Monday, 1 February 2010

Ashes to Ashes,Gold to Dust

After I answered comments early on Saturday morning I started telling Kiki about them and it got me thinking.

There have been a number of comments and emails about how I enter a trade.

Usually, I enter a trade on the close of the range bar. I do NOT wait for a new bar to form. Why? Because waiting and being sure would cost me money. I have said I enter aggressively, not because I eat a lot of red meat but because I make more money.

If I were to consistently enter late, my trading statistics would be hugely affected. Much more than you would think.

Let's say someone is trading my way and trading for instance 9 contracts.

Earnings per year would be, say, about $594,000 ($900 x 3, 220 days a year).

Number of contracts traded per year could be about 10,000.

If I entered 2 ticks late on half of those in ES, it would cost me 5000 x $25 = $125,000

If I adjusted my profit targets to compensate, my profitability would be greatly reduced as the targets 2 ticks higher often are not met and I would be stopped out at break even or worse.

If I leave my stops where they would have been with the "correct" entry, then two things happen:

I am assuming more risk and my losing trades lose more than 25% of the time, worse case. That could cost me another $125,000. Now instead of making $594,000, I'm only making $344,000. But it gets worse. Say I raise my stop so I am only risking the same amount as I would have had I entered at the "correct" price. Now I find that about 30% of the time I would get stopped out of a good trade and make a loss instead of a profit. Now my the whole maths of my methodology has fallen apart and I may be joining the 90% who end up blowing their account up.

What this post is trying to demonstrate is that trading is not just about winning and losing trades. Behind it all, there is a set of complex mathematics going on in the background. A trading methodology consists of a number components: setups, risk management, trade management which all together become your way of trading. Your way of trading will either give you a great living and build wealth or grind you to dust. Without understanding which, you are whistling in the dark hoping you don't fall down a mineshaft.

Trading is my business. I do what successful business managers do. I look at my profit margin, turnover, losses and a whole bunch of things, plug them into my software, be it MSA or a spreadsheet, and then do a lot of "what if's". My trading plan is not a wish list. Its a product of both my trading methodology and the data mining so I set myself up to succeed.

Today's trades were interesting.

Trades 1 and 2 could have been the same trade, depending on whether you were all in and all out or scaled. Now for Trade 3, it helped that I did the Profile split the way I did. Price was accepted within Value and motored all the way to VAH of the distribution. Trade 4 was selling into the hole but I had plenty of time to get out at a couple of ticks profit. The trade location is what saves me most of the time. Aggressive entries mean lower risk for me. Trade 5 was an entry against the DVAL and paid off well even though order flow was not completely clear. I went for it because of the trade location and the bounce off the 99EMA which gave me the sign that the swing was over after that consolidation between the 2 EMAs. I exited happily as the previous high was taken out just above the split's VAH.

Click to enlarge


  1. Tom,

    What kept you out of entering short at 15:04 or 15:06? I saw selling from the VAH, momentum falling, CDV about to go negative, and we retraced back into friday's single prints, raising the possibility of price moving down through them.


  2. Aaron, the 2CCIs told me it was a pullback and would bounce. Compare the CCIs there with them in Trade 4 which I did sell into the hole. In any event, had Itaken the 15:04, the same consolidation followed by a break back above the 33EMA would have told me to get out of Dodge. So it really doesn't matter if you get caught by that type of trade as the damage is non existent.

  3. You forgot to figure into the equation as a COST... how many times (%) you enter but the bar never forms ... Say you expect the 5 Range Bar to be a long so you place a BUY STOP at the 5 Tick (potential) High, only to have your entry filled but the market trade lower and no new bar was created. YOu're left with you pants down.

    In that case - do you exit within the bar .. or 1 tick below it? If within ... then the market rallies back up .. do you enter at the high of the bar again ??

    This intra-bar entry stuff is tricky. I like to enter on a buy stop 1 tick above the bar for 1/2 my position and at the high using a limit order for the other half.

    Nice posts recently by the way.

  4. "I enter a trade on the close of the range bar. I do NOT wait for a new bar to form. "

    You have mentioned this before and it has always puzzled me. The close of a range bar is caused by the formation of a new bar outside the range. The events are simultaneous. Is it that your entry anticipates that a range break is at hand, based on momentum?

