Goals for the coming year

With a new year comes renewed enthusiasm for my trading. I anticipate this will be my breakout year where I finally break the nut which has proved so elusive: consistent trading profits.

My first primary goal is consistency. I intend to trade 2 systems on the forex and spot gold markets.

The first system is meantrades classic. Depending on the prior months results I will either use 10 range or 20 range bars to maximize profitability.

The second system is a momentum based system which does not use support and resistance levels. A pure trend trade system which will test my patience as well as my beliefs about the forex market.

Another goal very much on my mind is the use of stops. Last year I discovered that the best thing about constant range bars was not their clarity of trend but their ability to reduce stops to the smallest level possible (but not any smaller). Thus my goal is to apply stops on a absolute dogmatic level.

In the past few months I have discoevred the world of online poker and have experienced some modest success. The exercise of playing another game of skill with money has helped me realize just how essential stops are in the longevity of a trading system. For years I struggled with this. Meantrades did not employ price stops and although the returns were outstanding, in other periods the draw downs were just unbearable.

On the mental side of things my goal is to not respond so emotionally to situations I find uncomfortable. Just try and take things in stride. I'm 36 years old, it's time to find some peace of mind in my life experiences. Some things in life are just unpleasant. Better to face them head on than the rant and rave about how distasteful they are.

Hope the New Year is a good one for you too.

Good trading

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.

Meantrades OHLC a deeper understanding...

My objective with altering the Support and Resistance levels to OHLC with Meantrades is to refine an already useful concept. The less trade points we have an opportunity to trade, the more likely we are to execute according to plan. Of course the assumed premise is that the system has a positive expectancy.

Meantrades, regardless of how the support and resistance lines are formed, no matter what the time frame, has a positive expectancy. The only question in my mind has always been drawdowns. OHLC seems to create a more significant way to enter the market and reduce risk.

Yesterday there was 3 trades in 4 markets I follow. EURUSD went for a loss, Oil had a break even stop, as did YM index. With intervention both Oil went for 40 points as did the YM. The EURUSD loss was -37 pips. In the previous stop method of meantrades, the EURUSD trade would still be short and sitting on a drawdown of about 150 pips this morning. Nothing to panic about, but with volatility at an all time high, there will come a day in the not too distant future where the maximum negative excursion will be so large, no account size can handle it. I hate hard stops, but I hate margin calls even more.

OHLC will always be used with modified price bars. Originally I saw the value of constant range bars with their ability to remain in trends longer. These days, it is more about reducing risk. If you were to compare a stop loss on a time based price candle, there is no way to know truly how large it will get before its close. Fast markets create larger candles. With constant range bars, fast candles are always the same size. Compare these two losing trades to see what I mean:

I am using the 15 minute time frame in comparison. There is no exact way to compare the two charts. In my eyes 15 minutes seems to be the smallest time frame you can trade without seeing false signals all over the place. But then, some people see the market crystal clear on 5 minute charts. It doesn't really matter to me anymore, CRBs have eliminated any lack of clarity for me in the markets.

Here we can see with CRBs we reduced the stop loss not only in amount of pips but we were able to see that the market had violated its stop level much earlier than with the conventional time based chart.




To recap what Meantrades actually comprises:

• Keltner bands: 

We must have a Keltner band touch of the outer band in the opposite direction of the trend. We don't want to be trading support and resistance without a healthy amount of momentum in either direction. If a market is simply climbing the wall of worry, there is no place to be looking for reversals. It is much better to be with the trend at that point as it will eventually climax and present a better reversal trade opportunity at some later point.

2 possible Keltner band setups:

1. Market has a strong breakout outside the Keltner bands and then reverses.

2. Market trades outside the Keltner but has no thrust higher. This is a slightly lower percentage scenario than #1 but nonetheless still a statistically significant trade setup. Often this trade can turn into a creeping market where it never has any thrust higher but still takes out stops.