Monthly Archives: September 2011

Improve Your Trading Focus through the use of Aviation Scanning Techniques

Here's something for the short timeframe swing traders and scalpers to try, in an attempt to improve your ability to sustain your focus and attention and to ensure that you do not miss critical information at the most important times within your trading routine.

Consider where your attention needs to be during key time segments (eg. price in setup area, entry and early trade management, ongoing trade management) and then set up standard scan patterns.

This concept comes from my aviation background. The primary means of maintaining an aircraft in a safe flight attitude is through being able to see the horizon outside the aircraft. At night or in cloud the pilot loses reference to the horizon, so needs to make use of information available through their flight instruments. Failure to do so can result in loss of control, sometimes within seconds.

Pilots are taught to immediately start scanning the instruments upon loss of external visual reference.

While there are several scanning methods available, one of the most common is a Selective Radial Scan, where attention is primarily maintained on the Attitude Indicator, and branches out to one supporting instrument at a time, returning always to the Attitude Indicator before scanning elsewhere. This reduces the chance of fixation upon any of the less important secondary instruments, maintaining greater awareness and ensuring faster response to unexpected changes in attitude.

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Trading is a Fight!

"Everyone has a plan, 'till they get punched in the mouth"
…. Mike Tyson

Trading is a fight! You're stepping into the ring to face the best in the world. You'd better be ready.

Because they're ready for you.

Have you studied your opponent? Do you know how they move? Do you know the methods they most often use to deceive you? Do you know their strengths such that you can quickly and effectively adopt a defensive mindset? Do you know when they expose their weakness so that you can go on the attack?

Have you studied yourself? Are you aware of your own weaknesses? Have you planned to avoid exposing these openings to your opponent. Are you aware of your strengths and the methods required to use them effectively? Have you established a workout routine to place yourself in peak physical condition? Have you implemented sports psychology routines in order to enter the fight with a positive and confident mindset?

Do you have a plan? Do you know how you're going to approach today's opponent? Are you going for the knockout punch, or are you expecting a slower, grinding session where the eventual points winner is the one who can outthink their opponent the most?

Have you trained thoroughly? Have you spent session after session in the sim, or live markets, gaining experience and match fitness? Have you danced with the market as it parries and thrusts? Have you learnt to take some hits, but to do so defensively so that they minimise impact. Have you learnt to spot opportunity, before it's seen by your opponent, so that you can strike hard and fast when they least expect it. Have you learnt the skill of patience; waiting out of reach for the right time to fight rather than rushing headlong into their fists. Have you learnt to reassess odds in the heat of the battle, and amend your plan when you find your opponent has the better of you.

And most importantly, do you have a plan for when it all turns to s#*t. Because it will. There will be days when you take a pounding. Do you know when to throw in the towel, and step out of the ring to recover and rebuild? There will be weeks and months when you doubt that you've got what it takes. Do you have a plan to rebuild confidence and grind your way back to the top.

Mike Tyson says, "Everyone has a plan, 'till they get punched in the mouth".

So, how are you going to react when the markets provide you with a financial and psychological punch in the face? 

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Trading Counter-Trend Against Market Bias

The following is a great question I received in a recent email:

QUESTION:

Hi Lance,

I have a hypothetical question:

Assume you are trading 6E (EUR/USD) on a 3/5 min timeframe.

  • Current price is halfway between support and resistance on a 30min timeframe.
  • The trend is up and your premise is for price action to continue upwards for a test of resistance.
  • Price action now goes into a pullback showing short term bearish bias.

What decisions do you make about taking a counter trend trade with the short-term bias but against the trend and your premise?

I assume one decision would be aggressively monitoring the trade but would it be worth it?

I also assume that your trading experience also guides you to expect, say, a 50% retracement?

Maybe the uptrend has been slow/fast and you believe there is now an imbalance between buyers and sellers? Good/bad daily news?

However, what do you see that influences you to believe a counter trend trade would be successful

 

REPLY:

First, it’s important to recognise that if your premise is for the trend to continue to S/R then any counter-trend trades will be a much lower probability. It’s much better to stick to the with-trend opportunity.

If I understand your scenario correctly, you’re just talking about trading the pullback. You’re not expecting a reversal. So… stick to with-trend.

Al Brooks in “Reading Price Charts Bar by Bar” says:  (by the way… this book is compulsory reading, in my opinion)

“Trends are always forming pullbacks that look like terrible entries but are profitable and reversals that look good but are losers. Most trend pullbacks follow just enough of a climax to make traders wonder if the trend has ended and trap traders out of entering on the pullback. Also the trend reversals are just good enough to attract and trap Countertrend traders. If you trade Countertrend, you are gambling, and although you will often win and have fun, the math is against you, and you will slowly but surely go broke. Countertrend setups in strong trends almost always fail and become great With Trend setups…”

I prefer to not rule out counter-trend opportunity entirely, but will say that I largely agree with Al Brooks’ statement. The best opportunity is with-trend. Counter-trend is MUCH harder and you should think VERY carefully before considering counter-trend trades.

Ok… so let’s assume you do want to take counter-trend trades.

The first thing we need is the right environment, so we need to consider the nature of the trend. In particular, we’re concerned with the depth of the pullbacks, as they must be deep enough to allow for profit potential. I don’t necessarily assume a 50% retracement, but instead expect pullbacks to remain consistent with previous pullbacks within that trend (until something changes). So if the trend is fast and previous pullbacks are shallow, then attempting counter-trend entries would be just pointless – financial suicide. There will not be sufficient counter-trend price movement to allow for profit. Stand aside, and watch for with-trend entries back in the direction of your bias.

However if the trend is slow and wide swinging, then there may be sufficient profit potential.

Given the right environment, let me now address your question, “What do you see to influence you to believe a counter trend trade would be successful?”

There is only one thing – and it’s the same with all setups (with-trend and counter-trend). I have to believe that this entry is at a source of orderflow that can move price in my favour. There is never any other reason.

So if the market is rallying and I want to take a short counter-trend trade, it will only be because current price location and behaviour make this an obvious location for other people to go short with or after me.

Perhaps current price action will tempt existing longs to take profit, or at least lighten their position. Perhaps late longs will want to scratch or take their loss due to expectation of a fall. Perhaps something will attract new shorts (eg. maybe it’s an obvious point on higher timeframes for a pullback short entry).

The way I prefer to trade is to identify trapped traders. So I’ll be looking for something that brings in new late longs and then reverses, raising sufficient fear in their minds to cause them to exit.

I suspect you’re really after a pattern or price action answer – eg. over-extended price movement, then a retest which breaks and fails. To be honest, this would be one case when it may be a great short (given deep enough pullbacks). However, there may be other short opportunities that look equally as good, without meeting this pattern definition. I’m not a simple pattern based trader. I trade against other market participants. So, the answer must take them (and their decision making) into account.

So, what influences my decision to enter counter-trend. Trapped longs wanting to get out.

A quick word about trade management – it must be aggressive. I do not trust these positions at all. If they do not move in the required direction in accordance with my expectations, then they should be scratched. You can always re-enter if subsequent assessment says it’s still a good trade. But don’t blindly hold till either your target or stop. Counter-trend opportunity, not at S/R, are a lower probability trade.

Lance Beggs.

Here are a couple of examples from last weeks charts: (Again though I will stress the point that I’m not a pattern trader… not all counter-trend entries will look like the examples below. However they will all be based in some way on the trapped trader concept)