The View DownRiver

Hello everyone. I trade currencies including gold. I wanted to start a journal to post some of my trades and analysis.

My Background......
I thought it might be helpful to give you a little background on myself. I think this is important because many of you should be able to relate to my journey. I live in the United States, in Maryland near the Chesapeake Bay. I love the water and the Bay. I especially like to fish so from time to time I might talk about the water and fishing. There are a lot of similarities in water, fishing and trading.


I did not graduate from Yale or Harvard. I do not have any family history in the markets. I am not an ecomomist, nor have I ever been employed by anyone in the trading business. I know very little about market fundamentals and do not understand GDP's, trade deficits or how to interpret consumer retail reports. I do not hinge on every news release.


Despite all this, I am a successful full-time trader. I started with a meager sum of money and promptly lost most of it. It took several years to build my business and finally make the transistion to full-time. I used to work in sales for a major US corporation and started trading part-time. I developed the River Theory Trading Methodology completely on my own and I have absolutely no background in computer programming.


Why am I successful? I understand human emotion and the mental side of this business. I understand what drives markets. I understand the concept of value. I understand the importance of risk and how to manage it. I understand how to set goals and reach goals. I understand that trading is not about the latest greatest system advertised on some late night infomercial or sent to your inbox. I understand that trading challenges your innermost soul and creates opportunity to discover your hidden talents.


I want to help you understand better if you will let me. The transistion I went through was a valuable learning lesson. Like many of you newer traders, I wanted to make trading my profession in the worst way. I fell in love with it and I finally began to reach my goals when I realized how important the mental side of the business is in success. More than anything else, the mental process is what I hope to instill in anyone who has not found the "secret".



DRT

I developed a methodology that I call River Theory. It may sound a little hokie, but it helps me remember things and as I stated, I love the water and see many similarities in the flow of water and the flow of the markets.

I am a value trader. I focous strictly on supply and demand. I do use indicators and do not believe in their value. I strictly watch price and leave the interpretaion of any information up to my own mind. It is far more powerful than any silly squiggly line running all over a chart.

River Theory - The Methodology

I have always tried to use the constant tidal flows of water or currents as an analogy to help trade the constant flows that occur in the markets. As sure as the sun rises, these events occur. There are large dominating flows that are similar to ocean movements and smaller river flows at work ebbing and flowing from the large oceanic flows. Water, like price is always seeking equilibrium. Trying to find the balance point and then moving away again and again. RiverTheory attempts to help define those smaller flows since they are arguably easier to predict. Tidal rivers flood and ebb on a constant predictable cycle. Some tides are extreme, but in general the flows operate in predicable time tables. Price movements in tradable markets are very similar. A final observation and analogy is that under most conditions navigating the flows of a river are much less risky than navigating the unknowns associated with travel on oceans when traveling in a smaller boat.

I have designed a mathematical formula that attempts to define the “equilibrium” level on a dynamic basis as markets unfold on a session by sessoin basis. I named this concept River Theory and the level that represents equilibrium is called River.

Adaptive Dynamic Value (ADV) – The River or Equilibrium Level

The core methodology of RiverTheory is based on a concept called Adaptive Dynamic Value (ADV). Simply stated, ADV defines the current “flow of the market” by processing information that is occurring in the present. Not what happened yesterday or last week. There is always a micro flow within the market that is influenced by what is known and to some degree what is expected or unknown. This type of emotional flow may be caused by data releases, news, option related supply/demand, and key technical levels that will drive markets for a short time. Often it can be for only one session or part of a session. Price can reverse or return to true equilibrium after a session or event has passed. When a trader uses RiverTheory he can not trade with bias to longer term value or fundamentals. All he can be concerned with is capturing the current flow of the market based on what is known.

The River concept can be used successfully with any time frame. My preference are the daily and hourly levels. Montly, Weekly as well as 15M levels are extemely accurate.

Since River represents equilibrium or the fair level for the flow of price based on current conditions. It is a gauge for bullish or bearish sentiment. When price consolidates and builds value near River it is likely going to break out away in one direction or another. Likewise, if price has moved away it will likely seek equilibrium by moving toward River or River moving toward current price

What is my Ideal Methodology?

What is an ideal methodology for me?

Ever ask yourself this question? After several years of trading, I have concluded that there is no advantage in trying to analyze the markets beyond the facts of any given session. In other words, there is no advantage in trying to forecast price movement reflecting the emotional state of traders over a long period of time. That is like being a mind reader or convincing myself that I can actually predict the future. I do not have the enormous capital, or the forecasting ability to engage in long term predictions of the unknown to begin with. In reality, I do not think anyone does.

