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

  #1 (permalink)
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Research: trading pullbacks in CL

Hello all!

I wanted to start a research journal for a price action based strategy, based on trading pullbacks in CL.

Here are the starting parameters:

1. Trading only the first part of the pit session, from 9 am - 11:30 am. No entry permitted after 11:30 (I know, interesting things happen during lunch and from 1:30-2:30, but that's too bad), no entry permitted before 9 am.
2. No indicators (oscillators, funny moving averages, ichimoku, etc), esoterica (fibonacci levels, elliot wave), market profile, or volume.
3. Trading timeframe is 5 minute candles, a lower timeframe tick chart is possible to see Globex levels clearer, and pinpoint entries but I want to keep the focus on the 5 minute candles first.
4. Moving averages are only included for reference to trend (how strong or weakly the market is trending, higher timeframe considerations).
5. Stop entries (wait for price to move in your direction).
6. No trades ten minutes prior to a significant economic release, or for fifteen minutes prior to inventories. Ten minute waiting period after inventories.
7. All in, all out trading (no 'scaling' in or out).
8. Aggressive trade management.

My key inspirations are Al Brooks, Adam Grimes, and Bob Volman, in case anyone's interested.

To start, there are two classes of pullbacks: the simple pullback, and its sister the complex pullback (the latter of which is a fakeout reversal, basically).

Illustration provided below:

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We will be identifying both of them.

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  #3 (permalink)
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Here is how I divide my chart into time zones:

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1. Green: the pit open, from 9:00 am to 9:30 am.
2. No color: the US equities first half hour, from 9:30 - 10:00.
3. Dark red: 10:00 - 10:05 am, where economic releases happen most of the time.
4. No color: 10:05 - 11:30 am.
5. Grey: Noon session 11:30 am - 1:30 pm.
6. Red: 1:30 - 2:30 pm, the last hour of the pit session.

I know that Globex levels are important with crude, so I use the 512 tick chart to get a better look at things.

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Now for some semantics...

In addition to two forms of pullbacks (simple and complex) we have tight pullbacks, where we don't get much of a pullback, and we have what I call deep pullbacks, when the market retraces 50% or more of the trend move:

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Tight pullbacks force us to get in more expensively and thus run the risk of having the price retrace deeper, stopping us out. Deep pullbacks give us better trade location, but higher risk that the trade won't complete as the price is moving against us.

The proposed way to enter is a stop entry, that is waiting for price to hit a stop order to bring us into the trade. This is a tipping point, where we enter the trade once price confirms we're right by going in our chosen direction. Of course, we can always try to join the bid or offer to improve the entry price (and in CL this appears to pay off more often than not, though at occasional cost to a profitable trade that moves immediately in our direction).

Usually this is by breaking the extreme of the last counter-trend candle, as illustrated here:

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The basic mission here as I see it, is to define signals and categorize them into "valid" and "invalid". Valid signals are the setups that study will reveal over time offer the best expectancy and result in the largest average win. Invalid signals are those that if taken, will degrade our PnL over a significant sample of trades.

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Our goal is not to trade this setup every time it appears, but only take the valid setups. If that means we pass on 3 or even 10 invalid setups in a row, that's fine. If that means there's no valid trade for a whole week or even a whole month and we see a number of invalid trades that would have completed, that's too bad, but it's good for our account in the long run.

Our job is to maximize profit, not be always active in the market and needlessly feed our brokers commissions. We know that to maximize our profit we have to follow rules, and there's nothing more important than following rules. We just have to have the right rules and that is why we are doing this study. We want to create them, critique them, test them, and have confidence in them so we don't do stupid things later.

An important note: please be clear that in developing these ideas, I'm trying to fit my own personality. I fully realize someone else may come up with a different spin and I'm glad to discuss it and see what might work better for me as well. I particularly welcome experienced traders to belate what works and what doesn't for them.


Last edited by Georgii; September 7th, 2014 at 06:36 PM.
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Here's a schematic of a bearish pullback trade, which shows us what we should be looking at and considering.

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Entry conditions:

1. We want to take a look at the quality of the preexisting trend, which we are looking to ride. Is it a new trend, or is it already in its second, third, or fourth leg? Could it be overextended (climactic price action)? If it's overextended we need to be very careful not to get caught in a potential reversal, or a very deep pullback that could create a lot of confusion and triangulation as opposed to follow through.

2. We want to take a look at the quality of the last leg of the trend, for the same reasons as 1. As a matter of fact the preexisting leg may in some cases be the first leg of the trend, in which case it is a breakout.

3. We are interested in the quality of the pullback itself. Is it strong (are the counter-trend bars big with closes at the extreme) or weak? If it's too strong, that might be a good hint to wait for a complex pullback. If the bars are strong AND the pullback is deep, we may end up with an equidistant triangle or even a reversal.

