Sep 012011

We had a great time on vacation.  This is one of my favorite photos of me & my little girls with the beautiful blue beach of Nice in the background:

I haven’t seen turquoise water like since visiting tropical islands.  We’re lucky to have such a beautiful place within a day’s drive.

So vacation is a time to step back and rethink things over.  Life, hobbies, family, work, everything.  It is an opportunity to realize that maybe we’ve lost track of things that are important to us (family, regular exercise, etc.) due to being caught up in the daily grind.  It’s also a chance to challenge existing beliefs and consider new ones.

One of the things I’ve been observing is the value area trend.  However today I observed that sometimes the day’s trend can be even more powerful than the VA trend.  The VA trend is up over the past few days and I was not expecting a trend day down:


One possible explanation is the IMF released some bad news about European banks and the market sold off.  I tried several longs and managed to get a few pts profit out of them but in hindsight I was clearly on the wrong side.   One must be open to anything.

This makes me question the use of the VA trend.  If anything can happen today, does that VA trend introduce an unnecessary bias?  Should I just focus on today’s trend?  I think one must use both but overall I think the current day’s trend should have priority.

In this case I was getting long to buy pullbacks into yesterday’s range.  But I was also fading a trend move down.  These two are not compatible and I shouldn’t have taken the long trades.  I think one should not fade the day’s direction until we see some balance and rotations.  This is all a work in progress but the goal is to reduce fading as much as possible.

BTW, I’m writing about the European morning session which I consider a separate session from the ES RTH.  The reason is this is the regular session for Stoxx.  So it’s very possible that ES RTH opens with a gap down and when the VA trend is up that would be a good buying opportunity.  So I will be looking for a long at the open unless I see strong selling.

One possible set of rules:

  • VA Trend up & Day Trend up : Trade long only
  • VA Trend up & Day Trend down : Wait for higher lows and trade long
  • VA Trend down & Day Trend down : Trade short
  • VA Trend down & Day Trend up : Wait for lower highs and trade short

I didn’t say how to define the day trend and that’s simple, if the market makes a new high it’s up and if it makes a new low it’s down.

This could lower the amount of trades drastically but could also make more money overall by reducing risk, tightening stops, and getting bigger winners.  This is something I am continuing to watch.  I think if one is profitable and nimble, one can make money in any condition (as I made money trading long today in a trend day down).  But I think I could make even more if I avoided some of these conditions.

In both Al Brooks’ & Peter Brandt’s books both state that they would make more money if they avoided certain types of trades.  I find that fascinating.  They know they could do better but they can’t resist taking the less optimal trades.  That’s human nature.  And if these pro’s have this “issue” then it’s completely normal for the rest of us to have it as well.

One thing I can do is trade larger size when the above criteria are met and trade smaller size when they’re not.  I’ve been wanting to increase my size and this seems like a good way to do it.  This will compensate for the higher risk of trading without trend support.  That’s kind of what I did today as I entered with 1/2 position and only entered the 2nd half when I gained confidence of the setup.

One more comment:  Al Brooks says in his book that trading counter-trend will result in missing “with trend” trades.  That’s exactly what happened to me today.  I just exited a long and didn’t click the DOM fast enough to put my short order.  It didn’t get filled and I missed it.  That short setup went 10+ pts.

I’m just brainstorming here and I welcome any oposing views and/or feedback.


  2 Responses to “Ideas for trend trading rules”

  1. Nice pic and good points, Michael!
    My experience has been that the time of the day is also relevant when fading. Best time to fade the FESX for me is the first half hour after cash open (9.00 – 9.30) and then sometimes between 11.30-12.00 after it has made the morning range and tested an important area wide enough above/below the VWAP.
    I have also discovered that I have to read the T&S in order to be nimble enough to be profitable. And that means no browsing or other distractions – only classical music and here and then a look on the street below. That’s hard but I take a long break after the first 3 hours and trade only 2 hours in the afternoon.


  2. Markus – Good points on time of day. What you say makes sense as the first 30min often set the direction for the morning and then by lunch time we get a bit of a reversal.

    I also agree on distractions. I made my charts really big so that they take up all my screen space and this way the only way to use a browser is to bring it to the front so it’s a conscious thing that I know I’m watching my browser instead of my charts. Sounds simple but before I had a browser up all the time and it was distracting. So now I only look at it when while waiting for price to go to my zones.

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