Monday, May 3, 2010

I was stopped out of the trade I posted on 4/23/10. I'm not sure if it was the need to trade anxiety that made me put too much emphasis on certain things or that the trade just wasn't meant to work out. All I know is it was a paper loss and not a real loss.

I've been thinking about a few trading-related things and I thought I might as well share it here, at least for my own record.

Warning - very long post and possible rant alert

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People always say you need to find a method that fits you but they never go much into specifics of figuring out which qualities we should focus on and build a method around, let alone how to figure ourselves out before we unknowingly make a method for a personality we want to be.

I suggest everyone should take Carl Jung's personality test and answer truthfully, meaning don't just put the answer according what you'd like to be or what is right or cool, be totally honest. I'm an INTJ. It's not for everyone, but it describes me perfectly and I think its worth a try. I think it holds a blurry but profound mirror in front of people. Enough free advertising...

Jung says INTJs are strategists. I find that unless I fully know a method or system and why that method or system works, I won't follow it. I won't follow it because I'm a skeptic. I don't believe things just because of authority or tradition. Everything needs to be rational to me. This meant I needed find out the logic behind seemingly arbitrary rules. For example, this is why I've never felt fully comfortable in taking a trade based solely a MA crossover. Some people know how MAs work, I don't.

my method and view of the market -

If there was a 100% mechanical system that worked over the long run it WILL BE HOARDED. Think about it, why give it to anybody for any price? If people want to make money of this system, it'd better be through my hedge fund. This implies there must be variation in one's method.

I put much more weight on SR now because I've realized people will undoubtedly buy and sell more at certain areas. I'll go into why SR works but a few things to remember is that SR and the movement of price breeds future SR. If price is falling and reverses at one of these key SR levels, it will rise until it hits the next area simply because of the relative imbalance of incoming buy and sell orders. After it hits the first area it might continue going up. A stronger reversal signal is obviously a better sign that the first small SR area will be breached. Usually there won't be much space between a strong signal and the next area because the market is mostly sideways; price tends to come back on itself. This is why I look for reversals at the end of extreme swings.

Remember though, that these are areas and not specific to the pip. This is because buyers and sellers come into the market in waves. These waves often overlap, coming in different strengths and duration. This implies to me that there are times when the market will be easier to read using support and resistance as a framework. The other times are when waves similar in strength and duration overlap, creating a harsh environment to find a nice safe trade within. It could be done, but you'll need to be quick and nimble as there will be more SR areas where price direction can change.

You can probably infer from the charts I've posted so far to get an idea of which SR levels I use. I do all my analysis of a signal on its own time frame. The only time I'll switch is to get a clearer view of SR on one time frame lower, such as from daily to 4h. I intend to refine my entries and limit my risk, therefore letting me stack on position size. If I see a signal on the daily and already plan on taking the trade, I'll look to the 4h or even 1h to get a better price but I will put my stoploss at the same place I would have it if I took it on the daily.

Since I believe reversal signals such as pin bars only predict where price is going in the immediate future, I tend to take trades with a relatively lower risk reward. My method has a high win rate and low risk to reward. Other trades could have a low win rate and a high risk to reward. There is always an inverse correlation.



I'm winded... time to take a nap. It's late so I'm sorry if I was incoherent.

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