As a technical price action trader, I know that it is essential to work to a strategy. However, that is not the entire story, not by a long way. Within a plan, I have to define my trading frequency. The best way for me to explain is through an example. The diagram I have chosen is from the 5-minute chart on Thursday 7th February 2019 of the currency pairing AUD/USA.
Price in the chart above is ranging, but the last move long was from a higher low and before that a higher high; this ought to indicate that the dominant price direction is becoming long.
However, set against this is my understanding that the magnetic effect of the double zero number (in this case the price level 7,100) is still a dominant factor below our current price. In other words, my direction of trade at this point is undefined.
The next three and a half hours provides many exhausting false or aggressive opportunities that in one way or another match the criteria for my strategy but ultimately would avail to nothing other than a gradual depreciation of my account.
The box, drawn around the possible high and low levels of the period, was not so clear at the time. Moreover, something I am not able to show is the fluctuation (or flickering) of the open bar that adds to the frequently incorrect temptation of the determination of dominate price direction.
A substantial opportunity presents itself at the close of bar 1 shown above; this results in a false break of the lower part of the price box I have drawn.
The close of bar 2 either reconfirms our entry short at bar 1 or for the more conservative trader bar 2 is the real signal bar that has arguably closed below the breakout box drawn and demands a trade entry short into the face of the double zero number.
Bar 3, following the entry bar, provides a ceiling test of the bar 2 signal bar. Often a positive sign and another entry opportunity for the sharp trader. I can draw the box representing my best assessment of support and resistance with all the price action of the last few hours in place. Therefore, all well and good in hindsight.
But unless I sort my ‘trade frequency’ out in my mind, the result will not be as clean as I have demonstrated above. To decide and understand my ‘trade frequency’ can turn a mediocre account into a genuinely winning proposition.
To help sort the infinite frequency possibilities, I will classify them into three broad definitions: (1) Always-in or high frequency, (2) positive entries but aggressive, and (3) stable entries. Within each of these bands, there is the possibility for a wide range of clarity; for example, the final definition of group 3, could itself be classified from the stable aggressive to the conservative. But for now, the three bands are sufficient.
Our first definition very much appeals to me. The absorption or total engagement necessary to survive in this operation is electrifying. However, it is a fool errand. Very few highly experienced traders (or computer algorithms) are successful at ‘always in’ or high-frequency trading. Moreover, any form of spread commitment places this form of business into the impossibility category.
So that only leaves me with band 2 or band 3. In my opinion, over a series of trades, ‘positive aggressive’ is where all my losses reside, and ‘stable’ is where I get my wins. By making a conscious decision to disregard band ‘2’ (positive aggressive) trades and only to consider band ‘3’ (stable) entries is essential to the fruition of a compounded winning account.
In the example I have examined today, both signal bar 1 and signal bar 2 are stable entries; bar 1 being slightly on the bold side of this band, and bar 2, I suggest, being more on the firmly reassuringly conservative end of the stable definition.