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26. No more than two indicators are the maximum to confirm price action
Simplify your approach to technical analysis as much as possible. Emphasize price action analysis, de-emphasize indicator usage, and unless you are in a position to gain lots of information, totally ignore fundamental analysis. No more than two indicators are the maximum to confirm price action. At a trading seminar, at which I spoke, one trader there used 9 technical indicators to trade the futures markets. More than half of the trading seminar was devoted to technical analysis indicators and their usage in trading.
Wells Wilder wrote the best book ever written on trade indicators, "New Concepts in Commodity Trading Methods" and it should be read before oscillator usage or trading seminar attendance.
However, keep in mind Mr. Wilder eventually publicly disavowed every indicator except ADX. These days, I do not use Gann, Elliot, Fibonacci, open-interest, or RSI, in my technical analysis. I use mostly mental analysis of buying and selling pressures, as expressed in a series of price bars or chart patterns.
If you are going to trade with indicators despite my ranting and raving against them, the best way to trade them is to know what levels they achieve only 15% of the time when at a major top or bottom, and know the percentage of price action and indicator divergence for each market in which you use the indicator.
If only 15% of all Stochastic values go above 83 for Treasury Bonds, then upon reaching that value wait for confirming price action to generate a profitable sell signal. Traders may combine indicator values to specific time value tops and bottoms for counter-trend price objectives, but be sure to use non-correlating indicators to do the job.
The 15% level is different for each market. Price vs technical analysis divergence is an indicator value created when the market price moves to new higher levels, but the indicator remains below a previous indicator value level relevant to a previous price top. Corn used to have price action and stochastics divergence 80% of the time at bottoms. Knowing the percentage of divergence at tops and bottoms for each commodity makes money. What is the average counter trend price move when the Stochastics rise above 83 for T-Bonds with divergence? If you don’t know, you need to know.
Tell you what, it’s a lot easier learning to read a futures chart and to be stingy in your use of indicators.
27. TRADING THE ROSS HOOK™
The Ross hook™ (Rh)™ is always created as the result of profit-taking. It is defined in the following way:
• The first failure of prices to continue in the direction they were going regardless of time frame:
Subsequent to the breakout of the #2 point of a 1-2-3 formation subsequent to the breakout of any area of price consolidation containing at least 10 price bars
Let’s look at some examples, including a daily chart:
Of course the proper way to trade the Rh™ is through the use of the Traders Trick Entry™. The Traders Trick Entry™ and the Rh™ go hand in hand and are part and parcel of each other.
The 1-2-3 formation is part of the Law of Charts™, and the Traders Trick Entry™ is the best way to trade the Rh™ formation. Both are available to anyone as a free resource at Click-on Law of Charts™ and also on The Traders Trick Entry™ (Resources).
I give these links here in order to save precious space for the remainder of this trading article.
Now let’s look at a 5-minute chart.
Notice that every Rh™ is a potential #1 point for prices to move in the opposite direction.
It is important that you refrain from taking a breakout of the point of the Rh™. Too often this will place you in the market too late for capturing a sizable portion of each move.
There are numerous ways in which you can use the Rh™. I will present here just one of the methods. Hooks can be combined with indicators if you like. Here we will combine the 1-2-3, the hook and a simple moving average, as one way in which you might trade.
The chart shows trending prices underscored by a simple 9 bar moving average of the Opens.
To compute the moving average, simply add together the Opening prices of the latest 9 price bars, and divide by 9, and then plot.
Here are the rules for trading: First you must define a trend. I did it here by virtue of the violation of the #2 point of a 1-2-3 low formation.
We buy one tick above the #2 point as prices move higher (breakout) above the #2 point.
For protection, we tail a stop loss one tick below the previous bar’s value for the moving average.
In our example, prices do not move below the previous bar’s moving average until the price bar marked ‘Out.’
Let’s talk briefly about trade management. Assuming you bought 3 contracts upon entry you would cash one contract as soon as you could cover costs and take a small profit.
You would then use a trailing stop-loss protecting 50% of your unearned paper profits, and move one stop to break even. If you prefer, move both stops to break even.
Once prices move up a sufficient amount to where both stop losses can be placed above break even, trail one stop at 50% and another wherever it feels comfortable.
Keep in mind that ‘stop loss’ means protecting your position against a serious loss of margin (which can easily happen in the forex market in particular). Once the trade is in the clear, stop-loss means protecting your open position equity against loss of profits.
