Monday, 16 May 2011

Too Little Too Soon

Most new traders try and pick tops and bottoms - Outside in trades. That's their basic trading plan. The reason they do this is that if they manage to catch a top or bottom, the rewards can be great. You can easily see what the entries "would have" been and how much "could have" been made. Very enticing.

After achieving a win rate of about 5% to 10%, the next thing that happens is that when they put on a trade with a potential profit of say 25, they grab a profit of 1 instead, because they have had so many losing trades that when they finally see a profit they grab it. Grabbing it becomes the norm every time they are in profit. Of course, their stops are 3. Now making 1 in 10% of trades and losing 3 in 90% of trades has only one outcome.

Nevertheless, I see trading methodologies all over the web touting systems with a 30% win rate saying that you can make more on the 30% winners than you lose on 70% losers.

Trading is a mixture of mathematics and human behaviour. It's very hard to fight both of these "laws". Win rate is king as it resolves both the human behavioural issues and of course the math works.

Below is a nice Euro sequence today. I can filter chop by increasing the length of the longer CCI. In this case I've used 135 instead of 45. It's still the same stuff: identify the trend and trade the pullback in the direction of the trend. Back testing will show it all.


  1. Hi Tom. I'm curious if you've ever studied using the 33 and 99 period volume profiles in conjunction with the 33 & 99 EMAs at all?

    I've been watching them in Investor R/T and they seem to compliment the EMAs very well.

    What's your thoughts and/or experiences with them?

  2. Kyle, not sure what you mean by a "period volume profile".

  3. Tom, I'm not sure about the charting platform that you're using now but in Investor R/T if you look at the profile indicator tool you'll see that you can set the profile for a specific number of bars.

    For example, you can set up a profile that is only for the last 33 or 99 bars just like the EMAs. They seem to compliment the EMAs quite well from what I've seen so far.