Trading the Ranges

[veluri1967]

SETTING PROFIT TARGETS

1. After the trigger has been hit and you have entered a trade, find the highest high and the lowest low between points A and D.
2. Calculate the difference between these two prices.
3. Calculate 50 percent of the difference. You now have the first profit target (PT1).
4. If you have a long position, add the price of the market on the trigger date to PT1 to get your exact profit target.
5. If you have a short position, subtract the price of the market on the trigger date from PT1 to get your exact profit target.
6. The full profit target (PT2) is the full range of the difference you calculated.
7. Depending on the number of contracts or shares you have entered, the exit strategy will vary.

There are two types of losing tradesthe unavoidable loss and the dumb loss. The unavoidable loss occurs when a method loses money simply because not all methods are right all the time. The dumb loss occurs when you make a mistake in applying the method. The dumb loss is a loss that you made due to your own ignorance, lack of discipline, or lack of organization. The dumb loss is unacceptable. The only way you can learn how and when you took a dumb loss is by looking over your procedures. Here are the specific procedures:

1. Find the BUY/SELL setup.
2. Determine the buy or sell trigger point.
3. Enter the trade once it has triggered.
4. A trigger can only occur at the end of a price bardo not sit and watch the trigger within the time frame of the price barit is a waste of time and will drive you nuts.
5. If you are certain that a trade has triggered at the end of a price bar, then enter on the close of the bar. If you are not certain (i.e., the Momentum value is
too close to the trigger point), then wait for the bar to close and if there is a trigger then enter on the OPEN of the next bar.

The exact procedure from this point forward depends on your position size. There are three levels of position size, each of which depends on your degree of risk tolerance and account size.

CONSERVATIVE STRATEGY

The conservative strategy is simple. For the futures trader, it involves trading in one contract of the given market or 100 shares (round lot) of a stock. The problem with options to apply this strategy is that the price executions are often very poor, liquidity is often what accounts for poor price executions, and they lose time value. Instead, trade this strategy for futures and/or stocks.

The conservative trader has three choices when using this method.
Here are the choices and their pros and cons:

Place a profit taking order at PT1. The good news is that you often make a profit because PT1 is frequently hit. The bad news is that if the market keeps moving in the given direction, you will leave a lot of money on the table. The worse news is that you may make as many as 10 small profits in a row but, you could give it all back plus more on one losing trade. It is not recommended to use this strategy.

When PT1 is hit, change your stop-loss to breakeven (i.e., the price at which you entered). See the seasonal Lessons 2 and 3 or a more thorough description of the breakeven stop. The good news is that you are giving the market plenty of room to reach PT2 or even better levels. The bad news is that you may get stopped out at breakeven many times.

And this will make you mad. Unfortunately, as a one-contract trader, you do not have a choice. If you trade this strategy in stocks, you could split your
100 shares into three units and use the aggressive strategy described below.

The best strategy for conservative traders is to place a stop-loss at breakeven when PT1 is hit and then to use the TS (trailing stop) procedure when PT2 has been hit (see trailing stop procedures below).

MODERATE STRATEGY

This follow-through method requires you to trade in units of two. If you trade futures, then you will trade either 2, 4, 6, 8, . . . contracts. If you trade stocks, then you will trade 200, 400, 600, 800, . . . shares. You will exit your positions as follows:

1. After entering your position, you will place a profit taking order at PT1 to exit ∼HF (high frequency) of your position.
2. When PT1 is hit, you raise your stop-loss breakeven on the remaining ∼HF of your position.
3. When PT2 is hit you will begin to trail a stop at 50 percent.
4. If a trade produces an open profit of twice PT2 implement a 75 percent trailing stop.

AGGRESSIVE STRATEGY
This follow-through method requires you to trade in units of three. If you trade futures youll trade either 3, 6, 9, . . . contracts. If you trade stocks, then you will trade 300, 600, 900, . . . shares. You will exit your positions as follows:

1. After entering your position, you will place a profit-taking order at PT1 on one-third of your position.
2. When PT1 is hit, you will raise your stop-loss breakeven on one-third of your position with a stop-loss that locks in 50 percent of your profit on another one-third of your position.
3. When PT2 is hit you will exit another one-third of your position unless stopped out.
4. When PT2 is hit and you have closed out one-third of your position, you will trail a stop on the remaining one-third of the position.
5. If a trade produces an open profit of twice PT2, implement a 75 percent trailing stop.

