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 stream. Update: 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.