Retracement strategy development

sulong · Dec 23, 2004

This thread will have a focus on trading a retracement (ret) after a break out (bo).
For me, the number one factor in beginning our study, is a strong understanding of support and resistance. (S/R) Whatever entry opportunity may present itself, will do so as price leaves this area.

Consolidation of price as it forms the most recent S/R area, accompanied by a dry up in volume will be a crucial step for a BO, therefore a point of study.
Consolidation need not be limited to a horizontal price pattern. A “hinge” for example, can produce the desired results.

Posting anointed charts for illustration is encouraged.

Choosing an exit strategy is important as well, and as such will be on topic, as long as it gets posted and studied.

sulong · Dec 23, 2004

OK, I’m going to explain a few things about the way I do things, in an attempt to keep the confusion down to a minimum.
First off, I use IB charts with IB datafeed for my real time charting.
Then I use prophet.net charts for my look back, to get my S/R levels.
Then I use futuresource.com to look at over night price action.

I used to use sierra charts, and have a lot of charts saved up from that program. But conditions have changed, and I’m unable to continually collect data. So being the frugal person that I am, I’m trying things this other way, before I decide if I’ll need to purchase historical data, or another charting service.

I also predominately trade the first 2 hours of regular trading hours, and will until I complete an ill-advised obligation I agreed to.
There’s more, but this is enough to give you an idea why I might attach different types of charts at different times.

I trade the NQ intraday, and look for a setup on a 5m interval, and look to the 1m for entry.
If you trade stocks or other instruments, and / or on different bar intervals, You are still welcome to participate in this thread. The principals work the same way.

sulong · Dec 23, 2004

The daily NQ has found support at the 1610 area 4 times in the 9 days. Each time on less volume than the touch before. One side or the other seems to be weakening.

The daily ES found support at the 1195-96 area and also tested a number of times in the last 10 days or so.
ES is rising with little effort. Are shorts weakening? Will the new high hold throughout the holidays? Stay tuned..

The third chart is a 5m, and show how I set up the areas I watch for the day.

sulong · Dec 23, 2004

Another note on why I'm getting into all this retracement and breakout stuff.
I often read that ret's are an easy or simple way to trade. That may be true for a lot of traders, but for me it's the most difficult.
So seeing as how I have such a hard time recognising consolidations in real time, and displaying the Patience required to let it develop, I'm trying to strengthen this weakness.

I would rather pursue other strategies that I find much easer to recognise, and take advantage of.
But then, I would still be weak.

dbphoenix · Dec 23, 2004

sulong said:
Another note on why I'm getting into all this retracement and breakout stuff.
I often read that ret's are an easy or simple way to trade. That may be true for a lot of traders, but for me it's the most difficult.
So seeing as how I have such a hard time recognising consolidations in real time, and displaying the Patience required to let it develop, I'm trying to strengthen this weakness.

I would rather pursue other strategies that I find much easer to recognise, and take advantage of.
But then, I would still be weak.

It's an easy/simple way to trade if the market is trending. Considerably more difficult if it isn't. Note, for example, the April to January leg, the January to August correction, and the current leg. Evaluating the charts without taking the forest into account will lead to faulty assumptions and hypotheses.

Remember Wykoff:

The first step for a trader is to determine the current trend of the market.

The second step is to determine one's place in the current trend.

The third step is to determine the proper timing of one's entry into whatever it is he's trading.

And don't forget trend stages. Once you leave stage 1, breakout strategies become more problematic, so it follows that ret strategies will also become more challenging.

sulong · Dec 23, 2004

dbphoenix said:
Remember Wykoff:

The first step for a trader is to determine the current trend of the market.

The second step is to determine one's place in the current trend.

.

Good idea.
Below are 3 NDX charts, 2 weekly and one daily.
The longer term chart shows some possible R areas
The next weekly shows the correction (Jan to Aug) and then the aftermath.
The 3rd chart is the daily, and shows the current trading range.
So unless / until NDX breaks above 1630 or so, or a decisive break below 1560, attempting a ret strategy would not be keeping with a trend following method.

dbphoenix · Dec 23, 2004

sulong said:
Good idea.
Below are 3 NDX charts, 2 weekly and one daily.
The longer term chart shows some possible R areas
The next weekly shows the correction (Jan to Aug) and then the aftermath.
The 3rd chart is the daily, and shows the current trading range.
So unless / until NDX breaks above 1630 or so, or a decisive break below 1560, attempting a ret strategy would not be keeping with a trend following method.

Not exactly. When it "broke" above 1560, it resumed the trend. Therefore, any trade that met the criteria then or thereafter was game.

