RE: My trading systems, an overview
Kind of.. this is how I would have maybe played that chart if I'd seen it in time.
First off, the market is in an uptrend, so only look for buying opportunities, that's a no brainer.
So, look at the blue circle, see that first big red candle ? That's a signal that will make people think price could be reversing so they will be looking to go short. They'll wait for confirmation though (retail traders, of course) and have a sell order if the price goes below the recent lows, where you drew that red line.
So another big red candle happens and everyone is now in the trade short. So where would all the shorts have put their stop losses ? They will be either above the high of the signal candle (the second red one that made them enter the trade) or the recent high (above the first red candle). That's where you put your buy order !
Another location for your buy order could be just above the red line, as that would signal a trend reversal also and people might have their stop losses there instead. It's also above the 50% retracement level of that red candle which is also a popular level.
Then look what happens on the chart, the market stalls and forms a minor support level. So the people that are short are now thinking 'maybe this wasn't such a good idea' and move their stops down to just above those candles highs, just under the red line. So that's where you move your buy order to.
And look what happens, the next big green candle trips those stops and you're in the market going north. Hopefully the momentum will carry you up and on that chart it looks like it did. If you had a stop just under that minor support line then you'd have made a 1:4 trade or similar.
The beauty is, it might not even have happened. By putting stop buy orders on, they would only be triggered if the trade went in your direction. If the price had continued to drop then it doesn't matter, you didn't get the trade but you didn't lose anything either, consider that a win also !
Of course, it's very easy to look backwards and say exactly how it would have worked out, it's a lot harder when it's happening on the right hand side of the chart. Sometimes it works out, sometimes it doesn't, you just have to try it.
Always always let the market take you into a position, don't just guess and buy at market.
@tradegurl, more than a day later I realized I should have said thanks after you responded. That was very very detailed so thank you very much.
I found myself reading and re-reading what you said above and looking back at the trades that I have made. On some of the trades I was surprisingly close with my thinking compared to what you described. I think "Live trading 5: EOS" is a good example in case you want to have a look. Ignore the fact it was a losing one, I just was not smart enough to move my stop as the price increased...
Having though about this further I realized that others who I am learning from are using similar principles (stop-hunting - they just don't call it that) so that's encouraging.
Anyways, I'll be looking forward to your further posts and comments :)
I'll check out the post you mentioned and comment if I can think of anything useful to add.
The facts are like this - over 90% of traders fail, and lose all their money. To be in the 10% that do make money, you need to be thinking and doing the opposite to those in the 90%. That's pretty much the secret to it all :-)
Interesting fact for example, take a moving average cross system, something simple like the 9 SMA crossing above the 20SMA as a buy signal. Very common type of system that's recommended to newbie traders. Try backtesting it, it never ever works out profitable.
So what do you think happens if you always sell when you get a buy signal ? ;-)
Just to make sure I understood you correctly... You are saying I could try taking the MA cross system which would suggest going long when 9 SMA crosses and goes above 20 SMA and basically reverse it? I.e. 9 SMA crosses and goes above 20 SMA I place a short order just under the price where the SMAs crossed?
Well, "logically" thinking most of the orders I place should not get filled as price should, in theory, keep going up but the ones that do get filled will be filled with other peoples' stops.
Is this what you are saying?
Sorry no, I didn't mean in a 'trapped trader' sense, I was just making the point that if you always do something and it loses money, then it makes sense to do the opposite and see if it makes money instead... ;-) It wasn't a suggestion to actually try that system, just an example.
One of my hobbies is looking on YouTube for trading 'systems' and backtesting them to see how badly they fail (because they always do...). Then I test them again but with the signals reversed, and you'd be surprised how many are actually profitable with some minor tweeks lolol.