Entries that are already well developed

[Purple Brain]

I've just got a long entry signal on nzd/jpy (10:30 BST). It's been meandering back and forth and fairly directionless all of yesterday when it offered a long at 06:30 this morning. I ignored that signal based on the assumption that it was a continuation of the whipsaw of yesterday. Nothing wrong with that in my book.

But having developed into an up trend (I'm looking at the 15 minute chart), it gave me another long signal just now. This isn't just a one-off as I routinely get signals for trades where the pair is already well into a trend and I take the view that the surge in momentum which took it so far from its moving average (I use a 49 period ema) is unlikely to be sustained and I wait for a pullback to that moving average before considering taking a new position.

Is this a sound strategy or am I likely to miss more good trades than losers taking this view?

 

[timsk]

Is this a sound strategy or am I likely to miss more good trades than losers taking this view?

Hi PB,
I fear this will lead to disappointment in the long run. Basically, what you're doing is overriding what sounds like a fairly mechanical entry with a highly discretionary interpretation of recent price action. You'll get it right on occasions and congratulate yourself with your brilliant assessment of market sentiment but, more often than not, you'll get it wrong and you'll miss out on what would have been very profitable trades and the ones you do take will contain above average number of losers. So, what to do?

Well, I suggest you take all your signals without using any discretion whatsoever. However, there's an important caveat. Assume that the trade isn't going to work out and have a back up plan if the market just chops about in a sideways fashion. Let it do whatever it wants, safe in the knowledge that if a good trend develops you'll have a nice winner and, if it doesn't, you've got a mechanism in place to cope with it which ensure any losses are small compared to the winners. Easier said than done - but that's what I'd aim towards if I were you.
Tim.

 

[Purple Brain]

Thanks for the advice timsk. I'm not actually incurring losses as I'm overriding an entry with inaction - not taking action when I shouldn't. But of course you're right. If I don't take a trade I should have taken and it turns out to be a winner then I've forgone that profit from that trade which is in effect a loss of opportunity rather than loss of actual capital. Almost as bad.

 

[rawrschach]

Keep a journal.

Everything else is conjecture.

 

[Purple Brain]

Keep a journal.

Everything else is conjecture.

This is an excellent point and I did indeed start out keeping meticulous notes on all decisions made.But very few of my 'situations' fell neatly into the one camp or another and I ended up with hundreds of quite separate setup queries that refused to be more neatly catgeorised. Those query events which do occur frequently enough to break into my consciousness - such as the one described on this thread - are the ones that probably deserve journalling.

Thanks for the reminder to do the simple stuff. It gets lost sometimes in the busyness of the work.

 

[rawrschach]

RE your original post, keep a record of what happens for all 'well developed entries' and see how they pay off.

I disagree with Timsk.

I dunno how your signals are generated but trading blindly isn't smart.

 

[Purple Brain]

My trading activity could easily fall into the 'trading blindly' camp given my grasp of things, but I trade with what I consider the trend (price relationship to moving averages). I buy from pullbacks to an up trending moving average / sell on pullbacks to a down trending moving average.

It's when the price finishes its pullback and starts to go in the direction of the main trend (longer moving average) that I question the strength of the upcoming move. If the price all the way back to the 49 ema an then starts moving with the trend again after a bar or two, I'm comfortable with that. It's when it pulls back to a more minor, less significant moving average that I feel less confident.

But I re-started my journal for this specific situation right after your earlier post, so time will tell. No point back-testing these things as they never tell the whole story and go nowhere close to the wibble-wobble of indecision as each bar is forming over on the right hand side - where reality lives.

 

[barjon]

My trading activity could easily fall into the 'trading blindly' camp given my grasp of things, but I trade with what I consider the trend (price relationship to moving averages). I buy from pullbacks to an up trending moving average / sell on pullbacks to a down trending moving average.

It's when the price finishes its pullback and starts to go in the direction of the main trend (longer moving average) that I question the strength of the upcoming move. If the price all the way back to the 49 ema an then starts moving with the trend again after a bar or two, I'm comfortable with that. It's when it pulls back to a more minor, less significant moving average that I feel less confident.

