Proverbs 16:3 Trading Strategy

[Will Duxon]

This day-trading strategy uses historical data to analyze price action based on relationships between the trend, designated sets of average price ranges and the overall 24-hour market structure across multiple time frames via "Dynamic Trailing Support and Resistance Envelopes" as pictured here:



I've looked around and it seems to me that the use of multiple envelopes, or "envelopes within envelopes" is somewhat of a hallmark for this approach in that I've yet to find evidence of it being used by anyone else who's been active online.

 

[Will Duxon]

Initial Plans for the Week of September 18, 2016

Since the idea behind this approach is to enter positions based on the relationship between the trend, designated sets of average price ranges and the overall daily structure of the market, my hope is that it will give me a reasonable idea of where it would make sense to enter the market. Consequently, I pick my spots in advance and wait for the trades to come to me, so here are my initial plans for the start of next week.

Enter a long position if AUDUSD pulls back to support on the lower timeframe charts.

Enter a long position if and when EURGBP pulls back to support on the 1-hour chart.

Buy EURJPY when the trend turns north on the 1-hour chart (assuming it remains bound to the same range it has been stuck in for the last seven to ten days).

EURUSD is probably not worth the risk. It looks as if it is initiating a downtrend, in which case, it would make sense to sell the pair when it pulls back to resistance on the 1-hour chart. (But it might be wise to use a tight stop in case the asset is actually reversing north.)

Sell GBPJPY after it pulls back to resistance on the 1-hour chart.

Short GBPUSD if and when price pulls back to resistance on the 1-hour chart.

USDCAD looked like it was ready to form a major top, but now I’m not so sure. If it heads south, I might use the lower timeframes to short the pair on intraday pullbacks.

If I'm feeling adventurous, I might use the lower timeframes to sell USDCHF on pull backs if and when it reverses to the south.

Go long USDJPY once price drops down to support on the 1-hour chart. (The current zone of support is between 101.70 and 102.00.)

Sell XAUUSD if price pulls back to support on the 1-hour chart.

When it comes to SPX500, I currently see minor support at about 2130 and major support around 2112. I see minor resistance at 2150 and major resistance at about 2158.

 

[forker]

What exactly is your entry criteria?

 

[Will Duxon]

What exactly is your entry criteria?

My entry criteria are simple. As you might expect, the trade has to be in the same direction as the daily trend. For the sake of illustration, let’s say that day-to-day price movement is experiencing upward momentum.

I simply wait for price to pull back below the floor of the intermediate (grayish) envelope, and then enter a long position upon the formation of the first green candlestick, or the first candlestick that finds its way back inside the “fast” (white) envelope. (See the image below.)

My stop loss is set slightly below the lowest candlestick shadow in the area, and I exit the trade when price hits the top of the fast envelope (if I’m being conservative). If I’m willing to be patient and risk a loss in order to reap a much more substantial gain, I place my take profit target so it corresponds with the ceiling of the intermediate envelope. (Of course, my reward-to-risk ratio has to me a minimum of 1:1.)



This screen shot of a trade I made on September 15, 2016 is a clear example. I entered a long position when a green candlestick formed after price made contact with the floor of the intermediate envelop during an uptrend, which was defined by the overall market structure (blackish) envelope.

I obviously wanted to play it “safe” in this case, since I set my take profit target at the top of the long “red” candlestick rather than the ceiling of any of the envelopes. It’s as simple as that, but simple and elegant is how I like it.

 

[wackypete2]

Good luck

Peter

 

[forker]

Just an observation. Your stop in that example is a high on the 10th and a natural place for price to move to hit your stop. Also you might want to give your profit room to allow you to absorb losses. If you trade 1:1 then you need to have a very high win rate consistently. Anyway, these are just observations and you are the architect of your future. Good luck.

 

[tomorton]

Its the exits that are the most interesting problem in TA trading. I agree with forker: I place my initial stop for long just below a significant low - the best looks like the low of the 12th but that's way down from your entry. The idea of using a low is that its the lows that define the continuing uptrend - if an intermediate low is breached, TA says the uptrend may be failing, if an intermediate high is breached does this really mean anything?

I place an initial TP at 2 x the stop-loss distance which seems ambitious but the idea is to give me time to adjust the stop to b/e as price rises past the risk distance and cancel the initial TP: the initial TP is just to catch any unexpected price jump I don't see in time to react to.

 

[Will Duxon]

Just an observation. Your stop in that example is a high on the 10th and a natural place for price to move to hit your stop. Also you might want to give your profit room to allow you to absorb losses. If you trade 1:1 then you need to have a very high win rate consistently. Anyway, these are just observations and you are the architect of your future. Good luck.

I'm not sure what you meant by "is a high on the 10th," but there was definitely a lot of "congestion" at that level the day before, which was a factor in why I was reluctant to seek additional profit. (Like they say: "Always look left.")

I agree with your 1:1 statement, but when I hear certain highly successful traders comment on how they are right only 35% of the time yet still make a lot of money, it makes me wonder about just how good they really are at reading the market.

As for me, given my personality, sitting around watching price go up in down is not something I can handle, so the faster I can get out of a position, the better. Personally, anything less than an 80% win rate I find totally unacceptable, so the 1:1 reward-to-risk ratio has been working out okay since most of my trades tend to more or less go straight to their targets.

(UPDATE: In light of input from forker and tomorton, I've gone back to my original post and labeled this as a day-trading strategy, which I probably should have clarified in the beginning.)

 

[Will Duxon]

I place my initial stop for long just below a significant low - the best looks like the low of the 12th but that's way down from your entry.

I place an initial TP at 2 x the stop-loss distance which seems ambitious...

I suspect you and I have very different personalities. At the very least, it appears you have a much greater risk tolerance and are also more comfortable remaining in trades a lot longer than I am.

