Friday, October 23, 2015

Patience and discipline as keys to trading

The key to trading is not simply taking the right trades, but to also pass on any trades that don't seem right. After all, its easy to just take every trade and ignore the failures, but this only makes your broker rich.

When the price action is choppy or the signal is weak, wait for the market to move away and give a better setup. This is patience and the key to limiting your losses.

Once you are in the trade, follow your trading plan. Do not be shaken out of your position. Exit where you think is a reasonable and conservative exit. Do not be greedy or your winner may turn into a loser.

Tuesday, September 29, 2015

The shallowest trendline from the prior day

There is a shallowest possible bull and a shallowest possible bear trendline every day. These trendlines have some predictive power as to where the price can turn and trend. For example, the shallowest bear TL from the prior day from HOD and b21 caused a reaction that led to a large move. If the final bar is the highest or lowest bar of the day, then you can use a TCL instead, which has lower predictive use.

Note that when the price gaps far from the prior day's action, the shallowest TL from the prior day may never be tested and you should not wait for it.

Friday, September 25, 2015

Small trend bars in a hard trend

When the first two bars have strong closes and very little overlap, it is reasonable to assume a hard trend is in progress. In a hard trend, any small bar can use used as a signal bar, especially if its a trend bar near the TL (b3). In a pullback, you can often enter above any small trend bar (b10).

Thursday, September 24, 2015

Large inside bar on 1W

Inside bars are tricky and often require judgement to trade correctly. In general, large inside bars are overlaps and therefore a mini trading range. It is generally best to wait for the trade to trigger and take a pullback.

An outside bar that traps traders who did not see the reversal and entered (b23) makes an excellent signal bar if its not too large. If it does not trigger any small trend bar after it (b24) should work.

Tuesday, September 22, 2015

Waiting for chop to end

The day opened choppy from b1-8. From b8-11, bars suddenly had strong closes and shorter tails. This is a sign that the chop is ending.

When the chop ends, the initial move can usually be faded. In today's case, the initial move was a continuation up, which resulted in a large down move. If on the other hand, the move had been down, we would probably see a trend break up

Trading a choppy day

A choppy market is characterized by bars with large tails, occasionally interspersed with overlapping, opposing bars with large bodies. Its clear that the opposing bars are effectively a tail if you consider them in the aggregate.

Capturing large moves in this price action is very hard to do with a tight stop. The large move down from b3 only occurred after deep pullbacks and stopped me out.

There are ways to predict a breakout such as b29 but these are very hard to read. One way to keep yourself out of trouble is to wait for price action to be less choppy, i.e, you start to see more trend bars and less overlap.

If you must trade, deep pullbacks to the trendline are the safest and three push pullbacks are generally safe. Note that in choppy markets, you should always take an early profit and swing entries are hard to gauge.

Often, the mark of the successful trader is that he knows when the odds are against him and knows to sit out of the market when his expertise is not called upon. The trader who frets at missed opportunities is well advised to weigh against the missed losses and be content with making the right choice of staying out of the wrong market.

Thursday, September 17, 2015

The openers: 1W (first Wedge) and 1P (the first pullback in a trend.)

The market often moves sharply on poor signal bars (b2, b9, b12) in three pushes away from the open. The initial move off the open often turns into a W like move (b1-b13)  and results in a potential trend move that usually takes out the other end of the W (low of b1). If the breakout is strong, the move may continue to another measure of the W (distance from b1 L to b14 H).

Often W setups are not clean (b14). When W setups are poor due to overlaps and tails preceding (b10-13), its usually best to let the W succeed (b15-16) and enter on a pullback (b18). The first pullback of a trend gives the best chance for a long swing that can be held till the trend terminates.

Since b3 is a trend move from an ib2 setup, b9 is a 1P setup as well, but with a poor signal bar. It is a good practice to wait for a second entry in such cases.

Wednesday, September 16, 2015

Openers: ib2

When the market opens, either it begins to trend immediately as evidenced by very little overlap between b1 and b2 or it forms the opening range. A market that opens with a trend from b1 can simply be traded as a trend by entering with-trend close to the trendline.

Usually, the first two to five bars represent the opening range and present potential setups that may lead to a trend move, i.e, a sustained move in a predictable direction that can be consistently traded for profits.

