FX Cowboy Breakout and Retracement Journal

[FX_Cowboy]

Also, on closer inspection, trade 4 was not a valid trade by my rules, since the low of the second bar below the line is not higher than the low of the previous bar. I guess I need to get those glasses checked...

 

[dbphoenix]

I think I'm following. Thanks.

 

[FX_Cowboy]

Here are the charts from the second day.

Stats (in order of W/L, P/L, Max Loss, Losing Streak):
C1 - 13:1, 75:8, -8, 1
C2 - 2.5:1, 175:14, -8, 2
C3 - 0.3:1, 123:26, -8, 4

 

[dbphoenix]

A somewhat off-topic question. You started this journal in my old forum in January, 2005. However, you don't trade every day and haven't posted to it every day (and I hope you don't think about it every day), so it doesn't amount to 18 months of work. And counting posts doesn't help since a lot of them aren't yours (i.e., questions and comments from others). So how many months all told would you say it took you to get to this point?

 

[FX_Cowboy]

A somewhat off-topic question. You started this journal in my old forum in January, 2005. However, you don't trade every day and haven't posted to it every day (and I hope you don't think about it every day), so it doesn't amount to 18 months of work. And counting posts doesn't help since a lot of them aren't yours (i.e., questions and comments from others). So how many months all told would you say it took you to get to this point?

I really don't know how to answer your question. How long? Far too long. Easily twice as long as it should have taken. Because I do think about it every day, and do something trading related like reading and marking up charts every day. Unfortunately, I've wasted an awful lot of time thinking about and doing the wrong things. (As you know, since you've been kind enough to pull me out of more than a few blind alleys along the way.)

 

[dbphoenix]

It may not be fair to conclude that you've "wasted an awful lot of time thinking about and doing the wrong things". After all, if you hadn't done them, you wouldn't be where you are. You might have reached this point sooner, but then you might not be anywhere near this point at all.

It's always easy to say "if only I'd known". But I doubt it would have made any difference. There's a big difference, for example, between looking at 250 charts and sitting through 250 trading days. The experience of the latter cannot be transplanted into somebody else's head, and unless he wants to play Monkey See, Monkey Do, he may as well resign himself to the fact that this takes time. When I started, it would have done no good to tell me that indicators wouldn't do it for me. I had to find out for myself. And that took time. And things that I couldn't make work to save my life at one point suddenly made perfect sense at some later point. That's the difference between owning an experience and borrowing somebody else's.

You may find, in fact, that your learning curve begins to accelerate, not so much because of something new or newish that you're trying but because of all you've done that now serves as an underpinning. And even if it doesn't accelerate, you'll never slip back very far, if at all.

 

[FX_Cowboy]

One day before FOMC announcement. I've tried to be realistic here about when I could have seen S/R developing during the day (and have taken my losses accordingly).

Stats:

C1 - 4:1, 92/26, -8, 2
C2 - 1.5:1, 194:35, -8, 2
C3 - 0.3:1, 124:50, -8, 5

 

[FX_Cowboy]

I need to remember not to allow lines drawn the previous day to OVERLY influence my thinking. (It also helps to keep a time-related chart open as a cross-reference.)

 

[FX_Cowboy]

I'm going to get down a couple of final thoughts on the day covered in posting #87.

I know there are days when conditions won't be ideal for whatever trading strategy one is working on. And I doubt there are many strategies that are profitable on days with low trading activity and/or a lack of sustained directional movement. I'm thinking here of wasp's recent experiences on days prior to Fed speeches or announcements, and firewalker's enigmatic DAX charts. Days like this are frustrating when you're trying to find patterns, or determine the reliability of a new system, or maintain the discipline to trade your plan. But they obviously happen.

When they do, I would do well to try to identify the signs as early as possible, wait for the ambiguity to resolve itself, try not to force a trade, and above all accept that there are going to be days when things don't work out as well as I expect. Sometimes, after the fact, it's possible to take a broader view of the day, zoom out to a longer timeframe, and see the pattern that was so elusive in the heat of the trading day. It's all too easy to play "coulda, woulda, shoulda" at that point. Instead, I need to try to learn what I can from the day, and then just move on.

