Sunday, 25 April 2010

Stirred not Shaken

Removing all the indicators from the charts has caused quite a stir among the readership. Therefore, I'm going back to posting charts with the indicators still on them so both types of information is visible to everyone.

These emails and comments have highlighted something that I thought I had clearly explained, but maybe I wasn't clear enough in my explanation so I will have a go at explaining it again. What Exactly is a Setup. To summarise, a setup is the picture I want to see before I finally decide whether it qualifies as a trade and pull the trigger. Not all setups become trades. Why? Because when I look at all the ingredients of the picture, there may be enough contradicting ingredients to fail the setup as a trade.

A setup for me is when the order flow points either up or down without being hindered by support or resistance within the first logical scale area. The components of order flow is the pressure and amount of volume PLUS the speed or strength it is moving in that direction. The support and resistance comes from the context.

I see the setup as a picture that has many "colours". I sometimes place emphasis on one colour and at other times on another. This is discretionary trading. How I decide what to place the emphasis on in any one situation is based on context.  That context is what is hard to explain as sometimes I am not exactly sure how I do it. What I am sure of is that it's a lot like when my wife goes shopping. She can't tell me ahead of time what the dress she wants will look like, but she "recognises" it when she sees it because she has had enough "screen time" for her brain to compute the information and make a decision.

I know that this is not, in one way, helpful but in another way it shows the importance of reverse engineering setups and then spending enough time in SIM so that when you see it, you recognise it immediately and don't have to calculate or think. It's this "recognition" developed through "muscle memory" that takes you to CP. If you need or want indicators to get you there, that's fine. If you want to keep them, that's fine too. If you want to get rid of the indicators and it eventually improves profitability, terrific.

This whole decision making process is fairly unique as it involves you having confidence in what you are doing. Although I believe you shouldn't try and fix what isn't broken, I do believe that over time we can improve performance and as traders we are competing against other traders and need to be ahead of the curve, stretching our comfort zone while not falling out of CP. Experimenting by dropping an indicator and seeing how you go is an option.


  1. Tom,

    you should put this post and the two about order flow to the key post section. Great! Thanks.


  2. Tom, can we talk a bit about instant gratification(IG). I am feeling good about entries, however my exits strategy still sucks.

    If I have a setup and I entered long, what would be the first thing you see that would tell you...there is no IG here, time to exit.

    Next range bar of opposite color? VB of opposite color? 6cci shoots opposite trade? ETC..?

    I would like to get out from the trade at the first moment of feelihng, there is no IG here.

    Can you talk about what spooks you right away and tells you time to get out NOW, but please if you can explain in more details. Noone here has your wisdom on this subject of immediate exit as it related to EL, so, I beleive you will help tremendously to alot of would be EL CP's.

  3. El,

    After a break of two weeks from trading, I am resyncing with your blog. The recent posts on order flow and removing the indicators are quite intriguing. It is not surprising that you don't need indicators as you can see the set ups in HD. I am still on training wheels and so have to rely on the indicators. As someone posted, the day I don't need to use indicators would be very liberating. Thanks for the thought provoking posts.