The simple trend following method we have shown you is not the ‘be-all to end-all’ method of following a trend. There is much more to learn about trading trends.
You might consider any of the following money management styles:
1. Taking all of your position off at once time at a specific objective of points, ticks, or dollars.
2. Taking 1/3rd of your position off at a first objective and then the remainder at a second objective.
3. Taking 2/3rds of your position off at a first objective and the remainder at a second objective.
4. Taking 1/2 of your position off at a first objective and 1/2 at a second objective.
All of the above methods involve only money management. Futures money-management involves setting monetary, tick, point, or even percentage trade objectives. The following methods involve money management for the first taking of profit at an objective, but then using a trailing stop (trade management) for one or more of the profit taking exits.
5. Taking 1/3rd of your position off at a first objective and trailing a stop with 2/3rds of your position.
6. Taking 2/3rds of your position off at a first objective and trailing a stop for the final 1/3rd of your position.
7. Taking 1/2 of your position off at a first objective and trailing a stop for the remaining 1/2 of your position.
I’m sure by now you can see that there are other management combinations as well.
By means of testing you should be able to determine which method works best for your chosen market and time frame. Also realize that no method of management is to be set in stone. Markets change constantly, and you must adapt your trading to the realities of your chosen market. Let me give you an example:
At one point in my trading career, when the currencies were heavily traded, a time prior to the creation of the stock indices and US dollar market, I found in trading the Swiss Franc I was able to consistently make 12-ticks on most Traders Trick Entries™. Trading was during time intervals very easy for me. All I had to do was place my entry stop order in the market, and contingent upon being filled, I would have a Market if Touched order resting 12 ticks beyond my proposed entry point. This method of management worked for almost a year.
Then one day I noticed that all I could get was 10 ticks – eventually only 8 ticks, then 6 ticks. This method of management was not worth trading for less than 6 ticks, because at 6 6ticks I had to double my position size to make the same amount as before.
When I could no longer get 6 ticks I abandoned the trading method. I moved to other markets and did well in those – mainly the British Pound and the Japanese Yen. However, in those markets I had to trade a bit differently than in the Swiss Franc currency market.
It took some time, and I periodically kept an eye on the Swiss franc. Then I noticed that it was once again possible to make 12 ticks. This time that niche lasted only 6 months and it was over, with Swissie moving back to under 6 ticks in a matter of days.
In 47 years of trading, I have not found a holy grail of trading. In today’s markets I find that I have to change and adapt more often than ever before.
Changes in today’s markets are many, and the markets continue to change more rapidly than ever before. New exchanges, new markets (such as Forex Currencies), computers and electronic trading systems, have all changed the markets – especially with them bringing many thousands of new market participants.
Since any commodity, futures or forex trading market is comprised of all its participants, the changes have been monumental. No longer are financial markets dominated by professional speculators and commercial interests. Today, much of day trading is heavily populated by newbie traders trying to get rich quick. The single phenomenon of amateur day traders has caused the forex and commodity futures markets they trade in to become chaotic and confusing.
You must change. You must adapt. You must coordinate your trading with what is really happening. To that extent, you must trade the Rh intelligently and with common sense. There is nothing magic about Ross hooks. They describe what happens when traders take profits during the course of a trend. There is nothing more to gain than the realization of the simple fact of profit taking and what it looks like on a market bar chart.
28. It’s our job to trade “Forex” not “Histories”
Throughout the years I’ve been trading and writing I've often written about mind set—having the right frame of mind for your trading so you become a winner.
I've stated that it is our job to trade "futures," not "histories."
The future is the next bar on your chart. You can't possibly know how it will develop, how fast prices will move, or where it will end up. Since none of us know where the very next tick will be, it's impossible to know where the tick after that will be, or the tick after that, etc. All we know at any one time is what we're seeing. Interestingly, what we're seeing may not be true.
If we are day trading, we are not sure that what we're seeing is a bad tick, especially if it is not too far astray from the price action.
The daily price bar-chart doesn't always tell the truth, either. The open may not be where the first trade took place. The closing price is merely a consensus, and may be quite a bit distant from where the last trade took place. The high price may not have been the high, and the low price may not have been the low. If you don't believe that, then I challenge you to pick up any newspaper and take a look at some of the back months.
