QM Divergence 3-26-08

Our QM trade setup this morning combined divergence of our oscillator with price. This setup was confirmed with a doji candle. Now a lot of people tell me that trading the QM is "risky" because it is a volatile and high priced futures contract. However, risk is all in the eye of the beholder. For a mere $.12 stop I was able to let our profits ride to $1.08. Remember, risk is all what you make it.

Entry 104.38
Stop 104.26
R = 12 ticks
Initial target 104.70 (100% retracement)
R to R ratio: 2.65

Actual exit was at 105.46 for +59 points or +9 R
My exit was an opposing divergence signal in the opposite direction confirmed with a bearish hammer. This is a more aggressive exit than a trailing stop, however, it works well in certain markets. If one wanted to play things more conservatively, they would exit half their position at the 161% retracement level and then wait for an opposing signal to exit (you don't always get one of course).

YM 5 Min Divergence 3/20/08 - Does News Matter?

Our YM trade setup this morning combined divergence of our oscillator with price, a touch of the retracement area and a confirmed bullish harami candle that wasn't too big.

However, most traders wouldn't have taken this trade or would have tried to change something - why? Because this trade was right before a well anticipated Leading Indicators news release and Philly Fed announcement. So how much affect did this have on our trade? Not much...

Entry 12122
Stop 12098
R = 24 ticks
Initial target 12175 (100% retracement)
R to R ratio: 2.2

Actual exit was at 12181 for +59 points or +2.45 R
My exit was the low of the bar entering the 100.8% retracement level. This is a good way to trail your stops on moves that are unlikely to be lasting (such as this one). As it turned out this move had some more juice after this retracement, however, I still believe this was a good exit for this particular setup. You can't milk the market for every tick - get the meat in the middle and keep your R:R in line and life is good.

USDJPY Hidden Divergence 3/19/08 - Not Every Trade is Brilliant

Not every trade is a winner. This is a fact of trading. Most guys selling you software won't mention that reality. Fortunately I'm not selling anything (expect a viewpoint perhaps). What I find amazing is that most of the best traders I know average about a 40% win ratio - yep you hear that right they lose more than they win. And speaking of losses...

Our USDJPY 5 min bar trade setup this morning combined hidden divergence of our oscillator with price, a touch of the 61.8% retracement area and a confirmed bullish harami candle that wasn't too big.

Entry 99.28
Stop 99.06
R = 22 pips
Initial target 99.85 (61% retracement)
R to R ratio: 2.86

Actual exit was at 99.06 for -22 pips or -1R

Remember 1 loss isn't that big a deal (it means absolutely nothing statistically). Heck you can expect 6 or 7 loss strings sometimes - that's trading. But when your targets are at least 2:1 the odds are actually on your side even if you only win less than 50% of the time.

Type rest of the post here

YM 5 Min Bar Divergence 3/17/08

Divergence is one of those things in trading that is like an Art. The difference between a "good" divergence play and a "bad" one requires an eye for two things: 1) coincidence with a good fib placement, 2) a reasonable risk to reward ratio.

Our YM trade setup this morning combined divergence of our oscillator with price, a touch of the 61.8% retracement area and a confirmed bullish doji candle that wasn't too big.

Entry 11819
Stop 11792
R = 22 ticks
Initial target 11867 (61% retracement)
R to R ratio: 2.1

Actual exit was at 11864 for +48 points or +2.04 R
My exit was the low of the bar entering the 61.8% retracement level. This is a good way to trail your stops on moves that are unlikely to be lasting (such as this one). Since this wasn't a major S/R area to bounce from and we had already failed to make a move up this morning this wasn't likely to be a home run. However, this was a solid single and a good use of looking for multiple pieces of market information to confirm a potential entry.

Trade Like a Cheetah

According to Wikipedia, the cheetah (Acinonyx jubatus) is a member of the cat family (Felidae) that is unique for making up in speed and stealth what it lacks in climbing abilities.

What does this have to do with trading? Find out by reading more below...

Cheetahs are outranked by all the other large predators in most of their range. The death rate is very high during the early weeks of a cheetah's life, and up to 90% of the cubs are killed during this time by lions, hyenas or even by eagles. The cheetah has a 50% chance of losing its kill to other predators as well.[6] Cheetahs avoid competition by hunting at different times of the day.

Prey is stalked to within 10 metres (33 ft)-30 metres (98 ft), then chased. This is usually over in less than a minute, and if the cheetah fails to make a catch quickly, it will give up. Running at high speeds puts a great deal of strain on the cheetah's body. When sprinting, the cheetah's body temperature becomes so high that it would be deadly to continue - this is why the cheetah is often seen resting after it has caught its prey.