 

[tpaulbeaumont]

hi,
dont know if thres some overlap with the fx thread son t2w as ive never really posted b4, but im expecting further $ weakness in coming days. perhaps a new swing low on $Index, only to be reversed, and likely become a bottom.

 

[dbphoenix]

I'm going to get down a couple of final thoughts on the day covered in posting #87.

I know there are days when conditions won't be ideal for whatever trading strategy one is working on. And I doubt there are many strategies that are profitable on days with low trading activity and/or a lack of sustained directional movement. I'm thinking here of wasp's recent experiences on days prior to Fed speeches or announcements, and firewalker's enigmatic DAX charts. Days like this are frustrating when you're trying to find patterns, or determine the reliability of a new system, or maintain the discipline to trade your plan. But they obviously happen.

When they do, I would do well to try to identify the signs as early as possible, wait for the ambiguity to resolve itself, try not to force a trade, and above all accept that there are going to be days when things don't work out as well as I expect. Sometimes, after the fact, it's possible to take a broader view of the day, zoom out to a longer timeframe, and see the pattern that was so elusive in the heat of the trading day. It's all too easy to play "coulda, woulda, shoulda" at that point. Instead, I need to try to learn what I can from the day, and then just move on.

This is why it's so important to know exactly what you're looking for, even to the extent of writing down what to look for. That way, there won't be a lot of waffling around during the trading day. If you see it, you trade it. If you don't, you don't. If you're not sure, write down what it is that's causing you to hesitate, e.g., what did you not account for.

And if the first trade fits your specs and you take it and it doesn't work, and if the second trade fits your specs and you take it and it doesn't work, you then have to acknowledge that the market is banging you on the head and trying to get your attention in order to tell you that something is wrong and that the something is most likely not your fault. Most likely you're looking at those trades that are on the other side of your probability ratio. Those are the breaks. That's life.

Playing coulda woulda shoulda is not necessarily a bad thing if it's used as a learning tool rather than for self-recrimination. This is why I suggest -- especially when trying something new -- writing down what you plan to do, then what you did, then -- if you didn't do what you said you were going to do -- what you should have done, then why you didn't do what you should have done. This last is especially important because it very often brings to your immediate attention elements that you may have overlooked in your planning, or self-sabotaging behaviors that had not yet crystallized.

 

[FX_Cowboy]

This is why it's so important to know exactly what you're looking for, even to the extent of writing down what to look for. That way, there won't be a lot of waffling around during the trading day. If you see it, you trade it. If you don't, you don't. If you're not sure, write down what it is that's causing you to hesitate, e.g., what did you not account for.

I've really tried to streamline the rules, mainly in the interest of keeping things simple. But I think now that I've taken this too far, since there are some fairly obvious things I need to watch out for that are not in my current rule set. And maybe by putting these things down on paper (or virtual paper), I can avoid those situations where following my rules blindly flies in the face of what I would do if I were to analyze the situation in its entirety. Eventually, ideally, there should be no conflict between what my rules allow, and what logical analysis suggests, correct? It just seems that, without writing a very long, detailed and complicated plan, there has to be some kind of catch-all clause that allows me to disregard the rules for good reasons.

And if the first trade fits your specs and you take it and it doesn't work, and if the second trade fits your specs and you take it and it doesn't work, you then have to acknowledge that the market is banging you on the head and trying to get your attention in order to tell you that something is wrong and that the something is most likely not your fault. Most likely you're looking at those trades that are on the other side of your probability ratio. Those are the breaks. That's life.

I accept that sometimes either I'll just get it wrong, or that the market will change, and I'll end up on the wrong side of a trade. Those occurances become part of the probability statistics compiled during testing, and during real time trading, allowing you monitor how well you and your strategy are performing against your performance during testing. And I'm thinking over exactly how I want to amend the rules to prevent me from repeatedly beating my head against a wall, while still allowing for the losses that are just inherent in this strategy (something along the lines of two trades in the same direction, at the same level going bad causes me to stop trading and reassess the situation).

Playing coulda woulda shoulda is not necessarily a bad thing if it's used as a learning tool rather than for self-recrimination. This is why I suggest -- especially when trying something new -- writing down what you plan to do, then what you did, then -- if you didn't do what you said you were going to do -- what you should have done, then why you didn't do what you should have done. This last is especially important because it very often brings to your immediate attention elements that you may have overlooked in your planning, or self-sabotaging behaviors that had not yet crystallized.