For example if the futures exchange has reported that a back month they opened at 9755, with a high of 9802, a low of 9760, and a close of 9784. Does that make any sense? How can the low be higher than the open? How can the close be higher than the high? Yet that's the kind of garbage we have to put up with in this business.
Now you know the problem with back testing of trades. Back testing and simulated non-real-time testing are based on nothing but lies. That's why they don't work when you actually put them to the test with real trading using real data.
In fact, there are many reasons why back-testing and trade simulations won't work, and I may as well dump them in your lap right here.
Because you don't really know where the high or low were, or if the market ever really traded there, you don't know if your simulated stop was taken out or not.
If you say you have a trading system in which if you get three up days followed by a down day, the market will be up twelve days from now 82% of the time, then your whole statistical universe may have been based on what is not true.
Have you ever watched the cocoa market from the open to the market close? You can clearly see it trading at the open, but by the time the market closes, the open will at times be placed opposite the close. That might be fifty or more points away from where you saw it open and trade, and also as born out by a report of time and sales.
The way they report cocoa prices is going to give a fit to a lot of candlestick traders. Why? Because they are going to see far too many "doji's" (open=close), more than are really there. Cocoa is not the only culprit, but historically, it is certainly one of the worst
When you see a completed bar on a chart, you have no idea which way prices moved first. You don't know if they moved down first or up first. You don't know whether or not prices opened and then moved to the high, went down to the low, and then traded in the lower half of the price range until the close, at which time prices soared up to the high and closed there. You have no idea of the overlap. I've seen prices trade from one extreme to the other more than once at each extreme.
In any of those instances, your protective stop could have been taken out intra day.
You know nothing of the market volatility on any given day, once you see a completed price bar. Were prices ticking their normal, exchange minimum tick, or were they ticking two or three times the minimum every time prices ticked?
Even if you purchased intra day tick data for your simulation, showing every single tick the market made, you don't know what the volatility was. For instance, you don't know if the S&P was ticking five minimum fluctuations per tick or twenty-five minimum fluctuations per tick, and if it was doing it quickly or slowly. You don't know and you can't know, and anyone who tells you their simulated system works, based on such phony baloney, is a liar.
Not knowing how fast the market was means you can't really know what the slippage might have been. The faster the market, the greater the slippage potential. You can sit there and say you would have gotten in at a certain price or that you would have exited at a certain price, but if you don't know the market volatility, and how fast the market was, you do not know enough to say that you would have done such and such. Not knowing how fast the market was, you have no way of knowing how much slippage there would have been on your entry or your exit. Without knowledge of slippage, you can't possibly know the risk.
That is also true of volatility. Volatility is made up of range of movement, speed, and tick size. If you don't know the extent of slippage, you will not know the extent of the risk you would have encountered.
As if that's not bad enough, you also don't know how thin the market was at the time you would have traded it. If you are position trading, you can't go by the reported daily volume (which is always too late to do you any good), because there is no way to know what the volume was at the time your price would have been hit. So here again you have no idea of what slippage you might have encountered, and once more you would not have known the risk.
If you want to spend your money on a commodity or forex trading system based upon the unknown, then you must assume the risk of doing so. Since this is a business of assuming risk, you are entitled to insure prices in any market that you care to.
Insurance companies spend a lot of money to make sure that the risks they take are actuarially sound. That is the equivalent of finding good, well-formed, liquid markets to trade in. But any market can become totally chaotic. Markets can become extremely fast, and they can become quite volatile. So even if your system was back-tested in a liquid market, when that market becomes fast and/or volatile, your back-tested, simulated system will not be able to cope with it and you will lose. It's like going out to write life insurance on a battle front.
If your back-tested, simulated system does factor in some room for fast and/or volatile markets, then, when you will be trading in slow, non-volatile markets with the built in factor, you will be utilizing a system that is totally inappropriate for the slow, non-volatile market you are in. The best you can hope for is an "optimized" system. How can you possibly expect to compete with traders who are acting and reacting to the reality that is at hand at the time?
Extensive back-testing is for historians, not traders. It is the wrong view of the markets. Your trading must be forward looking without being ridiculous about seeing into the future.
If you don't know where the next tick is, how can you possibly know where the next market turning point will be? Can you see into the future?
Perhaps you may like to trade using astrology, as it has been said the famous old-time trader (from the 1920's thru 1950's era) Mr. W. D. Gann (William D Gann's photo to the left) used to trade financial markets successfully in his personal trading of stocks & commodities. Astrological traders are always trying to peer into the future.