But I re-started my journal for this specific situation right after your earlier post, so time will tell. No point back-testing these things as they never tell the whole story and go nowhere close to the wibble-wobble of indecision as each bar is forming over on the right hand side - where reality lives.

reality isn't your 49 moving average either - that's just a line on your chart where you, personally, have chosen to pay attention and assume a trend continuation if the price action looks right.

 

[Purple Brain]

reality isn't your 49 moving average either - that's just a line on your chart where you, personally, have chosen to pay attention and assume a trend continuation if the price action looks right.

Yes, I agree it is an artificial construct based on time and price which I use to focus my interest and attention, but it's a lot more real than the current bar.

Everyone who trades must have some event to which they have assigned significance in order to initiate a trade. Even those who apparently take random entries and exits must have an event to trigger those actions.

 

[barjon]

............. but it's a lot more real than the current bar........

I doubt that. What you are looking for, at best, is the price car rejoining the motorway with a bit of oomph (momentum) after it has taken time out to re-fuel at the service station. You're far more likely to find clues about that by watching its current motion than because its stop to grab a bite has brought its average speed down to any particular level.

Anyway I think you said it yourself when you said "...then starts moving with the trend again after a bar or two, I'm comfortable with that."

 

[timsk]

I doubt that. What you are looking for, at best, is the price car rejoining the motorway with a bit of oomph (momentum) after it has taken time out to re-fuel at the service station. You're far more likely to find clues about that by watching its current motion than because its stop to grab a bite has brought its average speed down to any particular level.

Anyway I think you said it yourself when you said "...then starts moving with the trend again after a bar or two, I'm comfortable with that."

I would argue that this is one of the most profound posts I've ever read in my ten years on T2W. Spot on barjon - anyone who chances upon this thread - take note!


As an aside, Purple Brain, what is the significance of the 49 MA? Why not the 48, 47, 46 or, going the other way, the 50, 51, 52 or 53 MA etc? At best, a MA is a mirage, don't assign greater importance or value to it - regardless of its value or calculation - than it truly deserves.
Tim.

 

[Purple Brain]

I doubt that. What you are looking for, at best, is the price car rejoining the motorway with a bit of oomph (momentum) after it has taken time out to re-fuel at the service station. You're far more likely to find clues about that by watching its current motion than because its stop to grab a bite has brought its average speed down to any particular level.

Anyway I think you said it yourself when you said "...then starts moving with the trend again after a bar or two, I'm comfortable with that."

Thanks for your comments barjon. Analogy and metaphor can be excellent teaching devices and I appreciate your efforts to help me. While I am certain I am using only the most basic and possibly quite useless tools in support of my trading methods, I can’t quite get why you and timsk and many of the other expert traders giving guidance on this site have such a dislike of moving averages.

I appreciate they are derivatives of price and time and therefore one step removed from the reality of the price action as it is now, but they also historically represent one of the few traders’ tools that have featured consistently in successful trading methodologies.

In time I would hope to have honed and developed my skills to the same level as yours and be able to look just at the price alone and have the same capability, limited as it currently is, as I do using moving averages. But until such time as I am able to achieve that level of mastery, the moving average represents one of the least complex and most useful guides to my making reasonable trading decisions.

 

[Purple Brain]

As an aside, Purple Brain, what is the significance of the 49 MA? Why not the 48, 47, 46 or, going the other way, the 50, 51, 52 or 53 MA etc? At best, a MA is a mirage, don't assign greater importance or value to it - regardless of its value or calculation - than it truly deserves.
Tim.

It has significance in that it, and the other moving averages I use, have provided useful guidance to my trading decisions across the the pairs I trade.

I use two longer moving averages for directional bias. They need to have decent slope and separation and be in an appropriate order with the price.

The two shorter moving averages of which the 49 is the longer I use for entry timing.

They are no more of a 'mirage' than determining a higher low followed by a higher high is more likely to lead to higher levels than lower.

 

[timsk]

They are no more of a 'mirage' than determining a higher low followed by a higher high is more likely to lead to higher levels than lower.

