Wednesday, 1 December 2010

Charts, Parameters and Methodology

I get lots of questions about chart set-ups.

I trade one chart with one periodicity (time frame) within a Market Profile context. I trade the order flow. I read the order flow using the elements that I have on my charts.

Each market has it's own fingerprint, just as each trader has their own in built rhythm. The idea is to match the two. Some of us need to slow things down and others need to speed things up.

The EL trading methodology comprises two types of trades: inside out and outside in. This represents trading with the trend when it is identifiable and fading the trend when the market becomes so overbought or so oversold that a change of trend is probable.

These are two distinct modes and require different considerations, very different context and a different mental preparation.

I use the different elements on my charts to provide the information that I process and come to a conclusion at the end of every bar. It is an ongoing process. Two of the elements I use are the 33 and 99 EMAs. The EMAs have parameters that are written in stone, no matter what periodicity I use, no matter what market I am looking at. They work best for me, ALWAYS.

I then have the other main tool for looking at momentum: the CCI. I use a fast CCI and a slow CCI, and I look at them both individually and then the relationship between the two. I can adjust the parameters of the CCIs to suit my requirements for information.

Then there are the range bars. In the ES I use both 1.25 and 1.50 depending on what I want to see.

This idea of magic numbers for parameters is a fiction, unless you are talking autotrading. As a discretionary trader, I am trading PRICE and I am using the indicators to help me see more clearly. Many people do not succeed because they trade indicators, not price. It would be like an F1 driver staring at his car's instruments/dashboard instead of the track. I am showing a Renko chart today so you can see what I am trying to say. It gets rid of the noise from the market and it does the job. I'm looking at order flow and as long as I can get the information and process it, I can trade effectively.

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