Jan 172011

Last week was an interesting week.  I’ve been experimenting with different approaches and I’m seeing what works and what doesn’t work.

One idea that I’ve been trying over the past week or so is to simplify.  Just take trades at CLVNs and hope for a move back to the LVN.  No scaling out.  Target or stop.  It didn’t work so well for me and I realized that by Wednesday and traded mostly sim on Thursday & Friday.

On Wednesday I made a mistake on a stoxx trade.  I had several levels grouped together and I went short, it went to the next level and I saw sellers coming in so I went short again and planned to scratch the first one.  It popped up to a third level and I did the same and that was the day the stoxx rocketed up into orbit.  I took a big stop on that one and took a big hit.  And that’s another reason I went to sim for Thursday & Friday.

So Friday I had an epiphany.  I was very patient on Friday and then I saw professionals selling the market around 1283 so I went short.  I ended up taking 1 pt as I saw buyers coming in.  I was happy to have my point, it was the only real money trade I took on Friday.  And then FT71 was saying how 85.50 was likely and I didn’t understand.  I was just shorting 83 and pre-market we had broken below support at 76-79 so I didn’t see why 85.50 was likely.

We had an interesting dialog where he asked me what I would do if I was holding inventory of an imaginary object.  It was a very interesting exchange and I really enjoyed it.  Frankly I’m very appreciative of the fact that a pro trader would put up with my silly questions and provoke me to think for myself.  I learned a lot from that exchange.  I don’t know how to to search Twitter archives but if you’re interested I’m sure you can find it on his Twitter streamUpdate: Markus posted it to the forums here.

This weekend we were very busy and I only had a few hours to study my charts.  I started going over past days, day-by-day and seeing how the market reacts to composite levels.  I determined that just blindly fading these levels isn’t going to work for me.  (If anyone is having success or failure doing this please let me know).  What I realized is that one really needs to understand the auction process as it unfolds in real time.

On Friday I saw a break of 76-79 as a sign of weakness and I was expecting 71.  To be honest I had a short swing trade position on and I covered 1/2 there and was holding the other half for 71 & lower.  I was happy I got half scaled out and things were going my way.

I can’t speak for FT71 and say what he thought, I don’t want to put words in his mouth.  So let me say that after studying this in hindsight and after our exchange together, I saw that 74, which was the top of the previous trading range, held and that buyers came in and lifted the price all the way to 80.  From this point of view 74 held and price was going up.  85.50 did seem likely.

That’s two different views.  One could have made a lot of money and one made $50.   I was trading against the rotation.  And this is probably why my expectancy has been hovering around 2 ticks over the past few months.  I’m not seeing the big moves.

Now here’s the challenge:  Seeing both points of view in real time.  Dalton talks about the “Destination Trade”.  When one side of a trading range is tested and rejected, the destination is the other side.  This, in FT71 speak, is like saying if  a CLVN holds then the CLVN on the opposite side will be tested.

Now this doesn’t always work, sometimes price will stop in the middle of the trading range (or at the CHVN).  But we can at least have a directional bias and avoid trading against the rotation.

This is also why scaling out is so important.  This past week I tried entering at CLVN and targetting CHVN.  Many times price would go 6-8 ticks my way and never make it to CHVN.  or make it to CHVN and then go all the way to the destination (without me).  We can’t know what will happen.  We can say one outcome is more likely than another, but profiting from it would require staying in the trade until the destination while at the same time not losing money when it doesn’t reach the destination.

This is where the math comes in.  One could have 4 tick stop and if the destination is 24 ticks that’s a 1:6 ratio.  One would have to be right a small percent of the time.  But that conflicts with the normal human tendancy to want to be right.  Losing 80% of trades is not easy, even if it’s profitable.

Scaling out may not be mathematically optimal in hindsight, but real time we don’t know the exact probabilities so scaling out let’s us take more guesses.  It can provide psychological comfort.

November was my best month.   I was trading 2 contracts and scaling out.  I forget when I did it but I went to trading one and my trading hasn’t been doing as well.

So now I’m putting two things together:  scaling out & destination trade.  The problem is which destination do I choose?  The closer the destination (target) the more likely I will get it.  The further away the less likely but the bigger the payoff.

Here is an example from a bund trade this morning.  I came up with 5 destinations.  I regrettably took my first target at 3 ticks, which left me only one contract left.  So it went to the next destination.  Now price could have turned around and dropped down and I would have been happy to have gotten all of this move up.  But price is continuing up (as you can see in the chart) 10 ticks past my entry.  If I had a 3rd contract I could have gotten those 10 ticks.

Trading with 2 contracts is very difficult.  If you see weakness and take one off, then you’ve reduced your risk but also limited your upside as well.  Three contracts would be much better.  But you better be profitable because stop outs with 3 contracts really hurts.  I identified 5 destinations plus the one I took at 3 ticks that makes 6.  You can see why FT71 scales out in 1/8 increments.

One has to be careful trying to trade like him with only 2 contracts.  And so now I’m debating if I should trade 2 or 3.  FT71 once recommended to trade 3 minimum.  I think that’s what I’ll do.  But I’m going to do it on sim to build confidence.  As I’m writing this the bund is now almost 20 ticks past my last target and 124.87 is looking very likely.