4. We are interested in the entry bar, the last counter-trend bar before the market begins going back in our direction. Ideal ones tend to have a tail in the counter-trend direction (as shown here), with a close in the direction of the trend we want to follow. But life is hardly this perfect and we often get many variations.

Trade management:

There are two places to put our initial stop: A is by the beginning of the trend leg, B is close to the entry bar. Obviously with A we have more pain when we're wrong, but also a bigger safety net against deep and complex pullbacks. B gives us smaller losses in size, but a higher chance of getting knocked out. My personality prefers B.

Our entry C, as we had already previously described, is a stop entry. Limit entries may also be explored, but not to complicate things at first, let's stick with stop entries.

We have two initial profit targets. D is the conservative profit target, which is simply the prior trend leg extreme. E is the more aggressive target, which is aiming for a measured move objective (leg 1 = leg 2). Adam Grimes suggests that most pullbacks are safely exited at D and that you should at least exit part of your position there. I'm trading all in-all out, so this will be my choice.

We haven't discussed stop trailing yet, mainly because we want to let our research give us some ideas.

Clearly there are other things to think about. The most important is likely the higher timeframe trend. We would, ideally speaking, like to be aligned with it in some way. At the same time, if we get a trend going opposite of the higher time frame, we may get cleaner action if we're shocking the market into a new trend. Things to think about...

Time of day is solved in our model, we're only trading the morning session. Why? Because a) I don't have time to trade at noon-afternoon, and b) the first two and a half hours are the most volatile usually. Obviously I look at market structure from the other sessions as well as Globex, and crude oil does trade actively at night so those levels mean more than they would in US stock index futures.


Last edited by Georgii; September 8th, 2014 at 12:23 AM.
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We'll start our analysis from January 2014...

1/2/14, day after New Years Day. 5 minute chart on the left, 512 tk chart on the right (featuring the Globex and pre-pit action in purple).

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1. The market gapped down. If we look at the 512 tk chart on the right, we see that the sell off was pretty persistent during Globex (see i). If you look at the moving averages, you can see that the market was overall trending down respectibly (the distance between the shorter and longer term EMA is a giveaway).
2. The last leg of the trend was respectably strong especially in the beginning, then it began a bit of rounding action but the bears are still firmly in control. So far, all lights are on for continued bearish action. No recent levels of support on a higher timeframe to cause problems.
3. This is a very tight pullback, just one bar. This automatically raises the question 'can we do better than that?' to get a better entry. The only thing going for it is that if we look a few bars to the left, we see some clustering action that may have encouraged support.
4. While this is a bearish entry bar, it's what I call a fairly thick entry - the thickness of the bar is greater than the distance between a stop entry and the profit target, which would be the extreme of the trend. The only way to play this would be to aim for a measured move, which was offered here.

An important note: the trade would have triggered at 10:00, which may have economic releases. If it did, this signal would be invalid anyway. But by the looks of this, it does not seem there was a release here.

ii. If we take a look at the 512 tk chart, we see that had we used the entry bars there, we could have theoretically had a fairly tight stop. But this seems to be a pretty aggressive entry in this case, since the pullback is so tight.

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CL

Georgii :

Put a 9 ma on your chart and compare the retracements to the ma. Kind of my security blanket.

Tim

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1/3/14 Friday

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Here's another day and we do get a setup, but like the last one challenging.

1. The general trend from the past few days is down, and today is no exception. We do start a bit confused, and if we look at the 512 tk chart during the Globex session (i) we see the market starts ranging, but the bulls aren't getting any real play on the upside.
2. This trend leg looks a lot like yesterday's (1/2/14), fairly strong, not climactic.
3. The pullback here is sharp, which is a bit disconcerting. Looking at a longer term time frame, we are near a possible support area, so that could be a motivator for a sharp pullback. Still, this is not a reversal signal in its own right. Maybe just a clue to wait for a complex pullback.
4. The 5 minute entry bar here is a bit troubling. It's inside the previous bar, setting a stop at its extreme is a bit risky and setting outside the previous bar makes the entry thick for our conservative take profit (which is all we were offered here). We never got a complex pullback.

If we take a look at the 512 tk chart on the right, we notice a complex pullback happened on this timeframe (ii). Entering on a stop here might have been a safer bet, as it communicated the idea in a more tradable way. However, one must be careful about not reading into the 512 tk too much, because while you may get more signals, you will also get more failures that you wouldn't have gotten triggered into on the 5 minute.

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missionatsea View Post
Georgii :

Put a 9 ma on your chart and compare the retracements to the ma. Kind of my security blanket.

Tim

Hi Tim! Right now I have a 21 pd EMA (green) and 63 pd EMA (red) on them just to see trend. I see the logic behind using a shorter EMA, but I'm cautious about relying on EMAs for entry signals so I purposely just keep longer ones so I can see them as trend strength indicators as opposed to S/R.

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