Comment by Peter jcp on November 26, 2011 at 7:49pm

Thanks Lisa - yes zones rather than one specific price such as say 1.05232. That is another point newer traders forget - you could have 10 different traders all in a room - all on different computers and feeds and all on different trading platforms - and there high or low price might differ by 2-6 pips- simply due to platform inaccuracy / broker price lags / etc.

High probability - OK lets explain why -

1. Generally we cannot be 100% certain of the future.- ie nobody can see the future in time.- we can all extrapolate and guess etc - but will never be 100% correct on what might happen in the future - Hope we all agree on that point - yes ?

2. The future is time ahead of now - ie 7.11pm UK time as I type.on the 26th of November 2011

3. I can predict the next 5 seconds fairly accurately so say 97% probability . I can also predict the next 5 minutes fairly accurately - say 95% - not in the world but purely in my own environment - OK agree?

4. Now can i predict the next 5 hrs and 5 days so accurately ?. Will I win the lottery within 5 days - will I have a major life changing event happen in the next 5 days - I dont know ??

5 The point i am trying to make is that probabilities are higher in shorter time frames in smaller price range. A fact no one can argue with. So on Monday - a 30 pip movement will happen for 98% certain - but will a 300 pip movement happen on say the Eu during the day - I dont know - might  - might not - say what 50% probability on that day. Also the 30 pip movement will happen more than once - 2-4 times seem high probability to me and so i can calculate all this into a working trading model - and say i can therefore expect these things to happen with high probability. However i cannot say with high probability - we will get a 200 pip move up or down during Monday on the Eu - but we might - but the probability is less than say 2-4 30 pip moves during the main sessions.

6. So time and smaller expectations are important on building high probability models. In life you have to "drill down" - or "micro manage" to achieve a more realistic approach on most subjects. Micro leads to Macro - we start life small and with no knowledge but we grow as time goes on etc. But the difference being in trading not every 10 pip movement leads to 50 pips which leads to 100pip+ etc in the same direction.

7. Conclusion I am far happier to invest £10K of money trying to obtain say 30 pips in a shorter time frame with a small stop - than even put £5k on a 400 pip target with a 100 pip stop. Probability wise the smaller trade will have an higher success rate ( when you know what you are doing) and could happen 2-4 times  a day - whereas the 400 pips trade will not happen 2-4 times a day - and as we say longer time period - lower probability- due to so many more macro events happening in 5 days than in 30 minutes .

Also to back this up is over thousands of trades over a long period. Most traders would not have this information because they normally fall into two catagories - swing or long term preference. I have no bias - tick to quarterly trades- and the trades in the past I left on over 3 months waiting to get back into profit rather then taking a loss have been the most inefficient trades in my trading life.Guess which have given me the most money and had the highest probability and also the best R R etc ???? - I bet you know - have you ever read any of these points before in trading books etc ?? - I never have - lol

 

Comment by 2ndSkiesForex on November 26, 2011 at 8:20pm

Hello Peter,

Ironically this discussion is coming up because I discuss many of these points, particularly pivot points, in my upcoming book.  What was more ironic (in my eyes) is how I am working on the book right now, and was brought over to forexstreet.net from a comment on one of my earlier posts and saw this thread.  Interesting.

I know you are a die hard fan of trading shorting time frames, and I can understand your logic around it.  However, I do have not only thousands of trades (and likely more than you), but I also have quantitative data that can demonstrate quite the opposite of what you are saying.

We have and trade for the fund certain price action patterns which are very specific.  One of the things we have tested for is time.  The minimum threshold for us taking a pattern is 70% accuracy that when the price action formation shows up, it will break north (or south) from the pattern and will close above the high or low of that pattern and candle.  

To me, it is no surprise our fund has been historically for the last 8yrs 76.3% accurate when our systems minimum threshold is 70%.  But here's where it gets interesting.  

The price action formations we are trading are mostly on the 4hr time frames. Meaning, we'd see a price action formation trigger on a 4hr candle and would know that over the last 10yrs (based on our quantitative data) that price would have a 70% or greater chance of trading and closing above the high/low of the previous candle. 

Now here's the kicker - when we tested the same formation on successively lower time frames, it actually became less predictive, meaning it was less accurate in price closing above/below the low of the candle.  Instead of the number being around 70%, it actually floated more towards this middle.