Okay, point taken. It really does seem to be the best way to improve the trading plan over time. I'll begin with the day in question, and add a post mortem after every tested trading day. And there are a couple of items I need to start adding at the beginning of the trading day too. I've been keeping these in my head, but that can be a cluttered place, so I can see the value of having it written down as well.

 

[FX_Cowboy]

hi,
dont know if thres some overlap with the fx thread son t2w as ive never really posted b4, but im expecting further $ weakness in coming days. perhaps a new swing low on $Index, only to be reversed, and likely become a bottom.

This thread involves the development of a specific strategy, but I see you've also found the Forex Forum:

http://www.trade2win.com/boards/forumdisplay.php?f=54

which is where I think you'll want to be posting. Good luck.

 

[dbphoenix]

I've really tried to streamline the rules, mainly in the interest of keeping things simple. But I think now that I've taken this too far, since there are some fairly obvious things I need to watch out for that are not in my current rule set. And maybe by putting these things down on paper (or virtual paper), I can avoid those situations where following my rules blindly flies in the face of what I would do if I were to analyze the situation in its entirety.

Think about what it was like learning how to drive. At the beginning, you had to think about everything, even to the extent of remembering which was the gas pedal and which was the brake. And having your father in the front seat didn't make the situation any more relaxing.

Eventually, however, most if not all of it became automatic. You did it without thinking about it, at least consciously (though at times you literally don't think about it, which is when you drive into a post).

So, for the time being, detailed is better. Do as much of your thinking ahead of time as possible. As I've said, the amount of anxiety you feel during the trading day is in direct inverse proportion to the amount of planning you do.

Eventually, ideally, there should be no conflict between what my rules allow, and what logical analysis suggests, correct?

Ideally, yes, though at some point you'll likely reach the point where the "logic" runs in the background and becomes what some like to call "intuition". And if it doesn't, then you can continue to trade by your rules.

It just seems that, without writing a very long, detailed and complicated plan, there has to be some kind of catch-all clause that allows me to disregard the rules for good reasons.

Yes, from Lee Richartz: Never be in a hurry to do something stupid.

Okay, point taken. It really does seem to be the best way to improve the trading plan over time. I'll begin with the day in question, and add a post mortem after every tested trading day. And there are a couple of items I need to start adding at the beginning of the trading day too. I've been keeping these in my head, but that can be a cluttered place, so I can see the value of having it written down as well.

In a nutshell, it really amounts to "What the hell was I thinking?" But getting it down on paper not only provides you with a better opportunity to do something about it, it helps to get it out of your head so that it doesn't interfere with other business (or with your time off).

 

[dbphoenix]

About "intuition". Rols posted something recently that I thought was pretty observant: "a proportion of discretionary trading is actually making ultra complex mechanical decisions in a blink and giving the illusion of being intuitive".

This may help put the "intuitive" traders in perspective.

 

[FX_Cowboy]

Post mortem for 3/28/06:

I believe I traded the rules of my plan correctly given the rules in effect and my interpretation of price action at the time. However, there were a couple of issues that I did not take into account.

First, just a technical note: trade 2 would never have been entered, because all 3 contracts were still running on trade 1. (I need to be more careful in applying this strategy in backtesting or the results will be wrong.)

Second, the price history I was using to backtest this day was incomplete. The price data jumps from Friday at 5:00 p.m. to Monday at 12:01 a.m. However, the Globex futures market opens on Sunday at 6:00 p.m. (EST). That means there was six hours of price data that I did not take into consideration and, more importantly, I didn't even take the data gap into consideration. My experience is that the price action on Sunday evening can be significant, so the lack of data is a serious disadvantage in interpreting price action early Monday morning. It just so happens that this day opened within one pip of the closing price on the previous Friday. But what happened just prior to the open? Was price descending from a point 30 pips higher? Was this the end of a buying climax? I just don't know. The point is, rather than making assumptions and applying rules to levels from the previous Friday, it would have been more prudent to watch and wait for price patterns and S/R levels to be established. That might have kept me out of trading until late Monday morning, or maybe the entire day. Which is fine.