The aggressive strategy allows you to take a profit, to trail a stop, and to hold a position for the bigger move should it occur. The moderate strategy also allows for this possibility. The conservative strategy can also allow youto ride a trade past PT1 and PT2; however, you will not be able to enjoy the
benefits of taking some profits. It would be an all or nothing strategy for the conservative trader. As you can imagine, this is anathema to the small
trader who is intent on taking profits as often as possible. If you use the conservative strategy, you fare better in the long run than if you trade for
the bigger moves.

Naturally, the decision is yours. But you substantially increase your odds of success by going after the big moves rather than the small moves.

STOP-LOSSES AND THE DANGER ZONE

Now let us look at the stop-loss. Most traders tell you that your stoploss should be placed at a level that you can afford. This is nonsense. The market does not give a darn about what you can afford to risk. Stop-losses must be dynamic and system related. Your stop-loss should be a function of the market and/or the system.

The initial stop-loss procedure is simple:

1. Stop-loss on long position is based on Momentum. If Momentum closes below point C, then you exit the trade.
2. Stop-loss on short position is based on Momentum. If Momentum closes above point C, then you exit your position.
3. You can get an estimate of what your stop-loss should be initially by working the Momentum formula backwards. In other words, determine what price would be required for point C to be penetrated.
4. You are in the danger zone (i.e., risk of being stopped out at a loss) until PT1 is hit.
5. Another more precise stop loss is to use the PT2 amount as your stoploss.

Happy Trading

 

[veluri1967]

I have scanned the data for BUY setups using this strategy.

The following shares satisfy BUY setup conditions and will wait for trigger to enter the trades. Of course I will post them here if buy triggers.

Central Bank
Mphasis

 

[laxsri]

Excellent write up and well researched, detailed. Kudos.
Can you please share the AFL and can I use it for intraday trading by converting the units from days to minutes?

Suggestions Pls.

 

[joshipr_in]

Thanks a lot for your posts.

 

[joshipr_in]

Hi,
I am novice and would appreciate if you can define these terms too...
Regards,

 

[veluri1967]

Posts 40 and 41 are interrelated. Read them together.

Still exists any doubt, please be specific to querry.

 

[hariompal]

no strategy works in the mkt............

 

[veluri1967]

no strategy works in the mkt............

You are 100% right at the face of it. Let me put the statement like this.

No strategy works in the market 100%. That implies there is risk even if you follow the best of the best strategies.

My plea is that one should have a strategy which favours odds in ones favour.
You should have a set of rules to maintain discipline in the trading coupled with best money management strategies. My attempt here is to give a well defined set of rules to trade to avoid dumb losses.

"The unavoidable loss occurs when a method loses money simply because not all methods are right all the time. The dumb loss occurs when you make a mistake in applying the method."

Happy Trading.

 

[veluri1967]

Many traders confuse setups with triggers. A setup is an indication that a given market is developing a pattern that could or should lead to action. While there are many patterns in the markets, there are only a handful that are reliable. The sad fact is that most traders follow patterns that are not reliable. Ask yourself the following questions about the methods you are currently using:

@ How often has the pattern or method you are using been correct?

@ Is the pattern completely objective and specific, or does it require you to make a judgment call?

@Does the pattern have specific entry and exit rules?

@ Does the pattern or method give you an idea of risk and/or reward?

If your answer to any one of these is no, then you are either losing money with the pattern or if you are making money with it your luck will not last.

The performance statistics of some commonly used trading tools might interest and disappoint you. For example, the daily reversal signal is one of the most widely followed price patterns and it comes in two forms—up and down—defined as follows:

@Daily reversal up. The market drops below the previous daily low and closes above the previous daily close.

@Daily reversal down. The market goes above the previous daily high and closes below the previous daily close.

Never ask what the percentage accuracy of a trading method is. This statistic is meaningless without knowledge of whether the method is profitable! In spite of the poor performance, the accuracy can be impressive and there must be a way to take advantage of the pattern. There is a way, and that way is simple. All we need to do is to add a trigger to the method.

You must rid yourself of common thinking unless you want common results!

To trade profitably you need to use a complete approach. Here are the elements of that approach:

*Specific entry and exit rules.
*100 percent objective follow-through.
*Statistical performance history.
* No interpretation needed.
*Independent of any fundamentals or analysis.
* Capable of being completely computerized and analyzed.

This gives you a complete package that places you way ahead of the vast majority of traders.

 

[veluri1967]

We know the pain of Whipsaws and deafening noise in the markets. Let us understand Whipsaws and Noise in a better way.