Not only would I be unable to tolerate losses as significant as might occur using stops like "the low of the 12th," but it counters a key principle underlying my approach, which is that I am entering the trade at a statistical support (or resistance) level based on historical price action, so if price turns against me at all, it means the premise on which I entered the trade was wrong, so I need to get out of it as soon as possible.

(I should probably go back to my initial post and label this as a day-trading strategy.)

 

[tomorton]

Hi will - Yes and yes - fair enough, each of us must trade according to our individual nature.

On your comments on r:r, I understand what you're saying. I have even occasionally read traders using r:r of less than 1:1 - 1:0.5 or 1:0.2 - they say their TP is always hit, their SL never. But these approaches are rare and disciples hard to find. One of the biggest myths in trading is that 1:3 is the minimum r:r.

 

[Trader333]

If you want the title of the thread changed then let me know.

 

[dbphoenix]

Hi will - Yes and yes - fair enough, each of us must trade according to our individual nature.

On your comments on r:r, I understand what you're saying. I have even occasionally read traders using r:r of less than 1:1 - 1:0.5 or 1:0.2 - they say their TP is always hit, their SL never. But these approaches are rare and disciples hard to find. One of the biggest myths in trading is that 1:3 is the minimum r:r.

What it all amounts to is scalping, which in virtually all cases is a symptom of fear. As for the "highly successful" [sic] traders who have only a 35%+/- win rate, they aren't strangling their profits; they are rather letting them run. If one doesn't know how to do that, he should learn before he begins trading.

 

[itspossible]

proverb-man who trade will lose shirt & maybe pants.
howeva always wins on twitter

 

[tar]

"Personally, anything less than an 80% win rate I find totally unacceptable.."


Anyone can achieve that win rate , not the point of trading ...

 

[NVP]

Nice.....ver nice

Dare I ask what envelope formulas you are using here ?

N

 

[Will Duxon]

What it all amounts to is scalping, which in virtually all cases is a symptom of fear. As for the "highly successful" traders who have only a 35%+/- win rate, they aren't strangling their profits; they are rather letting them run. If one doesn't know how to do that, he should learn before he begins trading.

Hello dbphoenix:

I think of scalping as shooting for about 5 pips profit at a time, which I admit to sometimes doing. But if you define a profit target of 30 to 50 pips as scalping as well, so be it. If this is a symptom of fear, you can just call me: "The Fearful Trader."

As for those "highly successful" traders letting their profits run, yes, that is exactly what they are doing, and more power to them! Perhaps it is true that "anyone who doesn't know how to do that should learn before he begins trading," but that rather sounds like an opinion to me, to which everyone is of course entitled. I'm more inclined however to adopt a "to each his own" point of view, but I thank you for your input.

 

[Will Duxon]

"Personally, anything less than an 80% win rate I find totally unacceptable.."


Anyone can achieve that win rate , not the point of trading ...

Quite right Tar. If one is right 80% of the time, but still losing money due to an unwillingness or inability to exit losing positions, then what is the point?

 

[Will Duxon]

Nice.....ver nice

Dare I ask what envelope formulas you are using here ?

N

I just saw where you posted related comments elsewhere, and the formulas are pretty much as you described. The details are of course proprietary (it's taken me five years to develop a methodology in which I have enough confidence to test publicly), but it essentially looks at the average price ranges within various intervals of time, and then uses that data to draw dynamic (adjusting) envelopes that define the limits beyond which price is probably not inclined to venture farther away from the associated moving average.

I'm currently long AUDUSD and will post a screen shot as soon as I'm finished responding to your inquiry here. I'll type a slightly longer explanation of my rationale than I was originally planning for the image in order to "piggy back" on what I've written here.

 

[Will Duxon]

Long AUDUSD



RATIONALE: What I call the "24-Hour Market Cycle" envelope is suggesting to me that the Aussie-US Dollar is in the middle of forming a major bottom and so not very inclined to fall lower than it did on September 13th anytime within the next few hours.

The intermediate (grayish) envelope is not headed north yet, but might be lagging. Even so, the floor of the envelop nonetheless indicates price opened the week right at statistical intra-day support, so combine that with the fact that the fast (white) envelop established support at the same level, and I'm very comfortable entering a long position here.

If price drops below 0.7470, it means that the above premise is invalid and I need to get out of the trade immediately because the situation is not as I believed it to be.

I was originally going to set my target at 0.75329, the ceiling of the intermediate envelope, but MT4 kept giving me an "invalid" message, so I set it at 0.75160 instead. That's probably just as well since, based on price action from the 12th, 13th, 15th and 16th, I wouldn't be surprised to see price get a little discouraged from climbing higher once it reaches that level anyway.

UPDATE: Price did struggle a bit after clearing my TP target at 02:20 GMT, but put it behind at 02:31 and never looked back after 02:43 (see second chart above).

 

[dbphoenix]

Hello dbphoenix:

I think of scalping as shooting for about about 5 pips profit at a time, which I admit to sometimes doing. But if you define a profit target of 30 to 50 pips as scalping as well, so be it. If this is a symptom of fear, you can just call me: "The Fearful Trader."

As for those "highly successful" traders letting their profits run, yes, that is exactly what they are doing, and more power to them! Perhaps it is true that "anyone who doesn't know how to do that should learn before he begins trading," but that rather sounds like an opinion to me, to which everyone is of course entitled. I'm more inclined however to adopt a "to each his own" point of view, but I thank you for your input.

Scalping has less to do with pips and ticks than it does with attitude.

As for the opinion part, it's based on many years of watching beginners and the paths they take. You are at least testing your theories, which puts you well ahead of most. Adhering to your methodology in the face of loss will be the acid test.