However, to leave it like that would really be skirting an issue that does come up fairly often. Let me play devil's advocate and ask myself how I want my plan to handle situations where, seemingly out of nowhere, the S/R levels shift. So, the assumption is that this was not a weekend, and that the price action shown in the chart was continuous.

In this scenario (starting from the black bozo extending down from the top S/R level drawn, which marks the first bar of the day), price has risen as high as the PDH, and made scant progress beyond it. In terms of more recent price action, this last SH is a HH that follows a HL. Following that bar, we have a slightly HL, but then a LH and a LL that extends down below previous (strong) support. Then price rises above the old S/R level, but forms another LH. That is the price swing that preceded my first long entry.

What we have here is a series of two LSH's and LSL's as soon as the SH that preceded my entry is formed (which, in fact, as I keep track of things, is the second bar preceding my entry). If this were all taking place above previous S, I could justify this as price action within the preceding range. But that is not the case. The previous S level has been compromised AND price has formed a SH below the level of a previous HL (S->R). All of this (which, by the way took place over the course of about six hours) might have tipped me off that change was in the wind.

Let's look at what's there in terms of entry possibilities. A short entry might be justified on the basis of the LSH's and LSL's. Looking at the five-minute chart, this seems like a reasonable option. One problem is that the entry point is above the previous S level. What if that last LL was just a test? And exactly where must the LSH occur in order to signal entry? Here's my answer: it is the price movement from the PDH back to S, and from there to the double top (that V) that defines the operative range. The low of the V is the price below which a SH must occur in order to signal a true reversal. The LSH occurs ABOVE the S line, so no short entry is justified at this time.

What about a long entry? At the points where I've marked entries 1 and 2 in the original chart, price is still below the supply line descending from the double top, there has been a LH after the double top, and a downtrend may be developing. Combined, these constitute ample justification NOT to go long.

I do see one entry in this range. Once the supply line has been broken, and the range has become established, I think a short entry from the top of the range would be justified. The only time when that entry is signalled is marked on the chart ("Short entry here").

 

[FX_Cowboy]

I'm trying to derive some fundamental rules that will help me to stay out of questionable trades, but rules which do not invalidate profitable trades (or, if I must choose, that provide more benefit than detriment to the overall plan).

Here are the candidate rules I've come up with. I intend to apply these rules starting in my testing with 3/27/06, and I do not see any other entries affected by the rules. (Later, if the costs seem to outweigh the benefits, I'll adjust or scrap these rules and recalculate results):
-- I define a range as 2 SH and 2 SL (having a common high/low) within a confined price range.
-- If price has just traversed a range counter the current trading direction, and in doing so has made one or more LSH AND LSL (when trading long, or HSL AND HSH when trading short), AND IF this price movement penetrates the existing S/R level to the extent that there are one or more bars that close under/over the S/R level, then no valid entry can be made until the SL or DL created by these swings has been cleared.
-- If a new range forms that straddles an existing S/R level, I'll employ the new range for the purpose of trade entries. The usual rules regarding trade direction apply.

 

[FX_Cowboy]

Here are the trades for 3/27/2006 employing my new rules.

Updated Stats (W/L, P/L, Max loss, Losing streak)
C1 - 15:1, 84:8, -8, 1
C2 - 3:1, 196:14, -8, 1
C3 - 0.5:1, 143:26, -8, 4

 

[dbphoenix]

Here are the trades for 3/27/2006 employing my new rules.

Updated Stats (W/L, P/L, Max loss, Losing streak)
C1 - 15:1, 84:8, -8, 1
C2 - 3:1, 196:14, -8, 1
C3 - 0.5:1, 143:26, -8, 4

Changing the rules requires a recalculation of the stats, i.e., whatever stats apply to one version of the system won't apply to another. Otherwise, you'd have no basis for comparison.

 

[FX_Cowboy]

Changing the rules requires a recalculation of the stats, i.e., whatever stats apply to one version of the system won't apply to another. Otherwise, you'd have no basis for comparison.

I went through the previous charts to determine if any of the trades logged would have been affected, but could not find any (in effect, recalculating the stats for previous trades). Is that sufficient? Or am I missing something?