FX Cowboy Breakout and Retracement Journal

[dbphoenix]

That this particular puzzle can be put together in different ways only makes it all the more interesting. And if later I decide that I want or need to change the puzzle around some, then that's okay too.

Exactly. As long as you're adaptable, you're in control.

 

[FX_Cowboy]

In another thread, DBP said the following:

Under different circumstances, I'd suggest that you translate all you've done here into a trading plan, but that would more likely foul you up given that you already have a trading plan (and it's not for the NQ).

DB, I know (or at least I think I know) that you weren't throwing down any gauntlets, but I do realize that such a trading plan is the way forward for me as a trader. And I disagree that this would more than likely foul me up, as I believe that I can incorporate much of what I've done into an improved trading plan. In fact (as I suspect you realize very well), my current trading plan is incomplete in some areas; going through this exercise is an opportunity for me to make some needed additions.

What I have in mind is based in part on the Erised exercise, and in part on the work firewalker has been doing with your help -- modified somewhat to suit my own preferences. The characteristics of the trading plan I have in mind are as follows:

1) Entries, stops, and targets based on the major S/R levels identified methodically based on prior preparation (larger timeframe charts), with additions and modifications based on the current day's price action.

2) Trade direction determined by combining the concepts of trend with these levels.

3) The most basic elements of the system can be proven through testing to have an edge, and can therefore be combined into a system which is profitable overall. (Or combined in different ways to allow the creation of different systems which are profitable.)

4) Maintains the best aspects of my current trading plan, including the ability to stay with winning positions as long as the entire trading day. BUT:
-- Flexible enough to allow changes in trading direction as the situation warrants (i.e., when major changes in market direction occur).

5) Lends itself to self-monitoring, both for errors and for changes in the market over time.

6) Incorporates all of the fundamental trading considerations like letting profits run, cutting off losing trades quickly, predefining risks, paying oneself as the market makes money available, etc.

7) With modifications, could be used in different markets (including the NQ ).

For me, the most immediate things to work on are (1) and (3). I'm looking for consistency in results, and that implies a consistent methodology, which is a weak point in my current trading. That is where I will focus my immediate attention.

 

[dbphoenix]

Sounds like a winner to me.

When I first started getting Forex people, I was concerned that I'd have little to say due to the lack of volume. But following you and others prompted me to re-examine just what it was that I was getting out of volume and to realize that volume was really just a helper, like the action of other indices. The mover was price (or, literally, the trader behavior that was moving price). That prompted further refinements in what I was doing.

And as for not being familiar with Forex and how it moved, that turned out to be an advantage as well, since I could not succumb to the temptation to nudge anyone into doing what I was doing, because I wasn't doing anything related to what they were trading. Even if I were tempted to offer shortcuts and tell them to enter here and exit there, I couldn't. I had no idea. I had to restrict myself to where I should be: structure.

So, I'm not surprised that you're flirting with this course. But would you be doing so if anyone had simply told you a year or more ago that this is the course that you ought to be following?

 

[FX_Cowboy]

I'm not sure. I guess that would depend on who the someone was, whether I thought I understood how it all fit together, and, as I began working with the strategy, whether I was able achieve results with it.

When I started with all this, I wonder whether I personally would have been able to execute this kind of plan successfully even if someone had pointed me in this direction. I do think the time is right to start work on this now, however, so it has probably all worked out for the best.

 

[dbphoenix]

I'm not sure. I guess that would depend on who the someone was, whether I thought I understood how it all fit together, and, as I began working with the strategy, whether I was able achieve results with it.

I've been through this many times before, and it always works out the same way. The "trader" tries it, it doesn't work, he moves on to something or somebody else, sometimes after wasting a lot of time declaiming how it's all a crock yada yada yada. The problem is that very often it IS a crock.

Which is why I stopped providing people with anything pre-packaged (and there's only one person who continues to press, but that's his problem) and insisted that they create something of their own. You know how that's gone; only 5% of the members in the last iteration of the forum elected to open and maintain journals (funny how that 5% figure keeps popping up). But those who have gone this route are confident in what they've created: they know it, they understand it, they trust it, they know how to fix it when something fetches loose.

So don't feel as though you're retreating by re-examining what you've done and what you're doing. You're simply entering another stage. And you'll do it again at some point in the future.

 

[firewalker99]

3) The most basic elements of the system can be proven through testing to have an edge, and can therefore be combined into a system which is profitable overall. (Or combined in different ways to allow the creation of different systems which are profitable.)