So what does this mean?  That many price action formations are harder and less predictive on lower time frames than higher.  This is not just some logic I came up with or observation, but we are talking 10yrs of quantitative data on price action formations (many of them).

So although I can see your logic and rationale around it, the actual quantitative data does not agree with your theory.

Oh and I know you have stated this before, that you can easily predict the weather say 5-10mins from now, but tomorrow would have a lesser idea about it...well, obviously you have never lived in Buenos Aires which has some of the most un-predictive weather possible.  There would be days where it would look like absolute sun, and then out of nowhere (and according to all the weather people who would try and predict the weather), a massive rain storm would come by and you'd have no idea if it was going to stay for 5mins or 2 days.  Why?  Because the weather there is incredibly unpredictable at times due to how it interacts with the polar regions (antartica) and wind formations out of there.  And since Antartica is undergoing massive changes, that also has unforeseen consequences on the weather in south america, particularly Argentina.

Is there an analogy in terms of the markets here?  Absolutely.  Flash crash ring a bell?  I'd love to see your short term predictions accuracy on that one in comparison to the longer term ones. Guess who made the most money on that day?  The HFT (high-frequency traders) and....get this...all the ones who were able to 'predict' that by the end of the day, the market would return back to normal (mean-reversion traders).  And those mean reversion traders...they were holding positions for hours because they knew it would take time and would likely be done by the end of day trading, not say in the next 5mins.

Now with high frequency trading running 91% of all day trading on the ES, the market is actually becoming harder to short term day trade then it is to hold positions longer.  This is part of the reason why 80+% of all hedge funds are down this year

Comment by 2ndSkiesForex on November 26, 2011 at 8:21pm

cont. of last post

...especially the ones that day trade the ES.  Because HFT's are controlling the market and are changing the variables.  They are dominating the short term so well that nobody (except other HFT's) are able to keep up with them since they are changing the game.  

They quote stuff, they layer orders, all of which are manipulative and deadly to anyone trading the ES on shorter time frames.  The ones who are holding positions longer are actually making money and doing better than the shorter term day traders.

So again, although your theory has a strong rationale behind it, along with a sound logic, that does not mean it applies here or is the truth of the market.

Kind Regards
Chris Capre
http://2ndskiesforex.com/
Twitter; 2ndSkiesForex 

 

Comment by Indy on November 26, 2011 at 8:36pm

Hello peter,

just wondering if you could give your opinion of charting packages in general as it is something I am looking into at the moment. I am just looking at autochartist at the moment, it seems to be a very popular one. I don't know if you have any views on that one in particular but if you have any opinions on different services in general and the thier usefullness, (or not), i would be very interested to hear them

and I would just like to say a general thanks for the good work blogging, its always interesting to hear different viewpoints. The same to you too Lisa. I like this ongoing debate of long term/short term its something every trader should think about when developing thier own market strategy.

cheers

Comment by Peter jcp on November 26, 2011 at 9:44pm

Hi Chris - your comments are always interesting and I certainly respect that you have more knowledge and information about trading than I do - as i have never actually worked for a professional investment body - whether it be a bank or independent fund.

However I have been extremely fortunate to have covered well over 10k hours of watching live charts with the high percentage of that viewing being based on under 30 minute time frames. My first few years were more on monthly / weekly /daily / 4hrs- as i was not full time and normally did not spend more than a maximum of 4 hrs a day watching the charts. From year 3 onwards I graduated more to the lower frames and for the last 4 years have spend the most of my chart viewing watching tick charts all the way up and correlating every movement with 1 /2 / 3 /5 / 10 /15 /20 30 /45 /60 minute charts - all live - not back tested etc

This as lead me to trade also with a stopwatch as time is such a key strategy within my ideal sweet spot short term trading and catching the 7-25+ pip moves that all need to be completed within 15 minutes within ceratin key times of the day. 

The result is my manual HFT ( not on par with the bank models lol) is that my stops are 5-7 pips on average - I arrive in profit within 2-4 minutes and I like to achieve first target within 15 minutes - 9-11 minutes most common - and then I take part or all profit.My probabilty then dip - as out of every 10 short term trades 2-3 will end up carrying on past 30 minutes and even up to a hour.