An ideal methodology for my style should include the following elements:

• Defines which markets to trade
• Defines exact risk on each trade
• Defines position sizing
• Defines when to trade
• Extremely simple and easy to implement
• Does not require extensive fundamental or technical analysis and predictions limiting time spent watching markets which enables concentration on trade management
• Allows complete flexibility for discretionary entries and exits, yet gives guidance on high probability entry and exit
• Short term holding periods
• Rings the register often
• Has potential for high profitability and defined risk given my current equity

What are your objectives?

EURUSD for Monday 3-12

As we head into a new week, I am continuing to watch for a new directional flow for the Euro currency. If you just use a commonsense look at this pair and many of the currencies, you can attribute the consolidations and lack of trend to uncertainty in the market. Our global central banks are at various stages of their monetary policies. Looking at the ECB...will they continue on their path of tightening? Or has vigilance escaped them for the moment. They don't know, so how should the market know? We just continue to focus on value since we have no control over the market direction. As many of you know, I watch the order flow on Euro Futures which are traded on the CME globex. I am usually able to see central bank and other large activity here. It has been noticeably absent in my opinion of some time.


If you recall on Friday, I had suspected we may see a buy extreme on a drop in value down near the 3063 level. Well the drop in value came and buyers emerged, but it was certainly not overwhelming. I remain long as we build value in the Transistion area and continue to focus on the 3063 level as my risk area. This area is eveident in the Monthly Price Distrubution Chart. I continued to add to my long positions on Thursday and Friday as the market gave me the opportunity at a good value.


Okay back to River Theory....


We closed on Friday under the Transition Level of 3132 and the River Level of 3142. The close was not significant in my opinion and only a few ticks under as we continue to resolve this key area. This close could be our first warning sign that a move is coming. Monday's price action should be key at determining the directional flow away from this level. Remember, our goal is capture the move away from this area. Ideally, we would like to take 100% of Zone 1. This would represent a move from 3132 to 3353 or 221 ticks.


If you are long stay long, using a close below 3063 as your risk. Traders can look to establish new longs on a move above River at 3142. Your short term risk level should be below the Transition Level at 3132. Targets are 3214, 3242 and 3353.


I do not recommend establishing shorts until the 3063 level is resolved. Again, refer to the Monthly Price Distribution Chart for guidance. If you are inclined to set up shorts, use the 3132 level as your key. Risk would be above the River Level at 3142. Downside targets are 3069, 3046 and 3007.


NEUTRAL UNTIL RIVER LEVEL OF 3142 IS RESOLVED

This journal will likely be of great interest to me as I view the market (in my case, index futures) in the same way, and I hope that it will also be of great interest to those who continue to flounder (no pun intended), particularly those who focus on currencies and don't always have "volume" to help them.

I look forward to your explorations.

Db

Thanks DB. Which Index Futures do you trade?

dbphoenix said:

This journal will likely be of great interest to me as I view the market (in my case, index futures) in the same way, and I hope that it will also be of great interest to those who continue to flounder (no pun intended), particularly those who focus on currencies and don't always have "volume" to help them.

I look forward to your explorations.

Db

Click to expand...

GBPUSD for Monday 3-12

Last week, I recommended setting up longs around the 9251 area. If you are long, then stay long as I continue to look for a move up to River level at 9383 and on to Transition at 9594. This would represent a move of approximately 201 points. Please take a look at the updated Monthly Price Distribution Analysis for this pair to get a longer term overview of the suspected move.


Traders should continue to look to establish longs on a move down to the 9251 area. We may get a push through this level down closer to 9200 which would represent an excellent buying opportunity. Set you risk area below 9175, which would indicate that this view is incorrect in the near term. Upside targets are 9383, then 9443 where I would expect strong supply to come in the market. Give this area some room to build value and look to reset for the continued move up. You could also take partial profits at this level and then re-establish longs on a continuation through the 9443 level looking for 9594.

NEUTRAL UNTIL RIVER IS RESOLVED AT 9383.

DownRiverTrader said:

Thanks DB. Which Index Futures do you trade?

Click to expand...

Just NQ. I've gotten lazy as the years have rolled on (and I try to be done by 1100 . . . ).

Db

USDJPY for Monday 3-12

We have had some wonderful profit on our short positions on the USDJPY over the last several days. However, last week I was warning about near term USD strength in this pair. On Thursday and Friday the USD strength materialized and price moved up in a range of around 261 points. My conclusion was inflenced by the out of balance state of our Monthly Price Distribution Analysis. Please remember to review these charts to get a overall view of value on this pair and help with your shorter term trading plans.


On Friday the River Level was at 117.05, I recommended to set up longs at this level . I hope you were able to catch this move of over 100 points. Our first target was at 117.99. You may have chosen to take partial profits here.


So what now?