FX, looking forward to your ongoing progress, I have two questions. You're building a system that "can be proven through testing to have an edge". I was curious, when do you consider it to have an edge? In other words, do you have any specific targets defined (don't necessarely mean exact numbers).

7) With modifications, could be used in different markets (including the NQ ).

So basically, it's your opinion that a system can be applied into different markets, with only some minor tweaks? Of course taking into consideration the obvious differences like, how big a move on average is, what MAE, spread, volatility, trending/ranging,... would it basically be that easy?

 

[FX_Cowboy]

I was curious, when do you consider it to have an edge? In other words, do you have any specific targets defined (don't necessarely mean exact numbers).

I consider a system to have an edge if it is consistently profitable over time.

So basically, it's your opinion that a system can be applied into different markets, with only some minor tweaks? Of course taking into consideration the obvious differences like, how big a move on average is, what MAE, spread, volatility, trending/ranging,... would it basically be that easy?

I do believe that it's possible to use some strategies/systems successfully in different markets. As to the extent of the "tweaking" involved, I can't answer that question...yet.

 

[FX_Cowboy]

I must admit to a certain amount of envy for those who are able to devote anything like full time to trading and/or developing a strategy. Over the past few days, I've had time for neither. Now, however, having put a couple of largish projects behind me, I can again focus on something really fun -- developing my strategy!

I've actually managed to sneak in some testing over the last few days, but since time was limited and posting in detail takes time, I haven't been putting up the charts I've been working on. This wasn't actually testing anyway, more along the lines of skill development. Specifically, I've been using replay to roll my own Erised exercises -- finding S/R levels in real time in the EURUSD futures market. Becoming more proficient at identifying these in real time is one of my short term goals.

Going through this exercise repeatedly has also given me a greater appreciation for BO and reversal strategies. However, useful though these clearly are, I see now that I can develop my overall plan without them (for now). At this time, I believe my efforts will be more usefully applied to developing consistency in identifying productive S/R levels, and then testing my RET strategy against these levels.

 

[FX_Cowboy]

Just so I can follow my progress later, I'm attaching the latest chart I completed. It's a bit difficult to make out because I compressed the time axis to show most of the previous day as well. Major S/R levels are marked with solid lines. The dotted lines represent "candidate" S/R levels I'm watching.

 

[FX_Cowboy]

I thought this day was worth posting. Virtually every S/R level indicated here was drawn the previous day. What's remarkable is how relevant these levels remained to the current day's price action.

 

[dbphoenix]

I thought this day was worth posting. Virtually every S/R level indicated here was drawn the previous day. What's remarkable is how relevant these levels remained to the current day's price action.

Remarkable in the sense that the relevance is worthy of remark, but not in the sense that it's incredible. Remember that S/R of this sort -- as opposed to Pivot Points, Fib, etc -- is based on frustration and fear. Taking it out of that context and treating it as a calculation of some kind makes it far more difficult to locate. But I've found in my own trading that making the effort yields more successful trades than using the various calculated S/R levels (by "more successful" I mean both more of them and a greater degree of success over all).

In any case, frustration and fear don't evaporate at the end of the day in a puff of smoke, especially if one is holding overnight. Hence the continued "relevance".

 

[FX_Cowboy]

I'm ready to start backtesting my revised plan, here in the form of a comparative study. The setup used for this exercise is basically the same as the one described previously in this journal, but with the following adjustments:

General Rules

-- Positions may be only opened between 2:00 a.m. and 12:00 noon. Any open positions must be closed at 1:00 p.m.
-- All valid entries must be taken.
-- S/R levels may be adjusted any time before a trade (no fair adjusting levels to invalidate a running trade or to call a trade after the fact, and stops once entered may not be moved back).
-- During backtesting, if the sequence of price movements in a bar is unclear, I'll assume the least advantageous outcome.

Entry and direction

-- Trades are entered after a BO, defined here as any price penetration through a S/R level, followed by a SL/SH above/below that S/R level (entry details specified previously in this journal).
-- After BO, price must return to the S/R level (within a pip) prior to any entry. There will be occasional exceptions to this rule (RET's taken beyond the S/R level), but only at levels specified in advance. (Edit: this is to allow more leeway when price BO through more important levels, and price may not retrace all the way to the S/R level, at least as shown with the time resolution of the chart I'm using. Trade management rules are modified slightly for these trades.)
-- Trade direction is determined by trend direction. If price is in a range, the last trade direction remains in force.