Results lead to average RR of over 2 and as you can imagine when a 7 pip stop goes to say 32 pips in under 15 minutes  - I have a really great profitable trade. Best trade in October was last day when I achieved a risk to reward of 1;16 in just under 60 minutes on the Pound. I had taken first target at about 38 pips in under 15 minutes and then was surprised at it moved up afterwards 

If I do not hit profit within 2-3 minutes - I either pullout break even or lose 2-3 pips - normally  i would not wait for a manual stop to be hit. Similar if after 10 minutes I only have a 14 pips profit i take it- or take part of it and try for the so called "free trade" with a stop set that means i will always have a profit.

Two years ago i started to notice changes in wave sizes and also extra "play" happening in the market- especially the EU. I put this down to the growth in the market and also to all the HFT going on.

This year as been very good for me and even last week was well over my 40 pip daily short term higher lot target from short term trades. I struggle to achieve over 10 trades at key times in say a 12 hour session cover the 2 major sessions. I am having to accept more in between bounces of 4-10 pips which are even difficult to scalp even with all the sophisticated set up i have on my tick chart. I am glad i am not a scalper now as the new trick being created my HFT is always taking the extremes between the norms of highs and lows on small time frames - to pysch scalpers out of their positions. 

My conclusions now have lead me to more "wrapping" based on intra day short term trades and then taking what i can out of the market within my time paramaters.

As I am still learning - and should imagine i will be for another 10 years as the markets continually change - I have been frustrated by not linking all my different trading styles together.

For Example just before the start of November I was fortunate to take a so called "scalp sell" on the EU and 1. 4238- not far off the high - and i even called it in the chat room as i took it.

It was a very high probability trade for me as it ticked a lot of boxes etc and i believed that within 15 minutes i would take over 15 pips. The stop was 3 pips above this high of 4242 and iw as delighted to hit over my target - and then fully came out. Within an hr I entered a swing trade only at one lot at 4219 - which i then use

Comment by Peter jcp on November 26, 2011 at 9:55pm

Hi Lisa and Indy - Yes will send you some info tomorrow on different platforms Indy. Thanks for your comments and i love a good debate about different methods of trading and always respect other people views - because as Lisa says quite correctly - we are all different - so true.

I also worry Lisa when i do see many newer traders trying to scalp on tick charts or one minute set ups. I agree you need lots of experience and knowledge that cannot be learnt in a few months or in some cases years. That why learning as many ways as possible is so important and then by continually working on them month after month- year after year - you will then end up with your own prefered method. You need to be past level 1 and know all the basics of how the market moves - before you then specialise.

Comment by Peter jcp on November 26, 2011 at 10:00pm

sorry just noticed my last comment above did not fully appear.

What iw as continuing to say was that i realise i  do not tie enough of my trading styles together enough and although i am very pleased i am still in a scalp sell - from 4219 - its not on my normal lot size - because i viewed it high risk - than scalping at a key time at an high.

it should result in big pips and a large RR - but i just realise i could have easily added to it more - and have therefore failed to opitmise a longer term trade. Thats life i suppose - and i will review my results continually - to see whether i need to adapt more to the every changing market.

Have a good Week Chris - reagards Peter

Comment by Peter jcp on November 26, 2011 at 10:23pm

A few other points from your own particular market findings- do you measure R R - or are you hedging or using other strategies on your 4 hr plus trades. Also are you bringing in time efficiency into the findings - as even if you said to me this probability as a 88% ( as an example) success rate based of years of back date information - but will take month to achieve - I would far sooner take say 50 trades in that month with only 72% probability with a good R R - because it would give me far higher results than the one 88% probability longer term trade.

I hope I have explained this correctly - but i do know a lot of criteria can be distorted if the main target is not always the most important objective- ie we want to achieve a highly sustainable double digit weekly result with low drawdowns and no hidden features that can blow the results out of water - ie - in a month we can have bank interventions - governments toppled - earthquakes etc etc - which normally do not happen in a 30 or 60 min time frames

Look forward to your further inputs and other traders views 

Comment by 2ndSkiesForex on November 26, 2011 at 10:27pm

Hello Peter,

One thing I haven't noticed you mentioning is the the spread costs you are paying (something all shorter term traders need to look at closely).  If you are taking 10 trades a day, you are also paying the spread 10x and at an avg. of 1.5-2pips spread, you are paying 15-20pips in spread costs.  That adds up over time so maybe you banked 15-20pips, but you paid 1-2 each time.