  5. Hi Bakrob99, I must say that I don't get trapped that way very often as I make sure that the momentum is in my favour. However, there is another solution if your broker front end allows. Use a STOP LIMIT order, 1 tick above and below BUT set the LIMIT to MINUS 1 in which case you will enter at the same price as the close of the bar unless it doesn't pull back 1 tick offerred. This option is good if you are prepared to miss the trade rather than risk the hammer. Me, I'll risk the hammer rather than miss the trade as my risk is small.

  6. I was also puzzled by this aspect of the methodology but it seems that as soon as you see the 5th tick you hit the bid or lift the offer.

  7. Hi Tom, what kept you from going long two bars back from the #5 trade. Thanks.

  8. Tom, if it is not too time-consuming, the table of actual fills you used to include would be instructive - especially to discern actual entry and exit points. I am also puzzled by the mechanics of entry based on the Close of the signal bar. As Anon mentioned above, Close of a range bar implies Open of a new bar. My assumption has been that you enter on the Open of the bar coming after the signal bar. A post on the actual entry method and possible alternatives will be helpful in understanding the waiting for the bar to close issue. Thanks for this excellent mentoring gratis!
    PS: Punchy headlines. I am sure Ad agency head hunters are looking for you. :-)

  9. Hi Tom,

    Firstly, thank you once again for allowing us to "follow along" as you train Kiki to become a consistant trader. I certainly appreciate the opportunity to train along side her, even if it is "virtually"... :)

    On your 5 trades today, I have some questions, and they actually have been on my mind for a while now. I have committed to learning this concept of "Context" and thus I have been working on this now since the webinar. That said, at some point, I have to understand the methodology that you are using for Entries and Exits. I acknowledge that over time, I will adapt this, and make it my own, to fit my own trading style, etc. At this time, I am simply trying to understand the fundamentals of the method you are using to enter, manage the trade once it's on, etc.

    I had thought that one of the things you focused on was the location of the Mom Dots. So in order to be Long, for example, you would want to see the MomDot "below" your Signal Bar. In looking at your first TWO trades today, it appears that the MomDot is "Above" your signal/entry bar. Your remaining 3 trades appear to fit how I thought you were using the MomDots, where the Dot is below the Longs, and above the Shorts, etc. Can you expand a bit more on "How" you are using these MomDots then please?

    This post is already getting rather lengthy, so I will stop it here for now, and make additional posts as we discuss the methodology for entries and exits along the way here. Thanks again Tom for sharing your vast knowledge, and thanks to Kiki for being "giving enough" to share her Dad's trading knowledge with us as she learns this business as well.


  10. Kevin, Yes, as long as everything else is in place.
    TomR, it looked like just a pullback in the downtrend until 2 bars later -CCI.
    Richard. MomDots are only 1 of the entry elements. They are also useful for exits.
    Geo, I want to do the detailed P&L but its been a PIA. I'm working on trying to make it less work. I hope to figure it out this week.

  11. I'm baffled as to how you split the doesn't appear to be globex and rth. Can you shed a little light on what you use for timeframe of sessions? or what the criteria is for splitting them. thanks so much - thoroughly enjoying your blog.

  12. Hi Tom and Kiki,

    I'm following along and learning a lot from you day by day.

    Thank you for sharing your knowledge and experience.

  13. tippet, it is RTH but the charts are London time. I untoggle the TPOs and can see where distributions break out. It just needs a bit of practice.

  14. Hi Tom and Kiki,

    Thank you Tom for clarifying that the MomDots are only one of the Entry Elements. Can I assume then that the other Elements are the Volume Breakdown, Cumm Vol Delta and the CCI's? Given that the MomDots are only one Element then, I guess you must give some weighting to all of them collectively, to determine when to Ignore something like a MomDot that does not support your trade plan? In other words, if the VB, Cum Vol Delta and CCI's are supporting your direction, even if the MomDots are not, you will still go ahead and take the trade? I assume this would be true of any "one" of the elements, that if the others line up to support your trade idea, that the fact that one or maybe even two, not sure about that two, would still allow you to take the setup?

    Thanks again Tom, I am learning a great deal about Context, and Order Flow from your Blog and just wanted you to know it is deeply appreciated.