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Supply/Demand - Revisited: A journal into the unknown
The thing with supply and demand zones (just like any other S+R type trading) is that I do not think it will be very successful without considering the Price Action context at the point of a zone test. A lot of times (like in your example trade) you will find price do the opposite of what you think should happen in your zone, it will drop right through demand zones or shoot right through supply zones, even on first test.
I do think it is a great tool to identify important places for possible price reaction, but the price action at the point of the test has to be considered before entering a trade.
Ditto with Fib lines or any other 'interesting' areas, you should see action indicative of a reversal OR acceleration - otherwise it wasn't an interesting price in the first place.
I saw your journal and thought I'd throw a few comments in for your consideration.
First, may I ask, "What type of trader are you?" Are you a scalper, a swing trader, a position trader, or something else? How big your trading account is/will be may have an impact on answering that question.
Second, and directly related to the first question, what charts do you look at? I see you posted a 30 min and a 10 min. Both can be pretty big charts if the size of your trading account can't/won't sustain big hits or losses.
Third, what time of day do you plan on trading? I see one of your trades was outside regular trading hours. Some markets can be particularly choppy during those hours.
Finally, what is your trigger? What do you need to see to make your decision?
I have long believed that three questions need to be answered when taking a trade.
What? - what side of the market should your trade be on? As a buyer or as a seller?
Where? - Trade location or the area(s) where you want to do business
When? - Timing When I see this or the Market does that in my area of interest, then I will execute the trade.
thanks for all the feedback so far. I will answer all questions the coming days. For now I post the latest trade made by the strategy. I found there was code issue preventing setting my final stop/loss. I fixed that now.
Around 11:00 there was a buy order. Price went into the small demand zone on top of the big demand zone below it. Since there was no supply zone present this trade is what I call a dynamic trade. For these trades the targets and stop losses change on trend reversals.
The maroon diamonds are the targets, I place them far way cause I don't want them to hit I want to set the best stop/loss on a reversal. Around 17:00 there was a trend reversal, this was detected and the stop/loss was set. Price came down and trade ended.
it is this idea that I would like to discuss. How can I set the most profitable stop/loss?
@ 46.98 price enters the demand zone. This is the trigger for me to buy (do not look at price action yet..) At 47.24 there is a price reversal and the down trend starts. Pretty good trade this would have been if the system ended the trade here. However the reversal caused the system to set a new stop/loss resulting in a profit of $10
It feels as if I am too late in these situations causing me to have a loss or a small profit. Setting a good stop/loss is something I find very difficult and would like to hear some suggestions to improve here.
decided to backtest with about 1 year of data. Below the result and the chart. I am not experienced enough to draw a lot of meaningful conclusions. Basically what I would like to know if this is a solid base to build on? Are there any obvious gaps in the strategy? I await your verdict
Does the backtest include slippage and commissions? Slipping one tick each side plus $5/RT equals $25/completed trade, which is about half your average profit per trade.
When backtesting it is always a good idea to build in a margin for error, i.e. add in slippage at various levels and see how the system performs. The idea is to get an accurate assessment of how sensitive the system is to slippage and whether it can be profitable with "realistic / real-life" slippage.
Shorter-term systems are always more sensitive to slippage than longer-term systems so it becomes a bit of a balancing act to get the systems to actually work when trading shorter term.
I would also suggest you manually review the results of your backtest. NinjaTrader has an odd way of determining prices for market orders which may not always be realistic for your system. An example of where this can trip you up is with stop-losses - assuming you monitor whenever price goes below your stop (for longs) and you then exit using the standard exit function, Ninja will execute the stop as a market order. The way Ninja determined the exit price was by having an exit price roughly in the middle of the bar (in my case at least). This leads to inaccurate exit prices and depending on a number of factors can result in you getting positive slippage on some of your stop-losses which probably won't happen in real life.
I never spent enough time with Ninja to figure out if there are better methods of handling stops, but as you can see, the above paragraph shows how backtest result can be significantly distorted and provide a false sense of security.