Granted we are choking again, having failed to hold onto a higher high, but here is where a stock trader would look for similar patterns (the "Darvas box") and begin to squeeze the trigger. (Sorry for the lurid metaphors; I'm watching Gosford Park . . . ) Most rookies, however, will wait for the breakout, then scramble around looking for something to buy . . .

erierambler · Dec 24, 2004

Nq

Not sure how the attached chart will turn out, hope everyone can see the bars and volume.
Volume on the NQ for December has traded between 1614 and 1626 the most so far (using market profile) Today and yesterday price has pretty much stayed within that range. Therefore Sulong for a breakout strategy / retracement let's see how this goes, should price break above 1626 by 5 pts and look for a retracement or below 1614 and look for a retracement.

erie

contrakt · Dec 24, 2004

timeframe

sulong said:
I also predominately trade the first 2 hours of regular trading hours, and will until I complete an ill-advised obligation I agreed to. There’s more, but this is enough to give you an idea why I might attach different types of charts at different times. I trade the NQ intraday, and look for a setup on a 5m interval, and look to the 1m for entry.

So the weekly and daily chart are for preparation on the next trading day and intraday 5m for setup and 1m for entry.

On what time frame do you:
1-asses direction, range (and S/R) intraday?
2-exercise (stop)loss control?

sulong · Dec 24, 2004

contrakt said:
So the weekly and daily chart are for preparation on the next trading day and intraday 5m for setup and 1m for entry.

On what time frame do you:
1-asses direction, range (and S/R) intraday?
2-exercise (stop)loss control?

For the last year or so I've only concerned my self with S/R, and my estimated strength of each on an intra day bases, along with the daily trend. ( I've never used a weekly chart before)
So with that I would enter at what I thought of as support, and exit at a failure to make a new high, or the completion of the ADR, which ever came first.

But now I believe I'm missing some important principals, which I'm trying to fix. Namely "effort and result" another way to say it might be, building energy and releasing energy.
That is why I'm looking at consolidation - BO's - RET's.
It's my thought that these types of market action, if analysed properly, give the best opportunity to participate with larger size in the form of pyramiding.

dbphoenix · Dec 24, 2004

Sulong agrees that the attached file on "Rectangles" may be of some help in clarifying a few issues regarding S/R, BOs, and RETs (then again, it may not, but it's worth a try).

Some of you already have it, but this is a handy place to keep a copy.

I'm also going to attach a copy of "Bases" since rectangles are a type of base, the success of a RET is so dependent on the success of the BO, and the success of the BO is so dependent on the nature and quality of the base.

sulong · Dec 25, 2004

DB,
Thankyou for adding the basses pdf.
The two pdf’s, side by side, go a long way in showing the different types of BO.

In the “rectangles pdf, on page one, following the chart along from the beginning at the far left side.

We begin with an upward move, which then presents a ret opportunity at 1. (Notice how price test an end of bar entry, 3 bars latter) and then I see another ret before we get to 2 (I’m going to call the high preceding that ret 1a). If another entry is made at this point, we have to decide if the distance between 1a and 2 is enough to keep us interested in trend type of trading. For me, 2 is the first failure to hold a new high, seen 3 bars after 2. So made a little on the first entry, and “be” on the second.
So now we have a tentative R line at 2 and the original trend is halted, but not broken.
Right here, is the question as I see it. Is 3 a ret? Or just a simple test of S from 1.

I’m not so much asking db, as I’m tossing out there to others who have the extended study material, is this how you follow the price action along? Are you guys seeing something different than I am, when you follow price, bar by bar? How do you read the action up to the formation of the trading range?

contrakt · Dec 25, 2004

sulong said:
We begin with an upward move, which then presents a ret opportunity at 1. (Notice how price test an end of bar entry, 3 bars latter) and then I see another ret before we get to 2 (I’m going to call the high preceding that ret 1a). If another entry is made at this point, we have to decide if the distance between 1a and 2 is enough to keep us interested in trend type of trading. For me, 2 is the first failure to hold a new high, seen 3 bars after 2. So made a little on the first entry, and “be” on the second.

So now we have a tentative R line at 2 and the original trend is halted, but not broken.
Right here, is the question as I see it. Is 3 a ret? Or just a simple test of S from 1.

Note that the low, after high at 1a, is broken before getting to 3. So to me 3 is a successful test of the S from 1. Just as 9 is a successful test of the S from 1 and 3.

sulong said:
For the last year or so I've only concerned my self with S/R, and my estimated strength of each on an intra day bases, along with the daily trend. ( I've never used a weekly chart before)
So with that I would enter at what I thought of as support, and exit at a failure to make a new high, or the completion of the ADR, which ever came first.

While waiting for bo-ret, giving this chart, one could play bar-breaks after 3, 8 and 9.
To me 8 and 9 have better potential than 3, because of the wider range and more volume.
8 has more potential than 9, because playing 9 might require overnight

risk.

Consider also:
-range left based on R-S or ADR;
-requirement and risk appetite for overnight risk;
-cost of trading;
-tailor-made assessment of current market conditions (

mojo).

