Tuesday, November 15, 2011

Trading with the trend

[EDIT 11/16/2011: Follow-up to this post here]

One of the challenges I've had when trying to define and clearly articulate my best trades is, well, I haven't had enough of them under the circumstances.  Since I'm still in the early stages of learning the Diamond Setups methodology, my experience was generally "given fish while learning to fish" during the first month, and that sure turned out to be quite a solid month that didn't seem real. 

Even if I were to look at back at my most profitable trades in that first month, I wouldn't have been able to tell you why I took it, except for the fact that Renato gave an alert and I entered the order (and it usually made money).  As great as it is to make money that way, I have an even more intense desire to be able to trade based on my own independent analysis.  So that's what's great about Renato's program -- he has no problems teaching you to how to fish based on everything he knows, and he does a very good job at it.

The lightbulb
When I started to try and "fish on my own" after 3 weeks of starting the DS program, things got a bit stale for a week, then a bit rocky, and finally I had the big meltdown(s) just as I started to trade live.  But upon reflection, I did learn and study what worked well for me, even as the red ink was spilling everywhere.

One of the "lightbulbs" during those dark times is so simple and something that I already written about it in the past.  How to save your emotional capital....simple, don't fight the trend!  Since the aggressive trading method I use generally goes for +2.00 profits, knowing the trend will help me ride the wave instead of against it, so that I can get that little extra "umphhh" to carry me to the finish line.  Every little bit of help counts.

Determining the trend

There are many ways to determine the trend, whether it's by trendline, moving averages, chart patterns, etc.  Like anything else in trading, there's no right or wrong way -- just a way that suits your personal preferences, each with their pros and cons.  I'm using a method that I learned many years ago, so it's something I feel comfortable with and seems to work. 

Assuming the trend is already up, I generally look for the swing low that preceded the HOD or a critical swing high, and if that swing low level is broken, then the trend will potentially change (possible chop zone), or the trend will change to down.  And as long as new highs are created along with higher swing lows, then the trend will remain up.  And vice versa for downtrends.

Here's an example of how I calculated the trend today:
So how does this fit in with my trading?
After reviewing my trades in the past, I've found that when I'm explicitly aware of the trend, AND I only look for quick scalp trades in the direction of the trend, I usually do well.

Fight the trend and my emotional and trading capital usual suffers.  If I do end up trading against the trend because of a strong signal, I'll usually be extra quick to take profits or to scratch the trade.  Very common sense -- this is not groundbreaking stuff by any means!

But it's so easy to get "stuck" or "out of sync" when trading a market that is trending strongly, especially if you've had success selling the highs and buying the lows during sideways or choppy markets.  I've had to snap myself out of trades recently -- exiting an against the trend trade early just to prepare myself for the next trade that goes with the trend.  Those with the trend trades usually end up with working better and more quickly, just the way I like it!

* * * * *
Monday, November 14
Total gross profits:  $337.50  +6.75/car
[SIM adjusted gross profits:  $162.50]  +3.25/car
Total trades:  11  [2 scratch, 2 loss]
Accuracy:  63.6%   [scratch counted as loss]
Contracts per trade: 1

NOTES:  I'm starting to think my SIM adjustments might be too penalizing, but I'd rather have it this way vs. being surprised with my results once I go live again.  In essence, the trades I adjust down to +2.00 ES points were +2.50 wins in SIM.  So I have total confidence that those trades would have been filled in real life.

Nearly all the trades today were prior to lunch.  I got Costco on my mind for whatever reason, and used that as an excuse to leave once the markets started looking choppy as we headed into the lunch hour.  However, I came back to see that there was quite a strong move higher while I was away.  

There was a +2 opportunity during the lunch hour that I missed, as well as another +2 opportunity in the afternoon where I brought in my stop a little too soon.  But all in all, today felt like a solid day mentally, and I believe having a lunch break helped me to maintain my patience in the afternoon.

The one full loss I had went against the trend, and not only that, it was initiated based on a level that wasn't quite as significant as I had originally thought.  But instead of scratching it or minimizing the loss once I discovered my error, I decided to let it stop me out.


Tomross58 said...

Hey Grove,,

Well you are not alone as I didnt realize that we were in a trend day until late afternoon. The lightbulb went off very late in the day and then I thought,,,,,Now this day makes sense,,,,. I think you are correct in that determining if we are in a trend day or range bound is a huge edge in trading. I like what you explained and I do mostly the same but I like to use the 9 EMA and the 20 EMA on the 5 min chart. When the EMA's are flat and sideways, candles will slice through them like butter but when in a trend day you will see price pullback to the EMA's after price is extended from the 9 or 20.(Yesterday was a great example,,,5 min Time frame) As you say nothing is 100% but more so of what you are used to I guess. I have to admit that these last few days I have not looked at my 5 min chart and now will bring it back not so much to trade off of but to help determine trend or range day. Excellent post.


Grove Under said...

Hi Tom,
Thanks much for the feedback. In some ways, perhaps having something else for me to focus on in addition to the system (especially when we're patiently waiting for a signal) helps to give my mind something to do (and stay out of trouble).

But one concern is whether having yet more information will confuse or hinder my ability to take a good signal.

Yet more stuff to consider as part of the journey!