May 072010

Nothing of interest to us today other than tick scalping which continues to be fantastic. Just getting filled whatever we can practically in either direction and winning on the volatility alone. Direction doesn’t matter. But don’t try that unless you know what you are doing. Remember, the way we trade market structure and order flow (scalping aside) is VERY specific. Contrarian in nature and only in rotational markets where we feel we have a really good shot and handicapping the probability of a level holding or failing. As I said in the pre-market I just can’t do that here. Too much conflicting information. We really deserve to be trading down but really not this far down, but in this kind of volatility sentiment no longer leads reasonably. Maybe later when it calms down things will come into clearer view. As you can see what we mentioned about the low volume notches has held true and the probes above and below have essentially negated their validity. If I were position trading on fundamentals I would be doing things much differently and I think there are some great swing and position plays here¬†– especially some great strangle and spread setups. But alas, all of our longer term strategies are 100% systematic and non-predictive and they will take care of themselves as they have for the last 20 years I’m sure. NJ was saying that in some of our accounts trading the general strategy we share on this blog we have had three days with no trade this week. That is no surprise because again, it is a contrarian, rotational strategy that can only really be traded in those markets. We have had the perfect storm of volatile, whippy, trend conditions that make us sit on our hands. But I wouldn’t do anything differently and I don’t feel we are missing. Like I would tell you if I were playing poker – “If I don’t have an edge I don’t bet. I can’t lose what I don’t put in the middle.” Although it kind of sucks because we can’t make any money when it is like this. I have outlined some scalp areas as always in purple for those who are interested…

 Posted by at 10:32 am

  4 Responses to “5/7/2010 Post Trading Analysis”

  1. The market has definitely been ignoring the acceptance and rejection levels.

    I found today to be a very good clinic on watching order flow and volume shifts since there have been so many up and down rotations. I noticed that the areas you scalp have the “textbook” volume shift that you’ve described (volume weighted toward the bottom/top of the bar indicating that the volume is no longer moving the price and exhaustion is settling in). How do you decide when to enter your scalp? The areas you scalped were also at the levels outlined in the pre-market analysis.

    When you scalp, do you just use a 1 tick target when your entry order is filled?
    In hindsight, it looks like the areas you scalped for 1 tick could have gotten 3-4 ticks.

    I traded several of these similar volume rotations after 10:00AM for 3-4 ticks purely based on order flow and volume shifts. Your explanations on how these volume shifts work is really starting to come together.

    Thanks for your ongoing tutelage, have a great weekend!

  2. Scalping is a specialized skill and as I said is beyond what we are willing to get into on this blog. I’m not using the footprint at all but the DOM. It is centered around open orders and the quality (size) of prints slowing. I do tend to scalp around key levels only so I’m not surpised you see congruence. Tick scalping isn’t about a shift or excursion of any kind but simply identifying likely volatility and winning from the noise itself. It is an art not a skill. Nobody else in the firm really doesn pure scalping but me in that sense. Also, in the truest sense a scalp can’t be anything more than a tick or two. Trading for a point isn’t scalping. The trades you are seeing with the volume build up to exhaustion and subsequent shift of dominance are not scalps but potential “regular” set ups for me. But remember, just because there is that condition doesn’t mean I’m trading. The real work is how I handicap the levels I choose to trade at all as I don’t want to trade them if I think I don’t have a huge edge built in to win regardless of the set up. I like to feel strongly to the tune of 70% or more favored to win a trade by buying or selling the level blind before I even get to looking at the flow. This is why we have no problem keeping to one trade a day. In conditions like this week we hardly traded at all. Anyway, with the timing there and a good set up I figure to add another 10% or more to the edge. It is all about getting an edge from each step in the process and not being too dependent on any one step to win. It isn’t the order flow timing that ever wins the trade. The levels and sentiment as to whether they hold or fail is the most important part. The order flow helps you mitigate your loss when you are wrong by keeping you from ending up “upside down” at any point in the trade. I will be showing that set up plus three others I think in the last webinar to be used interchangably in different conditions. Hope that helps clarify the difference between scalping and a regular “trap” set up as we call it. I think I am going to stop showing the scalps as I fear I may be confusing folks. Better to just focus on the regular set ups as they are relativelly easy to identify. Scalp details are far more intuitive and complex. A can of worms as they say…

    • Thanks for the overview on scalping. Instructive to see that you are striving for a 70%+ edge.

      Looking forward to the third webinar!

  3. Keep in mind edge is not to be confused witth overall win rate. Just the edge on picking the level and direction right. Over the last 6 months or so the aggregate of our single trade a day 1-2 handle setups are running in the mid eighties ratio-wise and the scalping is in the low to mid nineties. In contrast, many of our longer term trend following systems win only forty percent of events and only sixty percent of all months typically. The win/loss ratios are usually obsessed on by retail as they have a lot of mental issues with it. But for most pros they don’t matter much. You can either have a really high rate with inverted risk or a low rate with extreme relative reward. Neither is preferable. Best for smoothing to have both. As I keep saying in the materials it is all about the risk modeling and knowing your edge. As long as your edge is just a hair over a coin flip or better you can work wonders with it and make millions. And as I keep saying the fastest and easiest way to being able to truly track and know your edge is NOT in the study of individual trades and win/loss ratios as most retail think and do. The easiest way is to fix the number of daily events and work forward. No edge does not equal zero. It is really fifty percent…

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