:/:idea: neither 3, 8, 9 (and bars that follow directly) have any significant volume.

contrakt · Dec 25, 2004

sulong said:
For the last year or so I've only concerned my self with S/R, and my estimated strength of each on an intra day bases, along with the daily trend. ( I've never used a weekly chart before) So with that I would enter at what I thought of as support, and exit at a failure to make a new high

Sulong, im intrested in your defentition of "a failure to make a new high"

dbphoenix · Dec 25, 2004

sulong said:
So now we have a tentative R line at 2 and the original trend is halted, but not broken.

Right here, is the question as I see it. Is 3 a ret? Or just a simple test of S from 1.

Assuming that this is all you know of the price action and the trend, by the time price reaches potential S the first time after 2 (7 or 8 bars before 3), price is testing the swing low at 1 and which is coincidentally the TL. Therefore, the TL is not halted. If I had pyramided my position at both 1 and "1a", I'd definitely be out of the 1a, but probably still in the 1. When 3 failed to break S, I'd definitely add at that point, and, yes, 3 would at that point be a RET (as well as at least a partial confirmation of what had tentatively become S), assuming that there was some sort of BO at some point beyond the left edge and that entry was made well before the RET at 1 (if the BO occurred just to the left of the left edge, 1 would make a perfectly good initial entry point).

But that's what it means to trade in real time. For example, you have to know the characteristics of a hinge/springboard in order to recognize it in real time, perhaps before it has completely formed. Playing it after it's already formed is generally too late. Similarly, you can't know a range is going to form in advance. You can't know a swing low or swing high is going to be exceeded in advance. You trade what you see, not what you think, and if you get SO, then you re-evaluate the situation and regroup.

contrakt · Dec 26, 2004

dbphoenix said:
When 3 failed to break S, I'd definitely add at that point, and, yes, 3 would at that point be a RET (as well as at least a partial confirmation of what had tentatively become S), assuming that there was some sort of BO at some point beyond the left edge and that entry was made well before the RET at 1

Agree, 3 has mixed flavors of S and Ret. This seems to be a fruit full zone for sweet-spots.
3 and 9 are the same in this respect.

What general themes should be considered holding over night after 9, besides deep pockets or a small enough position?

dbphoenix · Dec 26, 2004

contrakt said:
Agree, 3 has mixed flavors of S and Ret. This seems to be a fruit full zone for sweet-spots.
3 and 9 are the same in this respect.

What general themes should be considered holding over night after 9, besides deep pockets or a small enough position?

It may be a "fruitful zone for sweet spots" later, but not at the time of 3. Therefore, 3 and 9 are not the same in this respect. The dynamics are entirely different since the range is well-established by 9.

As for holding overnight after 9, the most obvious consideration is risk tolerance, but your management would also depend on your position at the time: where did you enter, how much profit do you have, what's your plan, what's your objective, etc. However, 9 is a potential reversal, not a retracement, so it's off-topic.

sulong · Dec 26, 2004

contrakt said:
Sulong, im intrested in your defentition of "a failure to make a new high"

Contrakt,
I was waiting to see if there was any more responses to my questions before I answered your question.

As far as "failure", on an intraday Base's, If demand is not enough to push price through R on the second try, I'll exit at the break of the preceding completed bar +1 tick of that try.
If a new high is made with a completed bar the looks "hammer type", ( the tail shooting upwards) and price closes at or below the first high
I'll exit there.
A 5m 2 point bar cannot be a hammer type in my book.
Bozo's are another thing I'm working on, dividing them up between those that lead to S/R, and those that lead away from S/R, but that is a work in progress.

erierambler · Dec 26, 2004

sulong said:
So now we have a tentative R line at 2 and the original trend is halted, but not broken.
Right here, is the question as I see it. Is 3 a ret? Or just a simple test of S from 1.

I’m not so much asking db, as I’m tossing out there to others who have the extended study material, is this how you follow the price action along? Are you guys seeing something different than I am, when you follow price, bar by bar? How do you read the action up to the formation of the trading range?

Sulong,

Yes this is how I would follow price action along. It is mainly because of what I have learned from Db over time.
After the formation of the trading range:
Notice the red circle between #3 and #4. The fact that price dropped below that red circle between #4 and #5 would have me out. Then it would be the action after #10 that would get me in again. Meaning I would wait for a little consolidation at #10 area and take price from there. Kind of like where we are right now on the NQ.
Others may do it differently

erie

sulong · Dec 26, 2004

erierambler said:
Sulong,

Yes this is how I would follow price action along. It is mainly because of what I have learned from Db over time.
After the formation of the trading range:
Notice the red circle between #3 and #4. The fact that price dropped below that red circle between #4 and #5 would have me out. Then it would be the action after #10 that would get me in again. Meaning I would wait for a little consolidation at #10 area and take price from there. Kind of like where we are right now on the NQ.
Others may do it differently

erie

OK , a couple of questions.
first, starting at the far left of the chart on page 1, with in the context of "ret" at what point is your entry, that you would exit from between 4 and 5?

And if you don't mind, at which point is a "ret " type entry no longer appropriate to the market conditions?

From where I sit, point 6 is the is the place I view as a change of tactics are called for, until or unless I see a BO from the range.

Retracement strategy development

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