Fair enough PB,
Perhaps 'mirage' isn't quite the right word. What I meant by it was don't fall into the trap that so many traders succumb to of thinking that one particular MA (49 in your case) has special significance or is in some way 'better' or more important than other MAs, or respected by price in a way that other MAs aren't. I feared you might be in this category since you've opted to use a 49 period instead of the widely used 50 period. In terms of practical application, I'd be extremely surprised indeed if there was any advantage in using one over the other. That said, I accept completely that if you determine a MA in, say, the 40 - 60 period range is useful to you, then a period of 49 is likely to serve you just as well as a 48 or 50 etc!

Tim.

 

[Purple Brain]

Ah, I get your concerns now. I don't imbue that number or any other with special magical or mystical significance.

Aware that the 50 moving average was commonly used, I decided to clip it back a period to give me just that little more responsiveness over those laggards waiting for a full 50 periods. Did the same with the 20 period and use a 17 period. Found my edge.

I'm only half joking as that was the basis for using those number of periods and the logic still seems reasonable, if embarrassingly naive under the spotlight of expert scrutiny.

 

[timsk]

. . . While I am certain I am using only the most basic and possibly quite useless tools in support of my trading methods, I can’t quite get why you and timsk and many of the other expert traders giving guidance on this site have such a dislike of moving averages . . .

Hi PB (again!),
Ah, allow me to put the record straight! I can't speak for Jon, obviously, but I for one don't dislike moving averages at all. On the contrary, I like them and use them myself. What you and others may perceive as criticism by me of MAs isn't in fact criticism of the TA tool itself (which is what they are), but of the way many traders try and use them and the amount of misplaced trust and significance they ascribe to them. When a trader accepts that a MA is merely a dynamic, mathematically accurate trend line (as opposed to one drawn by hand), and that it has no special powers and that price doesn't magically bounce off of it etc., then they can be a useful and effective tool.
Tim.

 

[timsk]

I'm only half joking as that was the basis for using those number of periods and the logic still seems reasonable, if embarrassingly naive under the spotlight of expert scrutiny.

Expert scrutiny! As the old saying goes: 'ex' is a has been and 'spert' is a drip under pressure.

I'll now shoot myself in the foot (which, incidentally, is something I've never, ever done before here on T2W), and say that the MA on a 5 min chart that I routinely use is the 89 EMA. I picked the 89 period very early on in my trading 'career', having read a post saying the number 89 is part of the Fibonacci sequence and that price would respect it more than 88 or 90. Now, if you're thinking this completely negates what I've just written in my two previous posts - you're absolutely right - it's total rubbish! However, as luck would have it, it did what I wanted it to do. Namely, I wanted an MA which, on a typical day, price would touch or move through at least once. I've not done any tests, but I imagine any MA in the 75 - 100 area would work just as well. At that time, I traded a basket of about 20 U.S. equities. I knew the daily ranges of each of them and that on a typical day, a move above or below the 89 EMA of more that X amount was unlikely and that price would revert to the mean. And that was the basis for the trade. It worked pretty well - except for the days that it didn't, most notably strong trending days. But that's another story!
Tim.

 

[barjon]

................... While I am certain I am using only the most basic and possibly quite useless tools in support of my trading methods, I can’t quite get why you and timsk and many of the other expert traders giving guidance on this site have such a dislike of moving averages..............

pb

Firstly, I'm sorry if I came over as decrying your method - that wasn't my intention. As you develop your method you utilise the tools that suit you. It doesn't matter what anyone else thinks if they work for you.

I don't dislike moving averages. They give you lots of clues about trend and momentum, for example, and are a decent enough sort of summary about what's been happening to price. I merely caution against their use for anything more than that.

As I said before I think you yourself answered the question. Your extra confidence comes not from the fact that it has hit your ma, but from the price action afterwards. Momentum is the jewel in the crown - there is no handy dial to tell you when it will burst forth, but if you can develop a feel for how price is behaving as bars develop you may hear the rumblings.

The final point - and I apologise if this is a granny sucking eggs thing - is to remember that you are just in a sophisticated guessing game. There is no certainty.