Trade management

For this exercise, three contracts are traded:
- One contract is closed when price has reached the same distance from the entry point as the distance from the stop level to the entry point, or when SO.
- At that point, the stop is moved to the S/R level for the remaining contracts.
- The second contract is closed once price touches the next S/R level, or when SO. If there is no S/R level available during backtesting, I'll use the same distance as between the last two S/R levels. (Edit: at levels specified in advance as major BO levels, the rules for this contract are the same as for the 3rd contract, below.)
- The remaining contract runs until a signal is received in the opposite direction, or when SO.
- If one or both of the first two contracts has been closed, I may open a new trade (on a valid signal, same trade management rules) even if the third is still running.

If past is prologue, other issues will inevitably arise. But this should get me started.

 

[FX_Cowboy]

The backtesting drill...

 

[dbphoenix]

I know you're doing this for yourself, but, if it wouldn't be too much trouble, a brief explanation of what's happening here would be helpful.

 

[FX_Cowboy]

I know you're doing this for yourself, but, if it wouldn't be too much trouble, a brief explanation of what's happening here would be helpful.

You're right of course, and I had intended to add some detail in short order so that it was more clear what I'm doing, partly so others can follow along if they want, but also to warn me if I'm wandering off track again.

This is backtesting. The basic idea is that I'm going through historical charts using replay, in order to find the major S/R levels, and marking the charts accordingly. I then apply my rules to the chart, and mark the P/L for each trade and for each contract traded. For example, in the chart posted, the first notation is:

1 (Trade 1)

-8 (1st Contract, SO at -8)
-8 (2nd Contract, SO at -8)
-8 (3rd Contract, SO at -8)

Hardly an auspicious beginning .

My intention is to perform this same drill over several charts, hopefully encompassing several different kinds of days, until I can get a pretty good of how the plan in general is working, and specifically how each of the contract sub-strategies works out. This goes back to the idea of testing various elements of my plan so that later I can combine them any way I want with confidence.

I may make changes at this stage, but once I'm fairly satisfied, I'll move to the forward testing, which should be a bit more challenging: applying the plan to replay charts while at the same time identifying the S/R levels.

 

[FX_Cowboy]

Just to finish the story for that day, there were no additional trades, and the two trades that were running were closed according to my rules at 1:00 p.m., at a profit of respectively 59 pips and 84 pips.

 

[dbphoenix]

This is backtesting. The basic idea is that I'm going through historical charts using replay, in order to find the major S/R levels, and marking the charts accordingly. I then apply my rules to the chart, and mark the P/L for each trade and for each contract traded.

Excellent. This is exactly what I've been suggesting elsewhere. Since you're actually doing it, you're providing an example of the process (no pressure, of course ).

Now if I may, your rules. If I understand them, you're going long with three ctx at the dotted blue line after price breaks through it (and through the solid blue line), then returns to it? Or do I have it all wrong?

 

[FX_Cowboy]

Now if I may, your rules. If I understand them, you're going long with three ctx at the dotted blue line after price breaks through it (and through the solid blue line), then returns to it? Or do I have it all wrong?

This is truly a case where one assumes wrongly (me being the one) that everyone understands what he is saying. Only the solid blue lines count for signals (I should just get rid of the dotted blue lines, except that they seem to come in handy later).

In the first chart posted, the first trade is short (the trend direction the previous day had been short, we're still in the trading range at the bottom of that trend, so according to my rules, the trade direction remains the same).

The next trade is long because there is (as I interpret it), a technical reversal at that point. I know it's impossible to see on that chart, but I actually posted the previous day's chart in posting #69, where my reasons for going long there should be more evident. Since there is penetration of the upper blue line, and since this is a technical reversal, I'm looking for a RET trade long above that line. Entry is one pip above the "inside low" of the RET, in this case as soon as high of the hammer whose tail penetrates down through the solid blue line is exceeded.

 

[dbphoenix]

And the red squares and "TP" mean what? (I don't want to assume anything; if you've posted this elsewhere, my apologies)

 

[FX_Cowboy]

Just to clarify.

TP is "take profit". So, on trade 3, a profit of 7 pips is realized on the first contract, taken at the red square indicated, while a profit of 16 pips is taken on the second contract, taken at the lower red square. The third contract is still running, so it is only marked by an asterisk.