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.

OHLC is just a line in the sand for Support and Resistance

In spite of my interest in OHLC, there are plenty of other ways to create very clear and potent daily levels of support and resistance within the meantrades method.

Let's compare several of them and see the results from last week.

Using 10 pip CRB's we can track the progress of each method of Support and Resistance. It's starting to become fairly obvious that no matter how to create your "line in the sand" on your chart, every day the results will vary. Thus, for posterity's sake, let's compare the results. Keep in mind when we look at historical trades, we are very mechanical in our entry, although in real-time you can be less so, taking into account the velocity of the markets (the rate of bar change) to help you decide if one of the primary rules of meantrade could be overlooked for the sake of a great risk to reward setup. For example, perhaps price has already violated the keltner midpoint and you still want to take the reversal from the S/R level. There are so many good trades which don't set up perfectly. This requires a traders vision and resourcefulness and is the reason most great mechanical systems cannot be hardcoded into a black box to ride off into the sunset and make us all millionaires in a month.

Traditional Pivot points (using the daily close at 5pm as the starting point for daily calculation):

11/14-11/19, Keltner touch exit: +30
11/14-11/19, Supertrend exit (note: when using the supertrend exit, we move stops to break even once we touch the opposite keltner band from entry, it creates a high percentage of break even stop outs, but allows for a few really big wins throughout the trading week): +31

Fibonacci Levels based on the first High Low close of the day:
(One of the true benefits of this method of creating intra-day S/R is that it does not have levels after the market breaks out, in a sense, it only looks for reversals within the expected daily range)
11/14-11/19, keltner touch exit: -28
11/14-11/19, supertrend exit: +102

With this method we also have the option of trading with the trend only after price has broken the last fib extension level. As you can see in the screenshot above, this creates some very high probability setups.



ORB Fib levels based on Asian session range:
11/14-11/19, keltner touch exit: +87
11/14-11/19, supertrend exit: +114


Finally, OHLC levels:

11/14-11/19, keltner touch exit: +51
11/14-11/19, supertrend exit: +114

Quite interesting that the OHLC S/R levels performed exactly the same as the ORB Fib levels. Fine with me, it proves Meantrades was ok the way it is originally. I like having that validation. Most people in back-testing circles refer to that mental condition as positive expectancy. With positive expectancy we can take every signal without trepidation.

One more method for creating S/R levels I learned from a guy on elite trader a long time ago who claimed, with about 5 years of trading futures under his belt by this time, that if you adjusted your fib ratios to 3.77, 5.12 and 7.80 instead of the standard, 1.618, 2.618 and 4.236, you would have more accurate targets for the daily range. I tested it a while back and it was true...sometimes!

If we take the opening range and use these ratios, as well as high low and 50% of the ORB and then applied these ratios for last weeks trading this is what happens:

11/14-11/19, keltner touch exit: +113
11/14-11/19, supertrend exit: +206

Looks like a winner.

Keep in mind that this is based on a single brokers data. Your results will certainly vary. In fact, I invite anyone to get in touch with me on yahoo at "mezarashii" and I would be happy to teach you how to set up your charts to get you going on meantrades..., well, I'm not sure what we should call the last method of creating S/R levels. I'm open for suggestions.

So what did I discover here in the end. Almost certainly pivots are a waste of time when trading horizontal support and resistance levels. But then, this I knew for years. I'm not sure why it does not work in forex but I'm assuming it has a lot to do from what time you plot them and the end of trading for one market is not the end for another. Perhaps re-plotting based on the opening price of each market would yield more active S/R lines but at this point I will leave that discovery to someone else. I prefer ratios and you can see why with the results from last week. Imagine getting a yield like that week in and week out. Most of these winning trades came on 2 or 3 days only. The beginning of the week was a real dud and sitting on a negative balance was quite challenging. But with positive expectancy, you can continue to pull the trigger with total confidence. That is what I took from this weekend analysis.