Wednesday, April 4, 2012

Trending or Ranging? Stops or Cost averaging? Zero loss trading? Wake the fuck up.

There are a few basic unanswerable questions in intraday trading. Is the market trending or ranging? Do I use hard stops or average in? Has the market volume dried up for the day? Only the left side of the chart can give any clues. I've tried at various times to achieve some semblance of a complete system. One which avoided the draw-downs necessary in institutional standard systems popular in the trading community but I have never succeeded in achieving any level of certainty about my trading.

Last week I modified one of my basic exit criteria from using swing high extreme price levels to relying on a very good but nonetheless, delayed indicator called "supertrend." This resulted in disaster for my account. Instead of having a fixed stop loss range in place (because fills can be dubious in the forex world), I was giving myself back to the fate of the markets. Huge fuck up. Markets don't "respect" indicators. They are just tools to help confirm what you are already positioning for. Once you let indicators decide your sole entry and exit you are fucked and feeble. That's not trading, that's more like tossing a chinese star in the air with your bare hands below it. A bad idea set in motion. Sometimes I wish I had a very close trading ally. Perhaps this is why most great traders don't actually pull the trigger, they have clerks who do the "dirty work" for them.

March was a decent month. I only traded 2 weeks but came out with a 20% return on equity. Very pleased. But then I went and messed with a sound risk metric, employing "supertrend" as a stop loss rather than simply a trailing stop. This caused me to give it all back to the market. Back to humble pie for me grandma.

In addition to battle tested methods of meantrade, I have always been focused on finding a way to trade ORB (opening range) breakouts on the same chart as reversals. I finally discovered that using a trailing indicator such as the cci, stochastics or rsi on a larger time frame as a directional indicator of the current market (yes, still a lagging metric but trends tend to persist in forex for at least a few hours which is all I need to take profits on a weekly basis) creates very robust breakout trading opportunities on my constant range charts. I have been using 10 pip ranges for both my EUR/USD and GBP/USD charts as of late as I find the market is as whippy as ever and the 20 crb's were giving back far too many pips.

I am now taking the pre-London range as my two trade levels (long and short). I only trade in the direction of the 4 hour indicator (in this case the 4hr reading of the CCI should be above the 0 level). The results are not bad. With this method it enables two trade opportunities per market per day. If the market breaks out I can enter at first break and if it pulls back to a trade level I am watching, I can enter for a nice reversion trade. Now I have both sides of a good market on my radar and on the same chart. This is somewhat encouraging for me as I was often sitting staring at the screen waiting for a meantrades setup to occur while the market just takes off without any retrenchments. Not a particularly useful way to trade the forex market these days.

So I will take this massive hiccup in stride. I will stay the course, I won't take this as an indication that I have failed once again. But a very sound reminder that I have a decent system, which works but requires that I take my medicine. And everyone knows a traders medicine is their stop loss.