WHIPSAWS​

Breakouts occur where an irresistible force meets an immovable object. This odd description illustrates the underlying physics of the bull-bear conflict. No one really knows how much pressure or volume will push price into a profitable trend. Every position carries considerable risk, no matter how perfect the setup or underlying news. And every market action triggers a strong reaction.

Painful whipsaws arise naturally or through conscious manipulation. Because markets move constantly in and out of balance, sudden reversals can occur when conditions trap one side of the action. While everyone knows where key breakout numbers reside, no one can be sure what will happen when price gets there. S/R demands greater volume for breakouts as it builds over time.

Each test triggers more recognition among the crowd and raises the stakes. When price returns for a new test, everyone watches to see what happens.

Successful breakouts generally occur in two phases. First, price thrusts through S/R on increased volume. It expands a few ticks and then pulls back while interest ebbs. A second surge then carries price well past the initial thrust as the trend strengthens into a ramping event. Success requires that both crowd impulses appear and contribute to awakening momentum.

Whipsaws push price backward when breakouts dont generate this second surge efficiently. This failure swing may or may not elicit a false breakout. The pullback forces weak hands to dump positions quickly and can generate a self-fulfilling event with price spiraling into a major reversal. But another breakout surge can appear if exit pressure ebbs quickly. Of course, this produces great frustration for those who just cut their losses.

Markets overshoot natural targets all the time. They crash through S/R, Bollinger Bands, and moving averages with ease. Then, just as participants look elsewhere, the trend reverses and carries price back within expected boundaries. These frustrating whipsaws have become far more common in recent years. The crowds love of technical analysis ensures that they will be part of the charting landscape for many years to come.

Overshoots capitalize on S/R knowledge. Insiders know that trading strategies shift on key price violations, so action pushes through these levels to force volatility and volume. The apparent signal increases momentum in the broken direction and carries price further into the hole. As it reaches the next major barrier, a reversal finally begins that returns price back across the original violation. So how can the swing trader tell if an overshoot signals a real trend change?

Unfortunately, there is no simple answer. An apparent overshoot may reflect a real violation or just a routine shakeout. Use candlestick shadows after the event to interpret overshoots whenever possible and always exercise defensive risk management.

Fibonacci retracements should hold 62% to remain intact. But pullbacks often overshoot all the way to 75% before they reverse. When a market reaches the 62% barrier, stand aside and watch for overshoots. Price may violate the level several times while shaking out the expectant crowd.

Consider a trade after the overshoot ends and momentum starts to build in the opposite direction. Use candlestick shadows to watch Fibonacci support levels. These allow deep violations as long as the bar closes within retracement boundaries.

Markets try to fool swing traders at every turn, but the ability to see past the violation game grows with every successful execution. Insiders cannot repeal the laws of physics, and supply-demand still guides short-term direction most of the time. Estimate the force required to lift price to new highs or sink it below support for every setup. Whipsaws and overshoots can occur only if market interest falls below this important level.

NOISE​

Questionable positions invoke wish fulfillment instead of risk management. Effective strategy must deal with expectations as well as results. Market participants love to see things that arent there, and the daily grind gives them many opportunities. Because ranges persist most of the time, many intermediate highs and lows capture inappropriate attention and lead to bad decisions. Tape reading and Level II compound this problem with their emotional bursts of excitement and pain.

Technical noise increases in shorter time frames and decreases in longer ones. This underlying mechanism explains why many day traders bleed capital when they take too many positions. They misidentify each market wobble as an entry signal rather than waiting for cross-verification to line up. Longer time frames reduce noise because primary market forces still carry weight and guide trend development. When choosing shorter holding periods, always filter trades through broader trends to locate the most favorable setups.

Avoid Fibonacci on short-term charts except in very dynamic trends and highly liquid markets. Five-minute chart retracements work, but only after the swing trader adjusts to considerable noise and whipsaw. Narrow intraday ranges often flatten retracement signals to the point that they become useless. At the least, overlay longer-term trends on intraday charts and ignore retracement levels on less persistent price movement.

First and last hours mark intense periods of price discovery. These volatile phases invoke many imaginary trends, reversals, and shakeouts. Tighten up defensive strategies when executing positions during these times. Consider broad market forces when trying to predict short-term market direction. Step back and look at the longer-term view. Does the current action take place at a major breakout level, or are smaller forces at work? Try to avoid the first and last 15 minutes completely.

The noise level spikes sharply during these intervals and most strategies become pure gambling.