Wednesday, March 02, 2011

Chart Demonstrating Trading System.


Ok, so I have opened a chart in Paint and drawn a bunch of stuff on it as an attempt to outline my trading system.
The first entry is at the crossing of the horizontal hashed aqua line and the vertical solid aqua line. The price goes down a bit, then sideways. That used to really irritate me, but now I get into it. I have the "zone" psychology that Douglas talks about in Trading in the Zone. You just apply the system, and know that it is an edge. No particular trade matters, because you know more of them will win than lose. It's like a casino. They know they will win 60% of the time, so they don't care if they win or lose any particular hand. But I digress.
The price goes down, then moves sideways. Finally, it goes down and touches the blue line. I would scale down here, but not exit. But it allows me to take profit, and possibly move my stops up. Anyway, I would ultimately exit the trade when the yellow line crosses back over the blue. This happens shortly thereafter as price action reverses.
So the new entry comes right up. The yellow line passes over the blue, AND the ADX is above 25 AND slanting upwards. I would buy 4 lots, because there are four levels of resistance between the entry and the average daily range. The ADR is not visible here, because it has reset for the next day. It was about where the horizontal white line is at the top. So that was my target. At each horizontal line, the blue and red ones, I would sell half of what I had.
So initially, I would buy FOUR lots, one for each line between entry and target. (The horizontal dashed aqua line I just added to show my initial entry.) So price goes up and hits the red horizontal line. I count this and the red hashed line right above it as the same line, because they are so close together. So when it hits here, I would sell HALF of what I have, so I would take my FOUR lots and sell TWO. Now I have two lots left.
Then it goes waaaay up to that next line. That's a fairly wide space from the previous level to this level. But here, I scale down from TWO to ONE lot. Because again, I sell HALF of what I have.
Then price bounces back downwards before going on up to the blue line, where I would scale down from my remaining ONE lot to a HALF lot. It is not unusual for price action to bounce off of these lines. This is why they are called "resistance." Price can actually reverse at these levels, as we saw in the first trade, when price action bounced off the blue hashed line. Basically everyone scales down at these levels, so it creates pressure in the opposite direction. "Behavioral Finance."
Anyway, price goes up and hits the final target, which for me is the Average Daily Range. On my charts the ADR is shown by the horizontal hashed orange lines, but it resets each day, so the ADR of this trade is no longer shown. It is roughly approximate with the horizontal white line here, which actually represents current price.
Anyway, hope you can read my handwriting. LOL. I'm not used to writing with the mouse like that. As you can see, I sell when price action goes downward, and buy when it goes upwards. So I can trade downward, then when it reverses, trade it right back up. When the price is going downwards, the horizontal lines (pivots and centennials) are called "support," but when price is going up, it's called "resistance."
This is a 30 minute EurUsd (Euro/Dollar) chart. When it goes up, the Euro is going up against the Dollar. When it goes down, the Euro is going down against the Dollar.

0 Comments:

Post a Comment

<< Home