In order to merge the discussion at one place, I am re-posting my views on another powerful setup "
90-10 continuation setup" here.
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90-10 continuation setup is great method and I have seen working in other markets again and again..So I strongly believe that it will work in our market as well.
That means if price closes in top 10% or bottom 10% of the range, then it has high probability that the trend will continue in next day. (Your method will be called as 70-30 continuation from this standard.. but that doesn't matter. Please continue with your approach and once we have some data, we can playground with these numbers and improve the system.. )
Let me explain the
mkt psychology (as I understand) behind this system which makes me feel that it is based on a strong foundation ....
- Days range defines the boundary of battle between bulls and bears. One of those boundary points the battle was won by one or other party. I.e. at Day High - Bears won the battle and pushed the prices down.. And at Day Low - bulls have won the fight and stopped the prices going further down. So if prices close on upper 10% range by end of the day... then it indicates that bulls are strong at the close..
If you notice.. Market close defines the action by Big Players/ DII/ FII /professionals. whereas Mkt open price is impacted more by retail participants. So If professionals have pushed the prices high .. to the top of the range.. Then they are not going to book profit quickly.
Hence retail /novice traders will join them. They will read the paper/watch CNBC in the night and will feel that mkt is going up and will buy tomorrow. Retail traders are the people who buy after price has gone up and sell when price have gone down.
Professionals do the opposite.. And collect money from retail traders.
Logic is same when mkt closes in bottom 10%.
Hope I am making some sense here.. and it gives people some more belief in this method.
Now coming back to price action on next day.. Most likely mkt will open higher (I am looking for paper trade to give us that %age)... but at some stage people will come to take profit. Generally it happens in first 1 hour of trade or on first reversal on following day. People who bought yesterday will book profit (this may not be professionals but swing traders, or overnight traders).. so prices will retrace. If more professionals start buying tomorrow then trend will continue.. but if they decide to watch market before putting further money, then due to lack of participation from them, market may reverse on next day.
So for your strategy.. my suggestion will be (but decision is yours Kamalesh)
1) Decide
Setup criteria like
- look at chart at 3.00 pm / 3.15 pm
- Note days high and low till that time
- see if today is turing out to be a 90% - 10% range.. or not (IMO, 10% from range extreme is good sign to show the strength of bull /bear power that will take push the mkt in the same direction tomorrow... Aim of system should be to take high probability trades.. not more number of trades. One might like to experiment with other % range as well to gain more signals)
- if yes, then go to next step.. else shutdown the machine and do something else..
2)
Entry criteria
- buy at mkt / buy at open of 3.05 pm bar / buy at open of 3.20 pm bar.
- Place stoploss order... - at todays low, low of prev 1hr bar, 50 points below our entry.. or anything else.. But we got to think about the risks first. We can very well play around with these parameter later to improve the system
- Note that this SL will protect us with any sudden last min shock that we might see after out entry. Also we need to take care of putting this SL before mkt open (by After mkt hour order so atleast there is some protection).
3)
Exit rule -
- Stop loss related points that I mentioned above can very well come here as well
- Profit exit - define some rule.. like exit at 11.00 am on next day, or hold it close of next day and sell on open of following day.. In the absence of this rule, it will become difficult to make it a system and improve. You can also very well look at the break of Pivot low on next day.
- Trailing SL rule - optional.. this will help us in upgrading or SLoss to next level.
Also think about what to if mkt opens below our SL and SL is not triggered. Like Saints method which suggests that we wait for few minutes before taking any action.
4) Data /trade Recording - so that u can analyse it later..
- If I were you, I will record, atleast all the points mentioned in above 3 points. Additional points could be the sentiment of the day etc.
For shorts these rules will be more or less same.. with little bit of adjustments..
Hope this helps. Feel free to raise the question in this thread.
Happy Trading..
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Original post (dating back to nov-2008) is here so feel free to refer to that thread as well.
http://www.traderji.com/trading-diary/24946-patterns-technicals-3.html#post248618