In the automobile business they have a saying, "There's an ass for every seat." Likewise, there's a fool for every fortune teller who claims he can see into the future. You can always go out to your local coven and hire a witch to tell you what beans will do tomorrow. She may even be right from time-to-time.
You could always do as one charlatan did and run the biorhythm for each market based on the day it first started to trade. Or, you can cast the markets horoscope based on the same date. With the biorhythm, you'll know what time of day the market should be on its highs, and what time of day it will be on its lows.
You'll know which day the market will be ecstatic and reach a new high, and which day it will be down in the dumps and make a new low. However, you'll find that from time to time the market will reach new lows on the day it was supposed to reach new highs. Well, that's easy enough to explain. You can tell everyone "We've had an inversion. Until the market inverts again, the lows will be the highs, and the highs will be the lows!"
29. Help with Trading Orders
One way I can help is to suggest that you pick up a copy of our 4 cassette tape-set and manual called “Trading Order Power Strategies.”
No one has ever produced a product quite like it and many of our trader readers have told us that it was of immense help to them. However, until you get your copy, learn the following:
When the market trades above a buy-stop price order, it becomes a market order. The first down tick, after the market order price is activated, determines the highest price a buy stop order may be filled. The rule to remember placing stop-loss orders is this, "Buy above and sell below." Buy-stops are placed above the current market price and sell-stops are placed below the current market price.
If a buy-stop price is hit, the order then becomes an at-the-market order to be filled by the pit broker at the best price possible. If an S&P buy stop is hit at 40 and the market trades 40, 45, 50, then 45, the worst fill a trader can receive is a 50, because 45 is the first down tick. The exception to this rule comes under “fast market” condition, when brokers are not legally held to any prices, or in some New York markets, where pit brokers possess a license to steal.
Avoid trading fast markets (fast-market are common in the forex currency markets). A fast market condition exists when extremely volatile price action results from a large amount of orders executed or entered into the pit, almost simultaneously. These market conditions reflect emotional reactions usually in response to the most recent government statistics like crop reports, or unemployment data etc. Whenever you are able, avoid placing trade orders under fast market conditions because of the high probability that you will receive excessive trade slippage.
In general use at-the-market orders when it's absolutely necessary, unless your commodity or forex trading strategy calls for you to use them. “Slippage” is the price difference between the stop-loss-order price and the actual fill price; this becomes dangerously excessive in fast markets, when brokers have no restrictions on order prices.
Ask your futures broker about which government statistics can move the markets, thereby causing extreme price volatility. Try to avoid being in the market during the most critical governmental statistic release, when fast market conditions are likely to occur. It is wise to stay out for about an hour or unless the fast market condition calms down. “Triple Witching Day” involves the expiration of stock options, index options, and futures contracts. Always know when these days exist and try to avoid trading on these days, which are marked by excessive slippage, poor market fills due to extreme price volatility. All exchanges issue commodity report calendars that will be sent to traders upon request.
The New York markets usually have more slippage than Chicago commodity markets, and estimated $100 per trade slippage and commodity broker commission deduction should be used when producing hypothetical testing results from a futures trading system. The New York markets have less restrictions on their floor brokers and customers orders are accepted on a “not held responsible” basis. Recent reports of 10-cents slippage in a slow silver futures market are not uncommon. For Chicago markets you can use $50 to $75 slippage and commission for testing purposes.
30. Hey Joe, I’m never sure about trade position reversing. It is scary, isn’t it?
The only reason to reverse a daily chart short term position is because the intra-day buying and selling pressures have reversed the short term trend direction. When only intra day trend changes, a reversal is not mandated unless longer-term time and price objectives have been satisfied. If the short term market trend does not change but a technical stop-order is generated, then a trade exit without a reversal is mandated. Powerful trading signals, like an outside daily or weekly vertical bar, a previous five-day resistance top or support bottom violation, demand immediate reversals.
The above holds true for any time frame. If you are trading a 3-minute chart, and the trend reverses on the 1-minute price chart, it's either time to get out of the market or time to consider reversing your market position. You are correct about reversing being scary. It most certainly is, and I would not suggest doing so unless you 1.) Know what you are doing. 2.) Have the stomach for it, sufficiently quick on your feet.
Developing a stomach for trading position reversing takes practice and the self-assuredness that comes with the courage of your personal strength and convictions. Joe Ross is with TradingEducators.com