In A look back on my journey – Part 3 I looked at my issues and how they were visible in my trading results. This prompted me to keep a journal. The journal is really simple, for each trade I just write my thoughts while in the trade. My reasons for entering, for taking profit, for trailing a stop, etc. I used to write the results but that became tedious and redundant so now I focus on the thoughts. Lately I’ve been using Snag-It & Jing to make screenshots for the journal to make reviewing it easier.
I’m now going to share a few excepts from the journal. This is the real text mostly unedited (I did remove a few proprietary and/or personal items).
I went through and marked in bold the items that I thought were of particular interest to my trading plan. Here are my comments:
- #2 – I didn’t want to wait for a breakout as in the plan
- #9 – If I had waited, the breakout would have been false
- #10 – This one is key. I was watching my Tradestation charts and didn’t notice an important level on other charts, which leads to #11. This is an important item because I later discovered that the market & volume profile charts were actually more important than the cycle charts on Tradestation.
- #1 – I realize that I had missed a good trade because there was no cycle setup. Keep in mind that although I had just started journaling, I constantly have thoughts & ideas. The journaling just brought them out. This wasn’t the first time I had this concern.
- #2 – I took a breakout from the cycle charts but it happened to be at a high volume node (HVN). The problem with a HVN is can act as support or resistance. In this case the trade reversed and I stopped out. I studied this issue further and have termed it a “cycle ambush”. More on this later.
- #3 – This has been an ongoing struggle for me. I’d enter a trade when the stars cycles align. Then once in I’m the trade the cycles will conflict. This really gets confusing. Sometimes I exit and price goes on. Sometimes I stay in and price reverses. With 3 timeframes it’s very common that one of the three conflicts with the other two.
- #3 – Again, the cycle setup is good but it’s not at a good place, too close to potential support.
- #5 – I write what I’ve been thinking for a while now
- #6 – I can’t keep up with so many charts.
Let’s look at the “ambush” problem. I no longer have Bund data for Tradestation so I can’t pull up a chart for that day, but here is an example with ES:
I studied this ambush problem quite hard over the weekend. The sine waves are analyzing price. You can think of a simplified version that uses two de-trended moving averages. When the market is trending up the two moving averages will not cross. When the market then stops trending, they’ll cross. A lower low confirms the cross.
So you can see the sine waves are just responding to price. And that’s the problem. How can we trade price by looking at something responding to price? Furthermore something that is comparing the current price to the last x periods?
What makes the market reverse? Only one thing can make the market reverse and that’s a change in the order flow. Specifically, buyers becoming more willing to pay higher prices than sellers are willing to sell for lower prices. When this happens, the market will reverse and the sine wave has no way to deal with that.
This was a very profound moment in my journey. I’d been aware of order flow and all that, but I tried to fit it into my only frame of reference which was the cycle charts. What I needed to do was put the cycle charts into an order flow frame of reference. And I decided that if I could truly understand order flow then I didn’t need the cycles anyway.
And so that weekend I reviewed my journal, my trades, and everything I knew about the market and I decided that the sine waves were holding me back . They kept me from entering when intuition told me the market was going down, and they made me lazy which led to me being ambushed. And most of all they confused me as one was always contradicting the others.
I realize that showing a few excerpts from 2 days of my journal might give the impression that I over-reacted. So I want to stress the fact that these ideas & concerns were not new but had been in my mind for a while. Journaling got them on paper where I could see them and go over them and the charts.
What I found was that the market will turn based on these changes in the order flow. Usually these changes happen at support & resistance but they can happen anywhere. A lot of the time the sine waves will detect the loss in momentum leading up to these areas and “get it right”. And we think “Wow, the sine wave called that bottom perfectly”. But other times, it gets ambushed and due to cognitive dissonance we can brush those times aside and forget about them. That’s what I had done for 1.5 years, instead of asking why those ambushes happen.
That weekend I decided to remove the cycle charts. I would trade off a single timeframe (the “middle” timeframe of my cycle charts, which is 1500 tick chart for ES). I kept Better Momentum & the pro bars and I would base my trading more on the order flow and the support & resistance levels. I did that over the next two weeks until the end of the month.
My profit factor for the first half of September, using the cycles & multiple time frames, was 1.24. My profit factor for the second half of September, without the cycles and trading a single time frame, was 11.34. And I was shocked at the difference. I had never had a profit factor so high.
However I still had the issues I wrote about in Part 2 (a bit out of sequence) which brings me up to the present.
Continued in A look back on my journey – Part 5 – Market Profile