It is very important to review our PDA chart. You will see that we are at a key topside level in the short term distribution. If we build value here and don't move up, then the downside will likely materialize rather quickly so be very nimble with current longs or new longs as we are at critical mass in the short term strength.

If you are long stay long and continue to look for 119.35 where longs should exit for the short term. I will likely look to set up shorts at this level, but lets see when(if) we get there. I would now manage my risk by using the River Level at 117.43 as a downside guage. A move below here and I would cover any longs and stand aside.

If the market gives us the chance, look to get long ahead of 117.43 with risk below this area as we look for 117.99 and 119.35. I think the market could possibly range trade the 117.43 / 119.35 zone this week but let's see where we are in the next couple sessions first.


Only a move through and settle below River at 117.43 would cancel my short term bullish bias


SHORT TERM BULLISH WHILE ABOVE RIVER AT 117.43

read with interest

Thanks for the insight DRT into your trading style.
I have for many many years believed that some traders spend far to long looking at the charts instead of looking at the supply and demand. As we often over complicate we miss the opportunity to make some money.
I thought some time ago about how i traded the dow jones index. Back in 2001 i traded it and saw it as an animal which had pace and raced Up or Down and sometimes rested unsure ( through fear) where to go next. I still think this is the case as i return to trading again.
I like the idea of the ebb and flow DRT of a river. I think it's easy to forget the market tends to act on the fear and greed of its buyers and this is a very true example of nature taking its course.
Maybe old Fibonacci was on to something after all.

Trade well and keep the post going as i will certainly read it

Cheers
Sefty

Well said Sefty. Well said.

What about stop losses?


This question understandably comes up often so I thought it may be helpful to talk about my opinion on using stop losses when trading. More specifically, when trading River Theory on a daily time frame. I want to emphasize that my view may not be suitable for your risk tolerance or current trading method, so this is in no way a recommendation. Let's call it a MasterTrader observation of the markets. You should manage your risk based on your individual situation and capital and consult the advice of an expert.


I learned a lesson a good while ago concerning stop losses. Where ever I decided to place my stops, the market (like a heat seeking missile) decided to go after them. And then you know the story....the trade turned around and continued in the direction I planned while I sat on the sidelines with a loss. There is nothing more irritating than this when it happens. You were correct about your trade theme, but you were lousy at setting your stop loss. If you think about it, when you choose a stop loss level, chances are everyone else in the trading world is thinking the same thing. It is not unusual for these orders to sit on the books and dealers begin to magically work price toward them. Usually while you are asleep or eating your dinner during the Asian session.


After observing this for some time, I decided to try an experiment and trade without any fixed stop losses. Guess what? My profits increased and my winning trades increased. Did I get burned a few times? Yes, but I will not get in a situation where this is devastating to my trading capital because I have control over my risk and position sizing. How can it not happen? I take my excess equity out of my trading accounts every week and put them someplace safe. I trade some fairly large sizes and I hold overnight and over the weekends and holiday periods also.


So how do I manage risk on a trade-to-trade basis? Here's what I do....


As you may know, I am a value trader. What I am looking for is the price level that the market would need to build value at to prove me wrong. Notice I said, "build value" and not "trade". I am waiting for price to prove my particular trade theory wrong. Think of it as a zone and not a specific price.This may be a daily close or trading in an area over a couple sessions (building value) and not moving in my intended direction. I think it is really unbelievable that traders think they have the ability to forecast a stop loss at a specific tick level. Makes no sense in a market the size of the global currency exchange.


So in summary, I know my value area that would prove my trading decision incorrect. I wait for price to build value around this area and/or move completely through before deciding to close my trade or in other words acknowledge that my trade theme was wrong. Sometimes, I lose more than I had planned but if I have done my homework and forecasted a proper value area for supply or demand, more often that not I will come out ahead in terms of profits and loss. I give myself time to make a sound business decision. I don't close the store just because a manipulated rumor about ECB insiders providing information that there will be no more rate hikes, or the avian flu breaking out in Iceland. Just think about it in terms of common sense.


Instead of an exact stop loss level, try to think in terms of stop loss zones. To be successful at this you must always know your risk level based on your position sizing and forecasted value level for proving yourself incorrect.

EURUSD for 3-13

We did move up above the River level today as anticipated and discussed in the post yesterday. It may be helpful to review yesterday's post.


The EURUSD was up around 70 pips today. Hopefully you have been able to establish long positions over the last few sessions and have taken advantage of the move away from the River Level. The market has given us several occaissions to buy.


Remember, I continue to look for a move to 3353 at this time. We would capture the entire zone 1 of 221 pips if the up move continues. If you review the Price Distribution Chart, you will see that the 3262 area will be a difficult area of supply to push through. Be prepared if we do move up.


