Thursday, September 18, 2014

New 30 Day Challenge: Developing New System

Scalping Sucks

Well after months of working at it, the system from my original 30 day challenge does indeed work.  I ended up positive about a grand at the end of it, but it comes with so many problems.  The biggest is the fact that you have to be insanely disciplined and put your own personal feelings to the side.  My biggest challenge was fighting the URGE to counter trend trade.

It is human nature to want to get in at the very bottom, and sell at the very top.  Instead of trying to join the trend, I kept finding myself wanting to counter trend trade.  It was obvious that I was wrong in hindsight, but human nature is pretty powerful.  If trading was easy, everyone would be doing it.  I believe that it is inherently designed to be go against human nature.

I believe that scalping out one point on the E-Mini is just not worth it, and too much of your profits are being eaten up by commission and fees.  After all was said and done, I believe that way too much of my hard earned money went to pay for the broker.

Instead, I spent a significant amount of time developing a trend following strategy using a few different indicators.  While, a lot of people might not have trouble with the urge to want to counter trend trade, I do.  I have a simple indicator that lets me know when the market is trending or consolidating (and what side to be on).  I use another to spot divergences, and let me know that a reversal is imitate.  I also use two more that are simply used for entry points.  I will go into more detail on the system below.  It is still in development! DO NOT USE IT LIVE!

New 30 Day Challenge

Instrument: /CL (Crude Oil Futures)
Contract Size: 1 Contract (Proof of Concept)
Indicators:  AroonIndicator, VolumeZoneOscillator, FW_MMG, FW_SOAP,  PersonsPivots, and WoodiesPivots
Moving Averages: 21, 50, 100, 200
Chart Time Frames: 5 Minute (Main), 1 Hour ( Longer Reference)

There are two-three types of trades with this system. I say 2-3 because while there are three different reasons why you would be taking a trade, two of them look almost identical on the charts.  You are just taking them for different reasons.

Trade Type 1: Trend Reversal
This type of trade is a bit risky mainly because it requires you to do some interpretation.  I would recommend waiting for a conformation of a reversal before trading it, but I am willing to take a risky trade if the price action matches the indicators.

You would be looking for a divergence between the price action and the VolumeZoneOscillator.  I would also be looking for nasty looking candle to confirm that we might be reversing.  Basically, if you are looking to go short, then the price action would need to make a new high of the day, while the VolumeZoneOscillator making a lower high.

Here (two yellow boxes labeled point 1) we have a brand new high of the day, that is significantly higher then the consolidation.  The break out actually would match Trade Type 2 and 3, and you could have easily been in position to capture the 20 tick move.  The problem is that the VolumeZoneOscillator is screaming that there is something wrong, and then the nasty looking candle (Green Boxes labeled 2) confirms that we might be reversing.  It would still be a risky trade, but I would have taken it all the way down to the Pivot Points, 80 ticks.

Trade Type 2: Consolidation Breakout
This type of trade requires that there is a clear range established, and that the Aroonindicator lines are going parallel to each other.  You would simply try and position yourself for the breakout, or you could simply sell it when it reaches the other end of the range.  This actually happened in the previous example, but the range was so tight that it wouldn't make much money.  From about 8:05 to 8:35 the AroonIndicator was indicating a period of consolidation, and then you got a 30-40 tick pop.

On the other hand, sometimes the range is so wide that your target is just the other side of the range.  Either way, you just have to play it by ear.

Trade Type 3: Follow the Trend 
When trades types one or two get stopped out with small moves in your favor, then you might need to follow the trend. 
In this example, we have a trade that is consistently following the trend and making legs up.  I find these the hardest to trade, but the idea would be to buy in when it is testing the high of the previous leg. 

The Trading System: In Development

Here's where things are a little bit fuzzy. I am still working on the fixed betting system. It is hard to explain in words when you should close trades, how wide your stop should be, and just managing the trade in general. For example, in trade type one, if the trade does not reverse and instead enters a period of consolidation instead, then you should scratch the trade.  I will be working on this portion of the trading system as part of my 30 day challenge, and I will attempt to quantify everything.