Averaging down a losing position in a mean reverting situation

My 2¢: Let’s say that you have figured that the market is just about to bottom out and is due for a substantial rise. You have two choices:

1) Wait until the action of the market confirms your opinion and in doing so sacrificing a few points profit as insurance.

2) Enter slightly early with a smaller position than your usual stake allowing you room for error and the ability to averaging in.

This is absolutely not the advice I would give to newbie’s but it looks like you have a bit of a clue. When it comes to trading the ES I am definitely in the 1st choice camp. Naturally this works the same for tops as it does for bottoms. The reason so many lose money in trading is they hate to see the market move away from them and want to 'jump on board'. I now gladly give up 5 points 'profit' if I am sure I can get 1 point out of a move.

Wot he said...

Trying to catch reversals is a skill you don't really need. Sure - learn how they form, learn the sort of areas the market regularly bounces off.

Then catch the retracement once you are sure you've seen the makings of a reversal. It's much easier and reliable than trying to get the exact spot.
 
I assumed a range extension up until the buyers who had been loitering at 55.75 the day before turned up again. This led me to believe that sellers were active at 59.75/60.25 and the buyers were trying to hold up from 55.75.

Hence I then concluded this would now be Mean Reverting.

I know what you are trying to say Shake but I'll drop a view with a heartbeat on intraday. I also agree that trading like this will eventually conclude with like I said, 2 weeks of work down the toilet.

What was the actual premise for your first trade?

It really does look like "oooh - the market is moving down - oooh - it's moving more - I'm gonna miss it...."

Which of course is my patented formula for selling bottoms & buying tops.

And where is the mean you thought it was going to revert to? You sold the bottom, surely the mean is now in the middle?

Not taking the **** - serious questions - you know how I am with phrasing things tho...
 
Yesterday I perceived there to be a high probability that taking the increased risk would pay off. Today I'm questioning the viability of it as a longer term mechanism which is contextually sensitive to mean reverting conditions and I'm interested in the variety of responses.

If you want to try this a regular strategy then cut your risk at least in half as part of your normal trading. Your hunch paid off but where would you be if it didn't? Keeping a log as CV suggested would be a good thing too.

Peter
 
What was the actual premise for your first trade?

It really does look like "oooh - the market is moving down - oooh - it's moving more - I'm gonna miss it...."

Which of course is my patented formula for selling bottoms & buying tops.

And where is the mean you thought it was going to revert to? You sold the bottom, surely the mean is now in the middle?

Not taking the **** - serious questions - you know how I am with phrasing things tho...

Range extension below 55.75 where it had been propped up the day before with another 54.75 VPOC to be taken out in the process. I had been watching it rotate and decided it would go south.

The VPOC was up at 59 or so at that point and had assumed at that point that sellers had cut off buyers because of 2 attempts to breach this. This was all within the first 34mins of trading.

I assumed after the failure of the range extension downwards that with sellers holding 59/60 and buyers holding 55/56 that it would mean revert.
 
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Do you think that was luck that an OTF didn't come in after the first hour and then take me to the cleaners so to speak?

Don't you quote market profile theory at me!!! ;)

You were lucky volumes were low and that in turn caused us to have a morning of chop. You do not need OTF players to come in for a 10 point move on the ES - it is the norm, although in 2012 volatility is quite low. Absolutely nothing exceptional would have been needed for that market to run up 10-12 points. Nothing at all. Not OTFs, just regular day players cause intraday swings of that magnitude all the time.

You were also lucky that there wasn't some a$$hole politician saying something about Greece at the time you were in that trade. There is a huge increase of news batting your trades offside right now and that will continue to be the case until this Greek debacle is behind us.
 
You were also lucky that there wasn't some a$$hole politician saying something about Greece at the time you were in that trade. There is a huge increase of news batting your trades offside right now and that will continue to be the case until this Greek debacle is behind us.

ughhh...that's been causing more grief than I even care to admit (n)

Peter
 
Range extension below 55.75 where it had been propped up the day before with another 54.75 VPOC to be taken out in the process. I had been watching it rotate and decided it would go south.