The earliest such a setup can occur is during b2, when an inside bar forms with either b1 or b2 having small tails. Today's case with both b1 and b2 being trend bars with b2 at one end of b1 represents the ideal case.

(My stop-limit-buy entry order triggered but was not filled as shown on the right because the market did not pause or return to the price)

When both b1 or b2 are not trend bars or are heavily overlapped, ib2 becomes lower probability and it may be better to pass on the trade. The chances of a large move after stopping you out increase when b2 is not a trend bar.

Note: This setup is still beta and its likely to be removed or changed in the future

Monday, September 14, 2015

The open: Trendlines, Gap and setups

Shallowest Trendlines

The price action of the prior day give rise to two trendlines -- the shallowest bull and the shallowest bear trendlines of the prior day. The shallowest bull trendline is drawn from the lowest point of the day and touches another point such that all the price action past the lowest point is on one side of the line. The trendline should not be concerned about the price action before the low of the prior day. The shallowest bear trendline is similar from the high of the prior day.

When there are multiple points that are at the same point, as in bar 24,25 lows shown above or when the lows are formed by a double bottom of two separate swing points, simply use the most recent as the low of the day, i.e. do not draw a horizontal line.

When the next point is very close as in b28 above, the trendline could be shallow and inaccurate when drawn manually.

The price action of the current day should be expected to react to the trendlines from the prior day and then make a significant move.

If the last bar of the prior day is the highest bar of the day, there is no shallowest bear trendline. On the other hand, you can draw a shallowest bull TCL. TCLs are less significant than TLs and are only used for reversals when the price opens beyond it.


When the price action of the day opens well beyond the trendlines, the trendlines may not have any significance. When the gap is small (3 to 5 bars distance), a test of the line is likely to occur before any strong trend move. If the price opens between the two lines, there is a good chance of both lines being tested before any significant move.

If b1 of the current day overlaps with the last bar of the prior day and the prior day ended mid-trend move, then for all practical purposes, the open can be treated as its a continuation of yesterdays trend and the shallowest TL from the prior day be treated as the trendline for support, setups, etc.

Chances of an early trend

When b1 of the current day overlaps with the highest and lowest bar of the prior day, or the prior day ended in a large trend leg and b1 of the current day overlaps the last bar of the prior day, chances of an early trend including trend-from-open are high. When the price opens near to the shallowest trendlines from the prior day, it also increase the chances of a significant trend during the open (first 12 bars). On such days, look for 1P setups. You should hold a swing position since this could be a large move.


1W is the default open setup. If nothing else happens within the first hour, its likely that the price will give three pushes in one direction and try to reverse up. In general, opposing bars b1 and b2 represent the opening range. Three pushes beyond to b11 represents the first 3 push of the day and should result in an attempt to reverse the W, i.e. take out the other end of the opening range. If the W succeeds in reversing in one leg, then the price should be expected to at least go further to the measured move of the W.

Wednesday, September 9, 2015

My trading philosophy

Over the years, I have tried many different trading systems and have absorbed the best from the techniques I have encountered and ultimately ended up developing my own system. It is inevitable that you will do the same, even if you use my system as the foundation.

The key drivers of my trading goals were:
  • Getting most of the big moves of the day
  • The ability to sit through a trade, without panicking when it goes against me
  • Predictable losses that I can control
  • Few good trades vs many marginal trades
I arrived at the above after being burnt using alternate philosophies such as:
  • Trying to get all moves: Low win rate, small profits
  • Momentum trading: Needs large stops, hard to sit through.
  • Dollar cost Averaging: Unpredictable big losses
  • Scalping for a few ticks: Good for my broker, not me.
One of the key things that I learnt was that the mind's ability to focus attention wanes over time and judgement suffers. Your first two or three trades are when your judgement is finest. At the end of the day, especially if you have suffered losses already, you will probably make terrible mistakes and have days that will wipe out weeks of profit.

Trading every possible swing is fatiguing to the mind and is not something you can do day after day. Therefore, I chose to focus only on the big moves. That way, one to four trades a day were sufficient for success.

On entering a trade, I learnt that often I would be shaken out when the trade went against me. I deduced that this is because my body reacted viscerally to the open loss during a pullback. I realized that to be able to sit through a trade, I would need to trade with a fixed stop. Over time, the body gets de-sensitized to a fixed loss and you will stop reacting to it and you will be able to execute without emotion.