But, to compare the two, on an average day, I could make 1-3 trades, and bank anywhere from 75-200+pips per trade (depending upon volatility).  I pay a max of 1pip on spread and sometimes less.  I maybe spend a total of 1hr entering and managing each trade (max 2).  

Now according to your math, you make 10 trades and the avg. time to achieve part or all of profit is 9-11 mins = 90-110mins or 1.5 - almost 2hrs while catching 7-25+pip moves (using the avg. of that = 16pips x 10 trades = 160pips of profit).  Now we have to subtract the 2-3 trades you mentioned which take 30mins up to an hour (lets say 30mins each) so you are now spending a total of 8trades @ 10mins each = 80mins + 2 trades @ 30mins each = 60mins, so add that to your original 80mins = 140mins of total time or 2hrs and 20mins, all to make 160pips of profit min (assuming you go 10 out of 10 which my guess is you don't, but lets use it anyways).

Meanwhile, I make 75-200pips (lets take the avg. of that = 137.5) on a 1pip spread and that takes me an hour (max 2). On a typical day, I can have 1-3 trades, so lets say an avg. of 2.  

So I spend about 3hrs on 2 trades (only 40mins more than you, and that includes pre-analysis), walk away with a min 275pips (115 more than you based on avg. targets) and upwards of 300-450+ while paying 2pips in total spread and spent only 40mins more than you. 

Keep in mind, I only have to be accurate 2x and pay 2pips in spread whereas you have to be accurate 10x (much more difficult) and pay 10-20pips in spread.

So from a time perspective, and being efficient with your time, who really wins out here? 

Just something to think about.

But in my honest opinion, what is most important, is you find a style that works for you and that you can repeat year after year after year.  If you have found such a style, and have been able to repeat that year after year after year, then I say stick with it.

There is no monopoly on the markets or the truth about trading (and the markets).  So if you have found something that works for you and your natural inclinations, then I wholeheartedly support it.

Kind Regards
Chris 

Comment by Peter jcp on November 26, 2011 at 11:29pm

Thanks Chris - Key question though - what is the average size of your stop  - because that is on of the hidden advantages of having tighter stop - being able to add the extra spread I oncur already into my R R ratios  ie

IF I take a trade with say a 7 pip stop - which includes the 1-2pip spread - and  i lose - i only lose 7 pips - If a normal intraday trader losers with a normal intraday stop of 20-40 pips - he has still lost more than me - even if i do an additional 4 trades - this is what everbody forgets.

The other most important part of this debate which i have not mentioned - because the market is dyanamic and ever changing - i am also on a daily basis . So if i start off and have 4 winning trades on a row within 2 hrs - I can and should stop - as over daily target etc . However normally I dont - but then drop down lot size and carry on playing with other traders- to learn more about the market.

On accuarcy- daily tolerence and efficiency levels come into play. If i had 30 trades in a day - i would think i might be less accurate than just doing 3 or 4 trades. However yet again how statistics can deceive - when i have done 30 trades in a day - ie when the market as played into my hands - even if i drop accuracy levels down from an average of 70-80% - down to say only 65% - i would still make a higher return.

As you know Chris statistics can be moulded to suit either side of a fence. The only reason High frequency trading came out about was due to the statisticians and accountants proving that multiple high amounts of trades can make high returns than tradional investing methods.

One of the members in FX street two months ago had planned in advance to have a good days session on a Thursday of seeing what he could achieve in a day with sensible risk and taking a high number of intradays trades. I spent half the day with him in the chat room and we shared ideas. I had a very good day and did more than a normal amount of trades. I believe he achieved over 35 trades and obtained just under 600 pips and added 14% to his account.

A session like that would not be achieavable in a 20 day month more than probably 4-6 days - and he would burn himself out if he tried to do it more than once a week.

In conclusion as you say - If it works and it suits you - stick with it. I will keep you updated with my findings over the remains of the year- and look foward to sharing some non confidential info as well in the future. Regards Peter

 

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