FX Cowboy Breakout and Retracement Journal

[FX_Cowboy]

Thank you, DB, this is very thought provoking. I almost wish it were not so much so. Almost.

There is a tendency to think that once the trend one has been trading is broken and possibly reversed that that's that. But there may also be a new trend to trade in the opposite direction. Trading it means that you must have a very clear idea of exactly what defines a trend and what is an acceptable entry. If you don't have both, SARs will kill you.

With the clarity of hindsight, buying the first HrL with a stop just below would do the trick. In real time, it doesn't work out that way if you use the standard TL break and TL reversal protocols. That puts you in when price exceeds the LSH, which is considerably later than the first HrL. Which is where an SAR might come in, at your T1 short off R. If this didn't go, though, you'd need a second SAR just above R, all of which may be too complicated for real time.

Less complicated, actually, than what my plan calls for. But it requires looking at things a bit differently, and considering tactics which are unfamiliar (both of which, I realize, could be a good thing).

Or you can view the reversal up as a new trend and plot your demand line as you have. You then get an aborted new high at R, then a lower high immediately thereafter. Shorting here may or may not be justified according to your rules, but the stop can be very tight (which doesn't mean anything if the trade isn't justified, but it needs mentioning nonetheless). Or an SAR can be placed above in lieu of a closing stop.

Same situation shortly thereafter with the bounce off S, break of the supply line, break of the LSH.

Yes, this would obviously be of benefit. Looking at my current plan in light of this makes me realize that I've been avoiding SAR's, even though they could be of considerable benefit IF I can use them intelligently.

 

[dbphoenix]

My point was not to persuade you to consider SARs, much less incorporate them into your plan, but rather to raise the issue of what is or isn't a trend and how and when to take advantage of what we think it is or of what it appears to be.

You've experienced those days where price is launched right out of the gate and reaches the target in stairstep fashion just like the books say it's supposed to. But then there are all those days of false starts and aborted attempts to get somewhere and switchbacks and dead-ends.

We assume that if we've somehow got to BE that all we have to do is ride the trend to our target, and that little pause is just a retracement. But the "retracement" turns out to be a reversal. And then what? Maybe what we thought was the trend was only a prelude to the "real" trend, which happens to be in the opposite direction. How to take advantage of that without getting caught by the short hairs? The SAR is one possible tool. But it can easily backfire and take out your eye.

So if it seems as though you spend the greater part of your day just trying to catch whatever trend there may be, hoping all the while that it's not all in your imagination, you'll better understand those who just buy or short at the open with an MOC and go do something else for the rest of the day. Or who work to nail their entries with such accuracy that they can do considerable size for their first trade then stop.

 

[FX_Cowboy]

I'm coming to the conclusion that tick charts, for all their usefullness, may not be the best suited for keeping an eye on trend -- at least not when the market you follow goes through periods of highly varying volatility.

Here is a 5-minute chart covering approximately a 16-hour period, including the period from the first chart of posting #115. This chart offers a different perspective in a number of ways. The price traversals between around 1.2185 and around 1.2140, which appear to be news driven, occur much more quickly than is apparant in the tick chart, meaning one would need to be ready to act when price bounced off R and or S.

 

[dbphoenix]

FWIW, I use both. I have a small tick chart up to see what's going on within the bar, but I use something with a longer interval to judge trend, swing points, etc.

 

[FX_Cowboy]

One of the stated goals of my plan is to trade in the same direction as the trend. However, I can see that I'm being somewhat inconsistent (and somewhat confused) in my adherence to this idea. For example, imagine that a steep stage 3 TL is broken, followed by a reversal. Price then falls back to the stage 2 TL, which coincides with a previous strong support level, where I receive an entry signal. Which direction does my system say to trade?

(Edit: Or perhaps that IS the source of my confusion. In this case, until the HSL corresponding to the primary trend is passed, there is no reversal. That makes more sense to me.)

Well, currently my system doesn't really take this into account at all. It merely instructs me that if I receive a signal at one level, and that level is broken, that I should start trading in the opposite direction. I like the clarity and the unambiguous nature of that rule, but it could easily get me trading against the trend. My system might still make money doing so -- and might not -- but I am a believer in the idea that more money is to be made trading with the trend than against it.

Right now, I'm thinking that, by keeping better track of where price is now in relation to both longer term trends and the current series of swings high and low that I'm following on a shorter timeframe chart, I can answer these questions by considering the broader context. I can also make sure that the S/R levels that I'm preparing to trade from, are based on these longer term considerations.

