Sunday, 11 April 2010

Chop Suey can be Sweet and Sour

I just love Chinese food. Before the great Oriental immigration to Australia that started after 1973, I'd been known to stop in Hong Kong overnight to eat Chinese. Now, you have some of the best Chinese and Thai food in and around Sydney.

Anyway, CHOP. You are in CHOP when you see  horizontal EMAs and greatly overlapping range bars. When this happens, I go into Outside In mode. Outside in mode is when I look to fade any move, small as it may be. I don't change the way I trade, but I put more emphasis on other parts of the picture. Momentum and VB are the main features. I'll try and trade away from the EMAs looking for the market to go back there.

If the volatility of the market you are trading drops, you have a number of choices, including:
  1. Trade bigger size with tighter stops and closer targets
  2. Trade Outside in trades only, fading the moves or picking tops and bottoms (these are usually lower probability trades)
  3. Switch to a similar market with a larger daily range. An example of this could be switching to the DAX from the ES
As a trader, my job is to trade within the context that exists. I must fit the trade to the context rather than hope that the context will support the trade. The concept of envisioning what is going on is very important as it helps identify for me which mode I should be in. It's a natural part of my mental check at the close of each range bar. This has become part of my "muscle memory" and my win rate would be hugely less without this activity. It's like driving a car and knowing where you are.

You can use a few tricks to help you. The chart below shows an indicator - the 4th pane, the one below the VB, consolidates a lot of my rules into a red, yellow and green indicator that makes it quicker to see everything and not forget. As I get better at RTL I'm doing the same in MarketDelta.
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10 comments:

  1. Anonymous11 April 2010 at 11:12

    EL,

    One thing not mentioned much on the blog is support/resistance beyond the VA and POC. I am curios on why it is so. Do you simply find them not reliable enough?

    I am particularly interested in your opinion on intra-day levels. Here's an example that took place on last Friday: VPOC (1.3439) of 6E on April 9th turns out to be a strong resistance on April 5th and a strong support on March 29.

    I have not traded long enough to know if this is rare and just happen by chance, or there really is something to it.

    Thanks in advance and good luck.

    ReplyDelete
  2. n11 April 2010 at 12:11

    Hi Tom,

    This isn't related to this particular post but have you finally decided to change Flobot's name?

    Here's my suggestion:

    THWIGET
    The Harder i Work the luckier I GET

    ReplyDelete
  3. Anonymous11 April 2010 at 13:21

    Great post Tom,

    I think recognising marketconditions, and knowning when to switch from one mode to another accordingly, is one of the hardest parts to learn and implement.

    ReplyDelete
  4. Anonymous11 April 2010 at 15:06

    Hi Tom,

    Will you post the Tradestation code for your "ELmom" indicator like you have the other indicators?

    Thanks for everything you do for us. You've really improved my trading.

    Thanks.

    ReplyDelete
  5. Anonymous11 April 2010 at 20:26

    Hello Tom,

    Really appreciate the post, one question:
    Where do you look for these outside in trades?
    Do you use Market Profile for this or Keltner Bands?
    What trigger do you use? Momentum?

    Thanks very much!

    ReplyDelete
  6. timokrates12 April 2010 at 09:23

    Tom,

    did you switch the range bar size from 9 to 5 again?

    In terms of the new indicator: You use it mainly for exits?

    In general, I'm still chewing a bit on a proper exit strategy and it would be great if you could elaborate a bit on this topic.

    Thanks!

    ReplyDelete
  7. Anonymous12 April 2010 at 12:41

    Hi Tom,

    whould appreciate an example with your "mental check".

    Best blog on web!

    ReplyDelete
  8. Anonymous12 April 2010 at 15:35

    Thanks Tom,

    I think this is really very important, because only if you understand context and marketconditions, you can choose the right mode and setups fitting context.
    When you only have a hammer (setup), everything looks like a nail.

    ReplyDelete
  9. jr12 April 2010 at 16:50

    Hi EL thanks for the info on chop and how to spot it...I realized a couple of losing trades into today's session that I was in chop, but was also able to recover and do a couple of outside in's as well once I got my head around the context. Time and practice will no doubt enable me to spot the chop sooner.

    Thanks as always

    ReplyDelete
  10. O6613 April 2010 at 12:50

    im trying now for 4 months to break your secret code ...
    there are days that i think that i succesfuylly did it but to be honest until now im not CP.
    this last chart is showing the elmom indicator which refelects most of your rules.
    im starring at it for days now but i dont see any logic ....can you give me a direction to look at?
    thanks!
    otto

    ReplyDelete

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