Hard Work Pays Off

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LJJones's Blog

May 10 2011

Hard Work Pays Off

Went fishing on Saturday and bagged a nice 8lb Striper, was delicious! Looks like I'm about to take a bite!

Going again this weekend, hopefully will have more success. It's nice to get outdoors before the temperatures start hittng above 100. This week is supposed to be no higher than the low-80s.

The baby is about 3 weeks away! I can't hardly wait, but have been working hard at trading before my sleep gets reduced.

The last few days have been going pretty well. I'm really starting to hone in on trades that work and don't work within the scalping environment. You really just want to follow the path of least resistance when scalping, go with the flow... and avoid big picture traps where flow is likely to reverse. The beauty of scalping is that there is so many opportunities to trade in a day that you learn much faster, and can also cherry pick. For me, I do best in clearly trending markets and often get burned when that inevitable reversal comes in. I've been doing pretty well to avoid those situations or wait for extra confirmation in price before I choose to enter.

In the coming weeks I will start posting some trades if people are interested. I still want to spend a bit more time getting comfortable with my new methodology so I don't make a complete fool out of myself. From there I will start posting my sim results.

Before that I have to run the standard disclaimer:

Risk Disclosure

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The author is not liable for any loss or damage which may arise directly or indirectly from the content of this blog or any linked site.

One very important method of study for trading is to find trades that kind of look like your type of trades, but fail. That is... the ones that don't work. Quite often, there is an explanation... however, there is simply no strategy that would ever work 100% of the time. Today, I came out of the gate on a major heater and amassed nearly 30 ticks... but then I gave a bunch back in a few poor trades.

There was one trade in particular that went sour. I don't absolutely hate my trade, as often things aren't 100% perfect, but in my method of scalping, the less perfect the trade the more cautious you should be, and I certainly could have limited my losses more than I did. Part of the strategy is scaling into positions... this means you trade the first part of your trade when price hits a certain point, and if price goes against you (which technically means a better entry for you if your analysis of market sentiment is correct) you add part 2. I suppose you could technically call this "catching a falling knife," but personally I see a major difference mostly because I wouldn't use this technique at higher timeframes where I had much more time to react to price, gauge an entry, and enter. On smaller timeframes you must simplify things because of the speed at which price is moving.

Anyway... so we were in a well defined uptrend with good momentum and excelleration into upper resistance. Right there, there are two red flags. When price is extended, you often must look for deeper pullbacks... and when you are at the top of a swing your opportunities to profit are inherently limited. Furthermore, this upper resistance would form a double top on my higher timeframe chart (5 min, my trading timeframe is 1min). Given this information I should only be looking for the deepest pullbacks and probably trade only 1 entry, instead of scaling into 2 parts.

While I did wait for a slightly deeper pullback than normal, I probably should have waited for deeper with help from market structure and of course, as I said, only make this is a one part trade... but here is what happened (blue arrows are buy entries):

May 10 Trades

So my first entry had some help from the micro-market structure in the form of a swing low, but if that failed (and failed absolutely miserably... no rally at all), scaling into the second is bad, all of this within the context of being near a swing high and larger timeframe double top. While I don't blame myself for entering this trade, it really should have been 1 attempt.

The point being, trading is about knowing what a bad "setup" looks like. I use quotes because I hate the idea that is usually taught... that a "setup" is the result of indicators producing the right information that triggers a trade. It can simply never be that mechanical. In my opinion a setup is a trade within your trading plan with favorable conditions (market sentiment, market structure, momentum) in your favor.

Part of the reason that it's very difficult to create a winning trading algorithm is due to the subjectivity in trading, and because you absolutely must be able to determine when a potential trade that looks like your type of trade, really isn't at all. If I blindly trade every pullback of a trend without regard for momentum, market structure, and higher timeframes, I'm taking all of the good ones and all of the bad ones, with very little hope of profiting. You must eliminate those trades that have extra biases against your idea of where price will be headed (in my case, higher timeframe resistance and an extended move upwards) and take only the good ones. Then from there, your goal is to never ever miss a good one.

But overall today was still pretty decent. I bagged 11 ticks before paying 12 commissions (roughly 5 ticks) so I still ended up in the positive (and again, this is still all sim for now)... but I learned/reaffirmed some important concepts. I have no added a condition that I should be very cautious of, and hopefully will never make the same mistake again.

As I said last week if you want more information on technical analysis visit:

www.yourtradingcoach.com

And if you do decide that the YTC ebooks are a good fit for you, please hook a brother up and use this referral link so I get credit: Please see my last blog entry for who I think the ebooks are a good fit for, and who they aren't for.

As for my new HU video series the first should be debuting within the next week or two... after that I will quickly produce the next installment of the series taking into account the feedback received.

Best of luck on the water, the charts, or the felt!

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