August 5 2010 Overlay and Trades

Production was good today considering the tough action. The ES was contracting all day and the TF made a couple good fakes that I was able to exploit.

It took some conviction and patience.

Slinky Pattern

I was talking through a trade with another trader today when I observed the 2nd long that I was in go into what I call a slinky pattern. This is not too common but worth discussing.

It is basically a nested sideways oscillation that will usually occur mid range. This in indicative of an indecisive move.

If you look at my first trade, it was a basic continuation and I was able to confidently scratch it. Once it failed to open up, I was confident that it would retest the pivot it just came off of.

The only outcomes were that it would break that pivot or that the pivot would hold. If the pivot held, I would have what I call a pull back retest entry. That is what happened and I re entered long.

However, after I re entered, the price failed to break the high pivot again. I could not scratch this one. A scratch here would have allowed me only two out comes in the trade. Either a loss or a break even.

My thought on this is that I can usually not scratch because this is often the case. You are going to take all your losers. If you scratch your winners, even some of them, your edge will be eroded to zero.

I had to stick with it. The reason I am bringing this up is that it demonstrates that a trade is constantly changing in both risk reward and probability. I used to only make my exit decisions based on the stats at entry. Now my exit strategy is dynamic. (I have more on dynamic vs. static action coming soon)

When I entered the trade, it was a good looking retest pull back entry with a target potentially at resistance. Once the slinky pattern formed, everything changed. Now I was in a poker hand.

The probability of the trade went down as well as the potential for profit. Once the oscillation started, the local expectancy for a high probability move I had changed to only the width of the slinky pattern (about 40 ticks).

What I mean by poker is that I was trapped long. There was no good area to stop out the trade that was not far below the low pivot of the slinky. I was the aggressor when I entered but quickly became a potential victim. This was a trap that was set and I went for it. However, I knew it very early on and adapted instead of cutting the trade.

This may be very technical for some. My options were to have a guaranteed non win by scratching (which is a losing strategy over time...can not scratch your way to profitability), hope the trade runs to resistance before pushing against me, or trust my feel and let it wash upward for a good scalp.

I took the third option for a 14 tick high probability scalp. It turns out that I got out at a retail price (a wholesale exit for me). The price reversed just after that.

Through the process of elimination and a dynamic strategy, I was able to take profits on a trade that I would have taken a BE on at best just a few months ago. This was done without being defensive or stubborn and it is repeatable.

Fakes and Squeezes

I have refined my trading style to an interaction with the other players. The goal is to take advantage when I see them squeezing other and avoid not getting squeezed myself.

It is 100% a mental game and has little to do with patterns or even structure intra day. These things are very important and I could not trade well without them but the overall deciding factor in my edge is how I play and engage.

Question from Earlier
Hi Brian - Nice job on standing aside yesterday rather than risk money in a tough market. Something I am working at improving myself. To give me some guidelines can you talk about what signals you look for when to stay out and also if you have an average number of days per month that you either stay out completely or trade very very lightly? That would help give me some context of what I should be aiming for as I improve. Thanks mate.

This is a good question. I will start with the easy part. I rarely stand aside. Most months I do not have a day without trades. This trend may change as I have recently required mush more confirmation of my entries.

There are 2 things I look at...structure and feel.

Understanding market structure will allow you to premise for contractions but there is no way to know for sure. I also utilize to my feel. By that I mean what is the pace of the movement? Is it mushy or sluggish?

If you watch the action for long enough you can tell what mood it is in. That does not help much.

I could write about this for hours but here is a brief overview that might help. Watch for these things:

1. Price has extended its previous range's high and low the day before and has come back inside the range.

2. Market is opening mid range with no gap.

3. Specifically on the ES the first few 2 minute volume bars are less than 8000 followed be decreasing volume.

4. Price established an inside high followed by an inside low (or vice versa)

5. Look at the market depth on your DOM. If the bids and offers are all way higher than usual, a grind is likely. I look for depth of 1200+ 5 ticks above and below. When it gets to stacked 2000+, price is going nowhere.

6. This month particularly, the fact that everybody is on vacation. Price has no conviction and many of the best traders or taking time off thus the game players are having a field day with the retailers.

Some of that may not make sense. Feel free to ask a follow up.