about exits. The two are strongly related.

A small note. I like to be careful about reifying certain market concepts, for example smart money versus dumb money (institutions/professionals versus retail). That would automatically assume, among other things, that everyone is looking at the same exact time frame and is using the same exact form of analysis as I am, which is definitely not true. The market has a huge variety of participants using different forms of analysis and different time frames.

I would agree that when there is a visibly clear level on a number of time frames, that more participants are going to react around that level than some level inside the intra-day range (which is why, incidentally, I think it pays to be extra careful about responding to price formations on lower time frames). But the key name of the game is buying versus selling pressure on the price chart, and it's important to keep our focus on that alone.

The entire philosophy behind a pullback is trend resumption. There is momentum, and it has decided to momentarily take a break. Whether its people taking profits, or counter trend traders who are scaling into positions, or algo boxes is immaterial. Our expectation is that the trend will resume in the direction of the prior momentum, and we're using the chart to signal to us when that might happen.

There are three 'enemies' to this concept that will prevent us from making a profitable trade:

1) If the market is in fact at a point of overextension when it will reverse the entire trend leg (or most of it, to the point where we would heavily question the trend's integrity).
2) If the market locks into equilibrium, creating what often appears to be a 'triangle' (buying and selling pressure equalize without any strong follow through in either direction).
3) If the market is moving with such speed that we never get a breather that allows us to enter economically enough to play to our chosen target which is the extreme of the trend (as opposed to a measured move).

If you're interested in entering fast and hot trends to go for a measured move, Al Brooks discusses this in his work. It's not an easy method, however, because it forces you to have a wide stop. With an instrument like CL that might mean a $500 stop loss per contract, so if you don't have the right size account and risk tolerance that is playing with fire.

Here's a schematic of how we enter:

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As you can see, the idea here is that we're waiting for the counter-trend trend to FAIL. That is the tipping point that provides us with confirmation to enter.

Now let's be honest, there's probably no magic behind the 5 minute candle, any more than there is behind the 512 tick or the 2000 tick or the 2 Renko bar. I'd honestly be surprised if any time frame or form of measurement would be shown to have a verifiable, robust statistical edge superior to others in terms of breaking the candle extreme and triggering counter-trend order flow. What we do need however is a consistent and robust method of entry that suits our personality, a consistent definition of the failure of the counter-trend movement.

We've already proven that shorter time frames give us more triggers but also false signals. What we haven't yet figured out is are there circumstances when we can use it to our benefit to get an entry that would have been too thick on the 5 minute bars? We're going to need to consider this as we keep looking at examples.

Our goal is to get involved with the counter-trend trend's failure at an optimal area: where the probabilities are strongest that it will fail and follow through, with the most modest reasonable risk exposure.

Let's now contemplate the exit strategy.

We have two functions during our trading: to identify high probability entries, and then to manage those entries in a way that will that yield the highest expected profit, taking our psychological preferences into account if possible.

These are in fact two different functions. Once the trade is entered function one is over, and function two begins.

As we've said before, with pullback trades we're waiting for the counter-trend trend to fail, that is we're waiting for a new trend to emerge (the resumption of the prior trend). So once we enter, our job is to assess the status of this new trend - is it succeeding, or is it failing?

We're obviously pleased when this new trend moves aggressively toward our target without much if any pause. We're also obviously displeased when the counter-trend trend immediately reemerges and continues onward, taking us out of the market.

Both of these scenarios require no thinking, however. We could have just left our stop in the order book and taken a walk. What we need to know is how to handle all those 'in between' scenarios, for instance:

* When the price initially moves in our favor, then pauses.
* When price moves against us sharply, then slowly resumes in our favor.
* When price gradually moves in our favor, with somewhat unsteady retracements.
* When price freezes at our entry point.
* When price reaches a few ticks away from our target and appears to start correcting.

We also need to make a decision which time frame we will use in order to manage our trade. The lower time frame tick chart may allow us to manage things more aggressively and get out of a jam earlier, but just as it takes us into more undesirable trades, it likewise may take us out prematurely. This all of course depends on the rules we establish, and each one of the aforementioned scenarios may require its own approach to maximize our profit as well as play into our psychological preferences.


Last edited by Georgii; September 9th, 2014 at 06:49 PM.
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  #40 (permalink)
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robert880 View Post
@Georgii

How did you settle on the 512 tick chart? And how do you think it compares or works with the 5 minute. Great work. I'm following along.

Robert, I just found it was pretty close to a 1-2 minute chart on CL, and that seemed to be a good distance from the 5 minute chart. I experimented and found that it gives me a picture I'm comfortable with.

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