This is a complete change from some thinking I’ve had in the past.  The whole “Don Miller discussion” made a great case for a very small edge, even a few ticks.  But I’ve been studying Dalton and I see a lot of similarities between Dalton & FT71.  So another experiment begins.

One final thing, earlier I said one has to truly understand the auction process to be able to come up with these, as Dalton says, “asymmetric opportunities”.   I realized that my trading two markets has only hindered my ability to do this.  So back to one market.

A long post, but this really sums up my thinking & experimentation over the past month. Every time I try a new idea on sim it’s a learning experience.  Even if what I try turns out to not work, it’s still good experience.

Almost forgot, here’s my results from last week.  This is all real money day trading, sim & swing trading is not included.

Expectancy was actually up for ES & Bund.  My Stoxx mistake really hurt though.  Without it, I would have had a good week.

  7 Responses to “The auction, destination trade, & scaling out”

  1. I will put your Auction discussion w FT on the Forum.

  2. I am also trading 2cts and many times have same difficulties as you mention. U take 3, it goes to 12….u wait for 12, it reverses and stop u….so I guess u just have to decide if u want to go for bigger targets and remain in the trade with the risk to be taken out with nothing or very small gain, or go for the bigger moves.
    Small Targets can be played with SIZE in the future, but u need to reach consistency first.
    Big Targets require more patience and experience more losses, but why do not go for them if MANY times we get the perfect entry and catch a BIG move?
    It’s kind of a dilemma we need to internally solve…I thing it has lot to do with our personality.
    With 2cs / 3cs I would play targets in phases……scalper, trader , runner (u decide w/2cts if trader / runner) but remain to it, because we tend to “decide” to get out when we should not, and stay when we should get out.
    I always look at my trade location within the type of day we are in….if my entry seems to be near the LOD / HOD, I guess I can go for a more extended move….I feel “safe” being stopped out would change the complete picture…..If I am trading in the middle of the range instead, even if in the direction of the main trend or after a strong DB/DT, I do not feel sooo confort as a strong pullback could take me out, even if I am correct in the direction.
    And regarding targets….I use a fixed target for T2 (like 4/5 pts on ES) but will start looking for Price Action to tell me when to get out….it could be Climax, DT at a level, a pivot Low being taken with Volumen, etc……
    I started documenting my trades as u in terms of “Entry in Plan” and today I checked that last two weeks I could have made +$700 JUST but not taking the “Entry NOT in Plan” !!!

  3. Great post. I see a lot of similarities between your conclusions and mine. I’ve recently gone from watching five markets to only watching one, ES. Identifying the destination trade has also been crucial in my progress. Here are my trades from last week. I admittedly took one trade last week (3 contracts) that I knew I shouldn’t have so I’m still working on that monkey (as FT71 likes to put it). And at least once I week I accidentally enter and then quickly exit a trade due to clumsiness more than anything.

    In weeks past I would rarely hold for 2-4 point winners and last week I had a few of them despite not trading friday so the destination trade is really helping.

    btw, and this is just my opinion, but i think that being able to read the auction is a primary skill and that the number of contracts one trades is a matter of optimization. i think one can be profitable trading any number of contracts if the understanding is there. all that to say i think it’s great we’re really digging into the learning the auction concepts.

  4. Deltason – 26 pts in 4 days is outstanding. I hope you can continue this week. I love it.

    Gonzo – thanks for sharing.

    Today I did 2 contracts in the morning and 3 in the afternoon and worked well. I think one can be profitable with just 1 but psychologically it’s easier at least for me, to bank some profits. it lets me be patient.

  5. Dear Author of this blog. For your own good i would strongly suggest you look in the short term range like 30 sec. The reason is very straight. When market maker jerk the price up -; his move takes a secon or two. But he does reveal preparation steps in 30 sec candles footprint. I can givr you a lot of screensots of my profitable trades. Generally the big profile and value area – are the parts of intagraled picture – in mathematical terms – SUM OF VALUES OVER TIME. People use to get it. But behavior on footprint candle over a bunch ov intervals in short term 30 sec candles shows DIFFERENTIAL behavior in math term. It gives velocity and acceleration.
    So the typical behavior in 30 sec candles before the rally up
    1. Price will be dropping to the point when 2 candles has no more than 10 sold contracts all together at lowest level.
    2after that price wil go up – but will stay below the point where it dropped from. And market makers will be buying. In footprint you will see increasing numbers of contracts bought with no move of price up or with small move.
    3. You better entry long at this point . Vause market maker will shoot price up – as he decided he accumulated enough. And that jump will be at least 10 ticks.
    4. Moreover. He will do it thre times . Every time with easing price down to fake the turm down.
    5. So you got 3 move each average 10 ticks. So 30 ticks.
    Say 10 contracts.
    6. Bottom line. Attempting to nail long runs with few contracts for many ticks is OLD KINDERGARDEN. FORGET ABOUT IT FOREVER !!!!! Today market makers give you multiple opportunities to nail 10 tick s . BUT YOUR TIME AND DIRECTION SHOULD BE PERFECT.

    Perfect time for entry and direction is given ONLY by short 30 sec footprints. Some peopple do 10 sec. Same story.

    It makes my heart sad to see that people are still way late to grasp this. And they dont know where to look cause of a crowd of fake gurus.

  6. That was last week OIL . The profits and low drawdiwn said it all.

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