If you are long, stay long. The River Level comes in today at 3166. If we get a close below this level, then that would be a warning that the move up could be fading. Targets continue to be 3242/60 andthen 3353 where short term traders should cover and take profit.


NEUTRAL UNTIL RIVER LEVEL OF 3166 IS RESOLVED

US Dollar Index

Keep your eye on the USD Index as well as the Euro Index as a general guage of sentiment.

A close below River today shows weakness in the USD Index. Keep your eye on it tommorrow for confirmation.


SHORT TERM NEUTRAL UNTIL RIVER IS RESOLVED

GBPUSD for 3-13

It was a volatile day for sterling that produced some good opportunities. Hopefully, you were ready and took advantage as 2 of our upside targets were hit and then a reversal back down to our buy area at 9251 (actual low was 9249). These supply and demand levels proved extremely accurate today. As time goes on, I hope you will become more comfortable with River Theory and it will be easier trust the levels when opportunity like today occurs.

If you are long, stay long and continue to follow yesterday's analysis with the only exception being our River Level which is now at 9385. Review the Price Distribution Analysis for Sterling in the PDA section and also review the 3-12 post for guidance.



NEUTRAL UNTIL RIVER IS RESOLVED AT 9385

Eurusd 3-15

The move up did continue today as anticipated and we continue to hold above River which is coming in today at 3179. Many of us have some nice profits in this trade and have been long since the last week of February. I went back through the archives and we set up longs on February 26 and have added to them as the trade has developed. It has been a slow grind higher, a little different that some may be used to for this pair. It reflects the emotional state of the market and the position of the global central banks in my opinion.


Where are we now?


My view is little changed at the moment. I continue to look for a move to 3353 at this time. We would capture the entire zone 1 of 221 pips if the up move continues. If you review the Price Distribution Chart, you will see that the 3262 area will be a difficult area of supply to push through. Be prepared if we do move up.
If you are long, stay long. The River Level comes in today at 3179, up 10 ticks from yesterday. If we get a close below this level, then that would be a warning that the move up could be fading. Targets today are 3288 and then 3353 where short term traders should cover and take profit. You may decide to take partial profits ahead of 3353 at 3288 and manage the trade from this point.


SHORT TERM BULLISH ABOVE RIVER LEVEL OF 3179

Gbpusd 3-15

BINGO! The old Gal did have some life after all.


The analysis from yesterday was right on the money for this pair today. I hope you were able to take some nice profits on any longs today. I wonder what novice traders were thinking as sje looked old and tired. My guess is the buying was a lot of short covering. What do you think?


Here is the analysis from yesterday..


Traders can continue to look to establish new longs on a move down to the 9251 area. We may get a push through this level down closer to 9200 which would represent an excellent buying opportunity. Set your risk area below 9175, which would indicate that this view is incorrect in the near term.


We got a nice push down to 9212 and I bet most were selling. I hope you went long as we rocketed up 162 points out of this area.


So what now?


Longer term I continue to look for 9594, but we certainly have some wood to chop before we get there.


If you are long stay long, River comes in at 9397 today and we will need to push through this area to continue up to our higher targets. Expect volitilty here. Continue to look for 9443. The area between River and Zone -1 will be critical. I expect a lot of supply here. Try to give this area some room to resolve if your risk tolerance level can handle it, if not there is nothing wrong with taking profits ahead of these levels if we get there and waiting for this area to resolve.


Any move back through 9251 would cancel my short term bullish view and I would recommend to exit longs.


Don't forget to review the PDA charts on this one.


NEUTRAL UNTIL RIVER IS RESOLVED AT 9374

EURUSD for 3-23

EURUSD did close down today about 55 points toward our River Level as anticipated in the analysis from yesterday. If you followed the trading recommendation, you should be short out of the 3386 level.

Remember that this is a countertrend move with longer term value pointing to higher levels near the 1.4400 level. I want to emphasize that you should review the price distribution analysis update for this pair. It is very important to have a broader veiw as we head towards the end of the month.

So what now?

I indicated that we would see stalling from demand at Zone +1 3353 level and we did. You will recall that this area was our long term target on our recent longs. We want to now use this key level as an upward guage for any near term continued strength. A strong move through this area and you should cover shorts.

If you are short, stay short and continue to look for a downward test of the River Level which comes in today at 3271. I recommend covering shorts at this level. This would represent approximately 115 points on our countertrend trade. The River Level should help indicate the next directional move.

Normally, I would recommend that longs be established at this level on the test. I would recommend that we be patient if this area is tested and watch for the next clue on this occassion as I do I do see a possibility that we may continue to trade down to the Transition Level at 3132. If given the opportunity, traders who did not establish shorts yesterday can look to set shorts on a retest of the 3353 Level today and follow the recommendation above.



SHORT TERM NEUTRAL UNTIL RIVER IS RESOLVED