Thursday, April 4, 2013
One of the most interesting problems in day trading is early determination of a trend. An early determination is a decision before there are obvious HH and HL or LL and LH. One simple way to address this is to state that any sustained move from the open is a trend (b1-4) and any sustained move against such an opening trend (b5-8) is a possibly a first reversal (1Rev). Any move that is not sustained is simply a 1PB. The balance between a 1Rev and a deep 1PB is subtle. In the absence of a 3 push move and reversal, I generally err on the side of a 1PB (with some notable exceptions).
Once you have a trend, even if its simply an early determination, you can look for with-trend trades.
Among the with-trend setups, I'm most liberal about the first pullback (#1, #4). If the pullback is deep (#1) or has a strong signal bar (#4), I will often take it since it can lead to gains far larger than the risk. A first pullback made of a one leg or poor bar is not a higher probability trade, but when it does succeed, the gains can be large. Sometimes, a failed deep 1PB in the old direction is a 1PB in the new direction (#2,#3). Usually, I prefer to skip the reversal itself (b14) and take the 1PB after it (#4).
A first move against the current trend (#5,6) is likely to require you to exit on the entry bar, regardless of how good the signal bar may be.
Multi-leg pullbacks such as b54 have the highest probability of a strong entry bar and least adverse excursion after entry. When a multi-leg move is basically a micro-channel (#9), chances of a failed first attempt to break the channel are high.