These observations led me to focus on the open as a source of good trades since many large moves are at the open. Trading the open also has the benefit that I can choose to trade only an hour or two and quit for the day.

Its a viable trading plan to only trade the opening setups. If the open ends up being some sort of trend, it may be worthwhile taking with-trend trades. I generally avoid trading trading ranges or barb-wire. They are notoriously difficult to read correctly.

In future posts, I will describe my setups and trading reports in detail.

Tuesday, September 8, 2015

Market types and setups

The price action that defines markets can be divided into several types and each type has setups that typically work for it. Trending markets for example, facilitate with trend trades and usually cause reversal setups to fail with high probability. Trading ranges on the other hand, facilitate fading breakouts with high probability.

I divide the market price action into the following categories:

Trend (or elastic trend): There is an obvious trending in the market. Bars in the direction of the trend are small, close strong and there are multiple bars in any given trend-side push. Bars against the trend are fewer, usually larger and if there is more than a single bar, closes are usually weaker.

Hard Trend: This is a kind of trend where there are very few bars in the counter-trend direction. With-trend bars can be large or small, pullbacks are usually just a bar or two. This is a very strong trend.

Soft-trend: Bars are very small both trend-side and counter-trend-side. Very shallow pullbacks and pushes.

Channels: Channels look like Soft-trends but with one big difference. Unlike the trends above, a pullback in a channel often overlaps into the previous signal bar.

Trading Range: There is no discernible trend. Erratic movements usually lasting two or three pushes in one direction followed by pushes in the opposing direction. A move in one direction may or may not reach the other side before reversing, therefore hard to gauge profit target.

Barb Wire: A special kind of Trading range where the price action is confined to a narrow range made of small bars, many of which are dojis

The Open: Markets that have "Regular Trading Hours" have opens and closes for the day and the open of a given day has often behavior that may look entirely unlike the previous day. When the market opens and the first bar begins to form, the market is not in any of the above states yet and is considered to be in the open state. This lasts for about 10 bars or so.

The Setups
Each price action type has its own list of setups. A setup that works very well for hard-trend will fail for a channel and vice-versa. These 30 setups cover every possible large move from any type of price action. If you master these, you can trade any market.

There is a small number of setups per price action type and you can focus on a much smaller set of patterns. Setups marked beta are sustained observations but I'm unsure if they can be traded profitably in all kinds of markets. I may drop them in the future.

Setup List
SetupNameTrade typePrice Action Type
GRb1Gap reversal b1X -- BetaOpen
ib2Inside bar b2X -- BetaOpen
1Fb11st failure of b1XOpen
2Fb12nd failure of b1XOpen
1P1st pullbackXOpen
1FBO1st fbo of ORXOpen
2FBO2nd fbo of ORXOpenGGap
1W1st Wedge of dayXOpenRReversal
1TL1st close at TLXChannelTtrend
1CBO1st channel BOXChannelbbar
1ib1st inside barXChannelb1bar 1
CBPchannel BPXChannelPpullback
CXTchannel XTXChannel1P1st Pullback
fL2failed L2X -- BetaChannelOROpening Range
fL2failed L2XSoft TrendTLTrend Line
STbsmall Trend barXHard TrendBObreakout
Tb1Trend from b1XHard TrendBPbreakout+P
2_1tF2nd 1TFXHard TrendPpullback
2SP2nd shallow PXHard TrendXTexpanding TRI
1TAIL1st TailX -- BetaHard TrendTRITriangle
WPWedge pullbackX TrendBWBarb Wire
TLPP at TLXTrend1TFone tick failure
WWedge ReversalX RevTrend
Rfx2Reversal+fx2X RevTrend
W1PW + 1st pullbackX RevTrend
FBOFx2FBO + FX2X fBOTrading Range
WFBO, DPWedge FBOX fBOTrading Range
TRI BPTriangle BPX BOTrading Range
XTExpanding TriangleX BOTrading Range
BWBOBreakout from BWX BOBW

Setups not listed above such 1Rev, A2, BO, etc are obsolete due to various reasons such as being incorporated into the list above, me not using EMA anymore and inconsistent profits.