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The above is taken directly verbatim from Wikipedia. Does any of this sound familiar to you the TRADER?

Here are some points to consider:

1. The Cheetah is smaller and weaker than it's competition. In fact it is smaller and weaker than the prey it hunts.

You the trader have a very small account. You do not have 90 Ph.D financial analysts working for you, a Cray computer, or direct access to a financial exchange. The other "lions" that hunt in your territory are the large institutions, banks, and even larger traders and hedge funds. Given half a chance they will eat you - and not even notice it.

2. The Cheetah is much faster than it's competition and and employs stealth and retreat tactics when necessary.

As a short-term trader you can enter and exit a trade with minimal to no slippage (since you aren't trading 100's of contracts). You can be in and out of your trade in less than 15 seconds. Speed and stealth are your allies.

3. The Cheetah will either quickly catch it's prey or it will break off the chase. It is hunting for the weakest, smallest, most retarded gazelle of the herd. It will not be distracted by other gazelles that happen to cross it's path during the chase. Finally, if the Cheetah cannot catch it's prey (typically in less than 1 minute) then it will break off the chase. After all the Cheetah will die if it continues...

A cunning trader hunts only for the weakest/strongest trades and ignores market times/conditions that they cannot profit from. Lastly, as a trader you retreat quickly if the tides begin to turn against you. After all you're account will DIE if you do not!

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Enough with the hypothetical. How do you actually DO what I've been suggesting here?

First, I would suggest reading this thread that Avery has found and contributed to on Elite Trader - the jjrvat thread.

http://elitetrader.com/vb/showthread.php?s=&threadid=113456&perpage=6&pagenumber=1

Second, I would suggest that you attempt to implement this for yourself on whatever timeframe and instrument that you trade. After all pretty much any trading software is going to have a simple Moving Average in the charting package somewhere. You can use whatever trigger you like with this setup.

Lastly, I would encourage you to think of what I call "Time Stops". I would say that the main reason that most short-term traders get into trouble is that they don't apply their trade to 1 timeframe. For example if you are trading on a 5 minute chart - you should be making money in 5 bars (or 25 minutes) or the trade should be considered no good. If you are trading on a 1 minute bar then your time stop is 5 minutes. You get the idea. Obviously there is nothing magical about 5 bars (it could be 6 or 3 or 17). But you should work with this idea a bit.

Alright Cheetahs - let the good hunt begin!

USDCHF Trade Closed Out - Mixed Action on Consumer Sentiment

Well even though Consumer Sentiment came in stronger than anticipated mixed market action stopped me out of my trailing ATR stop of my short USDCHF. I had already booked 1R in profits (closing half the trade) the other day when prices began to stall.

Trade Result: +2.07 R or +124 pips

P.S. A lot of traders would be totally fuming right now that their stop got taken out (nearly to the pip I might add) and be sitting there blaming the market, blaming their broker, blaming the locals etc. That type of attitude will lead to self destruction in my humble opinion. The market moves the way it moves. You either make money or you don't. Don't get so caught up in each particular trade that your ego is invested as well as your dollars.

The bottom line in this game is NOT to be RIGHT but to MAKE MONEY.

Driving the Range with the Russell

Some mornings are just setup for playing the range and this morning was one of those on the Russell. A nice tight range with divergence setups usually equals some good opportunities.

Trade setup this morning was divergence of the oscillator with price and our 61% fib retracement.

Price setup a positive spinning top at the first sign of divergence (see first arrow), however, it failed to follow through on the next bar (hence the 1st setup never triggered). The second setup was a Harami bar (see next arrow) which confirmed one bar later that price was turning around.

Entry 654.90
Stop 654.40
R = 0.5 ticks
Initial target 658.70 (61% retracement)
R to R ratio: 7.6

Actual exit was at 660.8 for +5.9 points or 11.8 R
So why didn't I exit at the 61% retrace? Because price moved right through it without hesitation and unfortunately I was a bit slow to hit the 100% retrace at 661.7.

USDCHF Hidden Divergence on the 4 hour

Last night we had a nice continuation signal on the 4 hour USDCHF.

Initial Risk = 60 pips
Initial Projected Target = 132 pips

Risk to Reward = 2.2
Result:
Net profit: Still short but have moved stop to breakeven

EURUSD ABC Pattern Followup 3/11/08

This morning I pointed out an ABC pattern that was forming a few minutes before 10 a.m. This trade triggered several minutes later at the 100% retracement level, triggering a short at 1.5327 with a stop of 1.5341 R=14 pips and was stopped out at 10:00 a.m. Several minutes later a setup at the 161% retracement level triggered a short at 1.5336 stop at 1.5350 R=14 pips with the first target at 1.5295 projected risk to reward ratio of 2.7.