I can start by adding a review of longer term charts to my pre-trading routine. With my current charting program, this will essentially mean opening up the historical charts, which will clue me in to what is going to happen that day. I'm tossing around the idea of investing in a better charting program for a while for this reason, and also to gain more control over the speed at which I can perform backtesting. For now, though, I'll try to make my rules clear enough so that I don't have much (if any) wiggle room concerning what my plan calls for, even if I know that it's likely to cause a loss, or a lost opportunity.

 

[FX_Cowboy]

Thinking about trend (cont.)

Another practice to help me to keep the trend in mind (new rule):

-- Always mark the S/R level that, when breached, signifies the reversal of the trend.

And an exception to the rule on trade direction:

-- If price falls back from a stage 3 TL to a stage 2 or 1 TL (or stage 2 to stage 1, steeper to more gradual), and a signal is received at a S/R level coincident with that TL, then a trade may be entered in the direction of the trend indicated by that TL.

 

[dbphoenix]

I hope I haven't misled you in some way, Dan. The Stage 1/2/3 TLs have to do with momentum, not with S/R or reversal. What one does in these circumstances has as much to do with targets and goals and range and trading timeframes as it does with S/R.

For myself, I've found that the classical definition of reversal is the most reliable, but it's not 100% reliable, which is why the number of shares or contracts traded becomes just as important as how one defines reversal. If, for example, you're trading only one contract, then the issue of what to do when price drops below the LSL after breaking the TL becomes critical. There are no ifs, ands or buts. You either stick or get out.

However, if you're trading two contracts, suddenly you have a number of choices. You can cover one at that breach then move the other to BE. Or move the second so that it's behind the next swing point in line. Or cover both. Or put a follow-stop on it. And if you're trading three contracts, you have that many more choices, so that the question of reveral/no-reversal becomes far less important to the management of your trade.

HOWEVER, if you're going to trade three or more contracts, and if you're going to enter your position with all of them, you better be damn sure that your entries are solid. Few trading events are as discouraging as being clocked with a substantial loss before you're even out of the gate.

Therefore, consider playing it safe with one and exiting at the first sign of reversal. Paper-trade the other two. That way, if the "reversal" turns out to be a fake, you have at least one more iron in the fire, at least on paper. More importantly, you've booked profits rather than losses. At some later stage, you can trade two and trade the third on paper.

As for trading the reversal, consider trading it as a separate event, even if it's an SAR. In other words, covering an existing trade at a reversal signal is not contingent on an SAR setup. The SAR is an entirely separate issue, and the conditions for entry can be the same as for any other entry.

 

[FX_Cowboy]

I hope I haven't misled you in some way, Dan. The Stage 1/2/3 TLs have to do with momentum, not with S/R or reversal. What one does in these circumstances has as much to do with targets and goals and range and trading timeframes as it does with S/R.

Not at all, but I do think I was confusing two concepts. What I had in mind with the second rule was really to make myself available to enter a trade, assuming the entry was otherwise valid, when price fell back to a major S/R level that coincided with a longer term trendline, even if my trade direction rules would otherwise prohibit such an entry. Thanks for pointing this out though; on reflection I do see the difference between Stage 1/2/3 TL's and shorter term TL's branching off of longer term TL's.

For myself, I've found that the classical definition of reversal is the most reliable, but it's not 100% reliable, which is why the number of shares or contracts traded becomes just as important as how one defines reversal. If, for example, you're trading only one contract, then the issue of what to do when price drops below the LSL after breaking the TL becomes critical. There are no ifs, ands or buts. You either stick or get out.

However, if you're trading two contracts, suddenly you have a number of choices. You can cover one at that breach then move the other to BE. Or move the second so that it's behind the next swing point in line. Or cover both. Or put a follow-stop on it. And if you're trading three contracts, you have that many more choices, so that the question of reveral/no-reversal becomes far less important to the management of your trade.

I definitely understand what you mean about how trading with multiple contracts can give you many more options for money management, for example giving you the option of lightening your position rather than dumping it altogether, or reversing.

HOWEVER, if you're going to trade three or more contracts, and if you're going to enter your position with all of them, you better be damn sure that your entries are solid. Few trading events are as discouraging as being clocked with a substantial loss before you're even out of the gate.

Therefore, consider playing it safe with one and exiting at the first sign of reversal. Paper-trade the other two. That way, if the "reversal" turns out to be a fake, you have at least one more iron in the fire, at least on paper. More importantly, you've booked profits rather than losses. At some later stage, you can trade two and trade the third on paper.

If I understand correctly, you are referring to some time in the future when I trade the strategy I'm developing with real money. Yes, I do plan to get into trading the strategy as gradually as I can, and I like the idea of starting with a single contract. That was one reason why I decided to look at the results of my testing on a contract-by-contract basis, so that I could evaluate which of the contract rules seemed most attractive to trade as a stand-alone strategy.