The VPOC was up at 59 or so at that point and had assumed at that point that sellers had cut off buyers because of 2 attempts to breach this. This was all within the first 34mins of trading.

I assumed after the failure of it extended range downwards that with sellers holding 59/60 and buyers holding 55/56 that it would mean revert.

Look - you had a high volume selling climax there and you sold the end of it.

You have lower than average volume on the day and lower volatility overall since 2012. Playing breakouts is risky at best but when the volume is low and when you have just seen a volume spike to the downside, it's a very low probability trade.

How much further were you expecting that move down to go before the market got temporarily off balance and a pullback occured?
 
ughhh...that's been causing more grief than I even care to admit (n)

Peter

Yup - 23 ticks of slippage on the Bund was mine. That's not a 23 tick stop - it's 23 ticks slippage past my stop.

Angela Merkel was the culprit.

Eurex sent me a letter of thanks for that one.
 
You and I know that volumes and volatility are really (strangely) low at the moment on ES and it's been the case since the rally started in mid-december, even with Merkel this, Barosso that, creating trading opportunities for news traders. 10pt IB's are an exception at the moment and with only 304k showing on CBAVOL at the open and no news, it was always going to look like a quiet day.

Anyway, I've been a very naughty boy and I do concur that I have been lucky, perhaps, maybe ;)
 
Look - you had a high volume selling climax there and you sold the end of it.

You have lower than average volume on the day and lower volatility overall since 2012. Playing breakouts is risky at best but when the volume is low and when you have just seen a volume spike to the downside, it's a very low probability trade.

How much further were you expecting that move down to go before the market got temporarily off balance and a pullback occured?

54.75 was where I was expecting it to go to. You sound like my mum now :LOL:
 
:LOL: bet you didn't expect to be castigated for a dumb trade in the first place.

I'm not proud Jon, I've made lots of them and frankly have no shame left. :p

To be fair, it was poor trade selection on the first trade that created the situation in the first place so to point at the root cause isn't awfully surprising.
 

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54.75 was where I was expecting it to go to. You sound like my mum now :LOL:

OK - then as your mother...

The market profile gives you the overall structure - it's your 'higher timeframe' so to speak.

Still - you need to get in at a good spot. To an extent, the 'local' action has to be given a fair amount of weight.

I do something similar - I have a way I define the market overall, to set my bias but then I have to wait for a good spot to enter so that I don't get offside too much. This is of course quite often at the expense of getting in...

...which is why I have a huge arsenal of boredom trades...
 
I was reading your thread about using T&S/DOM to gauge entry stuff and was checking out your trades.

In some ways we do actually trade quite similarly but with one difference - I am more happy to trade confidence for location (the thing NT was talking about).

Due to this, I tend to preference the following trades, especially early in the session:

1) Hit the reversal of the opening swing (which I suspect you don't trade)

2) Range extremes when you can see buyers/sellers have dried up (which I suspect you do trade because it languishes before reversing)

3) Volume based reversals where it is clear that somebody really doesn't want price to move below (which I suspect you also trade).

You'll note these are all reversals that normally show up within the first hr of the session so most of the time, my day is done by 90mins after RTH open.

Occasionally though I do take these types of trade which feel more like the type you and NT were advocating:

4) Entry at extreme of a rotation when the prevailing direction is clear, especially if it is building to a breakout which I will then close when I see the BO failing which it invariably does.

5) Entry at extreme of rotations when it is a trend day.

What underpins much of this is early identification of day structure with a view to identifying directional conviction asap. I get it wrong sometimes and if I'm not sure, I stay out until I am sure but I feel ES tips it's hand early on in the proceedings without having to rely on day structure to explicitly reveal itself.
 
Sounds good Rob...

The way I trade could be summed up as...

1 - Market structure
2 - Price Action
3 - Order Flow

I don't use MP - but that's because I wait for the market to move before I jump on. So - most of the time, I'm in way after the reversal for just a sniff of the move. My version of Market Structure could be seen as a 'poor mans MP'.

I think you are basing your trades on very sound logic, I think there is a lot going for MP. Certainly more than MA!
 
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