Initial Risk = 14 pips
Initial Projected Target = 39 pips

Risk to Reward = 2.7
Result:
Net profit: -14 pips or -1R 1st trade
+5.8 pips or 0.4R 2nd trade

-8.2 pips or -0.6R


Type rest of the post here

EURUSD ABC Pattern Potential Setup 3/11/08

The ABC pattern is a consolidation pattern that is the practical form of an Elliot Wave analysis. On the EURUSD this morning we are showing several divergences on the longer time frames (like the 4 hour) indicating that the long trend against the USD may be taking a break to retrace.


The 5 min time frame is already showing a minor downtrend (really still somewhat sideways), however, there is an ABC pattern forming and if we get a reversal candle around the 161% retracement fib we will go short and see if we can get a short break in the EURUSD.

ER2 Divergence 3/10/08

This morning another divergence play was spotted at about 9:55 and triggered a few minutes later.

Initial Risk = 1 point
Initial Projected Target = 4 points

Risk to Reward = 4
Result:
Net profit: +4 points or 4R



At 9:55 our MACD oscillator indicated a divergence with a lower high, however price indicated a higher high. Using Fib's the FE 61% was identified as being the likely turn around area. This was triggered by the doji bar. This setup was confirmed on the same bar as it was a bearish doji candle. Entry was set to 1 tick below this candle at 653.0. Stop was the high of the confirmation candle at 654.0 for 1 point. Initial projected Fib target was at 649.1 for 4 points. This gave the trade a risk to reward ratio of 4.

After approximately 1 hour the initial target was met. Since this move was not part of an overall trend profit was taken at the Fib projected target.

Net profit: +4 points or 4R

USDJPY Divergence 3/10/08

This morning a classic divergence play was spotted at about 6:20 and triggered at 6:50 a.m. my time (PST).

Initial Risk = 9 pips
Initial Projected Target = 42 pips

Risk to Reward = 4.67
Result:
Net profit: +32 pips or 3.5R

At 6:20 our Moving Average oscillator indicated a divergence with a higher high, however price indicated a lower high. Using Fib's the FE 100% was identified as being the likely turn around area. This was triggered by the bar shown in the blue box indicating a potential setup. This setup was confirmed 2 bars later with a bearish engulfment candle. Entry was set to 1 pip below this candle at 102.25. Stop was the high of the confirmation candle at 102.34 for 9 pips. Initial projected Fib target was at 101.83 for 42 pips. This gave the trade a risk to reward ratio of 4.67.

After 8 candles the initial target was met. Since this move was part of the overall macro downtrend on the 30M bar (and above) we set our targets with the ATR 2.5 trailing stop.

Trailing stop is triggered at 101.93.

Net profit: +32 pips or 3.5R

Back in Action

I've decided it's time to revive this blog since I need a place to track my trades. Just so everyone knows I will be utilizing a different methodology than what I tracked here before. In case you're curious the old methodology works just fine still, although I've been looking at a more discretionary setup across multiple markets (eminis, Forex etc.) as this seems to be far out performing my more strictly mechanical methodologies. Never fear, however, I haven't take a nose dive completely off into la-la land of astral charting, moon phases and psychic intuition...

Recently I've been inspired by a number of things I've read (in the past of course) such as how Paul Tudor Jones describes his trading in Market Wizards (lots of little stabs at the market looking for the big payoff), Van Tharp (not some of his flaky ideas like entries don't matter but more looking at large R payoffs versus little R risk), and lastly Avery aka the RumpledOne who approaches each trade as a scalp but is willing to ride his scalps if the market is poised to do so.

Of course the big question that every trader eventually asks is "how do we know when we are part of a 'big' move and not just a reaction". That question has been on my mind for quite some time now and the light started to go on for me after reading a thread on Elite Trader (yes Alice there are a couple of real traders at Elite Trader) called Daytrading 2.0

For those of you who want the Reader's Digest version, let me sum it up by saying that you need to have an idea of what the macro (4x-6x larger than your current time frame) trend is and then look for higher highs, higher lows (for bullish conditions) and the opposite for bearish conditions.

The other discretionary setup I've been looking at recently is a divergence setup with a Fibonacci reversal target and a Japanese candlestick confirmation.

In case any of that sounds like Japanese to you, I'll be posting some trades in the next few days with these setups an an explanation of the setup logic.

Lord Tedders