As for trading the reversal, consider trading it as a separate event, even if it's an SAR. In other words, covering an existing trade at a reversal signal is not contingent on an SAR setup. The SAR is an entirely separate issue, and the conditions for entry can be the same as for any other entry.

So far, my strategy calls for stops for current positions, and then waiting for a separate entry signal before entering a trade in the opposite direction (so no SAR's). The one exception is for the C3 contract which runs until I do receive a signal in the opposite direction.

The only other exception I'm contemplating at this time (and even then, as I've defined my rules, it would affect only the C3 contract) is when price gives me a valid signal in the opposite direction at a time when price reaches a major S/R level that also coincides with a longer term trend line (say, a trend on a daily chart).

On trend reversals, you've made me cautious enough that, rather than adding this rule, I'll just study it further.

 

[dbphoenix]

If I understand correctly, you are referring to some time in the future when I trade the strategy I'm developing with real money.

True. What screws up many beginners and not-so-beginners is trying to make the most of the minimum. Thus they're continually ricocheting between selling too early and selling too late. However, if you're trading multiple contracts, the issue needn't come up. But, again, the entry has to be solid if one is going to trade multiple contracts.

 

[laptop1]

True. What screws up many beginners and not-so-beginners is trying to make the most of the minimum. Thus they're continually ricocheting between selling too early and selling too late. However, if you're trading multiple contracts, the issue needn't come up. But, again, the entry has to be solid if one is going to trade multiple contracts.

Trading multiple contracts

The correct way to trade is scale in. This way, if you are proven wrong, you lose little. You only add more if you are proven correct..

 

[dbphoenix]

Trading multiple contracts

The correct way to trade is scale in. This way, if you are proven wrong, you lose little. You only add more if you are proven correct..

There is no "correct" way. There is only what meets the individual trader's particular goals.

 

[FX_Cowboy]

4/4/2006 - Advance Planning

Chart 1: Price has been rising along a DL from a low made March 10, and we're now within striking distance of an important R level at 1.2280, where price was turned back in late March. A break above 1.2220 or so would put the Euro back in the range where 1.2280 was last threatened.

Chart 2: Price has been rising in a somewhat sawtooth fashion for just over a week now, rising from a low around 1.2015. It's interesting to note that the SL above current price action has been rising faster than the underlying DL, creating an inverted hinge. This is indicative of increasing price volatility over the course of the last several days, with widening daily ranges compared to the week before.

I consider the current BO levels to be 1.2255 long and 1.2019 short.

 

[FX_Cowboy]

T1: I'm considering R to lie at 1.2204, which is the point where upward price movement has consistently failed over the last 12 hours or so. Just prior to 2:00 a.m., price breaks above this level, and there is then a SL above 1.2204 that meets my criteria for a valid entry except for the fact that it occurs before 2:00 a.m. After 2:00, price breaks back down below this level, and I receive a signal to enter short at 1.2195. The initial stop is 1.2204. Targets are:

C1 - 1.2186 (9 pips)
C2 - 1.2173 (22 pips)
C3 - SO, or entry signal in opposite direction.

T2: Price breaks back above R at 1.2204 and forms another SL. The entry is taken at 1.2207 with an initial stop at 1.2200. Targets are:

C1 - 1.2214 (7 pips)
C2 - 1.2255 (48 pips)
C3 - SO, or entry signal in opposite direction.

T3: Price has broken above my stated BO level, so a C2 entry at this point follows the rules for C3. The C3 entry from T2 is still running at this point. The first qualifying entry is at 1.2274, with a stop at 1.2268. Targets are:

C1 - 1.2280 (6 pips)
C2 - SO, or entry signal in opposite direction
C3 - Still running.

As price rises, I realize I have not prepared for a price rise of this magnitude. Consulting historical charts, I find an important S/R level at 1.2330, which I adjust during the day to 1.2336. I find no reason to close C2 and C3 until all running trades are closed at 1:00 per my rules (at 1.2313).

 

[FX_Cowboy]

4/4/2006 - Review

This was a good day for this system. One drawback inherent in my rules is that I will take entries on moves that turn out to be shake outs. That's okay, as long as I remain alert to the possibility that price will reverse and that the "real move" will be in the opposite direction.

I'll also note again that a true BO strategy would be an invaluable addition to my system in the future. Without it, it is going to happen at some point (perhaps many times) that I just will not get an entry signal, and I'll be left on the side of the tracks watching the train go by.

Stats (W/L, P/L, Max loss, Losing streak)

C1 - 39:3 (93%), 227:21, -8, 1
C2 - 24:17 (59%), 530:82, -9, 3
C3 - 10:15 (40%), 473:75, -9, 5

 

[FX_Cowboy]

4/5/2006 Prep

Chart 1: By 1:00 a.m., price is testing R at 1.2333. Near S is 1.2300. So far, the tendency toward increasingly wide price swings between the SL and DL seems to be holding true.

Chart 2: Price has managed to break through R levels at 1.2220 and 1.2277. The next major resistance level is 1.2420. I've added a SL above the last 2 major price swings. This runs roughly parallel to the DL.

Judging from the longer term charts, I consider the BO levels now to be around 1.2420 long and 1.2217 short.

 

[FX_Cowboy]

T1: I'm continuing to trade from the R level set the previous day (call it the PDH, although it was surpassed just before midnight EST). There is a long signal before 2:00 a.m. (not taken), which sets the trade direction short. The first entry is signalled 1.2333; stop is 1.2340. Targets are:

C1 - 1.2326 (7 pips)
C2 - 1.2304 (29 pips)
C3 - SO, or entry signal in opposite direction.

T2: After price again surpasses R, a short entry is signalled at 1.2333, with an initial stop of 1.2339. Targets are:

C1 - 1.2327 (6 pips)
C2 - 1.2304 (29 pips)
C3 - SO, or entry signal in opposite direction.

T3: Again above R, setting trade direction long. By now, I'm assuming that we're in for a narrow-range day. Entry is at 1.2341, with initial stop at 1.2335. Targets are:

C1 - 1.2347 (6 pips)
C2 - 1.2356 (15 pips)
C3 - the usual

T4: Entry at 1.2329, initial stop at 1.2337. Targets are:

C1 - 1.2321 (8 pips)
C2 - 1.2304 (25 pips)
C3 - usual

T5: Entry at 1.2332, initial stop at 1.2337. Targets are:

C1 - 1.2327 (5 pips)
C2 - 1.2304 (28 pips)
C3 - Usual

 

[FX_Cowboy]

4/5/2006 Review

This was another narrow range day, the kind in which my system struggles. This might be a good day to take off, if you could discern quickly enough which way the wind was blowing. Even on a day like this, C1 fared well, and C2 ended up in the black. Not surprisingly, C3 took a beating. Combined profit for the day: 17 pips.

One thought for possible inclusion in my rules: Once 3 successive trades have been entered at the same level, take new trades only at the next higher and lower levels.

Stats

C1 - 43:4 (91%), 254:27, -8, 1
C2 - 26:20 (57%), 574:101, -9, 3
C3 - 10:20 (33%), 473:104, -9, 5

 

[FX_Cowboy]

4/6/2006 Prep

Chart 1: The previous day was a narrow range day, which nonetheless ended higher. One obvious price target is resistance at 1.2420. The continuation of the SL is actually somewhat higher than that. I'm now noticing that an air pocket has developed between the current price and 1.2277. If price heads lower, then that may be a target as well.

Chart 2: Late in the previous day, price moved back above 1.2336 and for now is holding above that level. Looking at the convergence between the SL and the DL, we can see increasing tension between where buyers and sellers are entering in force. This does not look good for buyers.

As far as news is concerned, Forex markets are focused on BOE and ECB interest rate announcements at 7:00 and 7:45 respectively.

I still consider BO levels to be 1.2420 long and 1.2117 short.

 

[FX_Cowboy]

Too many trades on this day to list each separately. I'll mention one exception. On T13, price had descended below the S/R level (which I had obtained from longer term charts), and had formed a LSH. When price rose above that level, normally my rules dictate that I begin to trade long.

However, in this case, there were a couple of other factors. The main was was that when price rose to 1.2304, this was the first test of that level, a level that had acted repeatedly as support over a period of two days. Essentially, since I received a perfect short signal here, I believe it would come down to whether I believed this level would now offer enough resistance to turn back price. Under the circumstances, the first RET on the 5-minute chart after a very strong BO short, I would go short here.

 

[FX_Cowboy]

4/6/06 Review

What I find remarkable here, is that with all the waffling about, and the ensuing losses on C2 and C3, the system was overall positive from T2 onward. That's something to bear in mind if I get this to paper trading or live trading and start getting frustrated when price just does not seem to want to continue in one direction.

Stats (W/L, P/L, Max loss, Losing streak)

C1 - 55:5 (92%), 332:33, -8, 1
C2 - 32:27 (54%), 709:143, -9, 3
C3 - 12:26 (32%), 564:142, -9, 6