Algo to trade by

“No data yet!….It is a capital mistake to theorise before you have all the evidence, it biases the judgement.”                                                       Sherlock Holmes

Obligation to self:

I prefer probability and momentum to be on my side in my trades; and when a trade qualifies, I take it, and I’m happy to manage it – I’m a trader after all

Note:

  • “Before a trader can use this entry and management strategy they must first be very proficient in all areas and methodologies of the detailed and wider view of what is commonly known as Price Action trading.”
  • “This page is under daily change and development; mostly minor tweaks, but, occasionally, something more.”
  • “I treat this ‘algorithm to trade by’ page as an actual computer algorithm – develop, add, adjust – but most important, qualify.”

Clarification:

  • Probability: is about the belief in an alternative outcome, it is not about the odds.
  • Market cycle (MC) is broadly the recognition of a trend or trading range (TR).
  • Context is the picture the accumulation of 100 to 130 or so bars on the screen provides.
  • My strategy is defined from one of the following:
    • Multiple swing
    • swing
    • swing/scalp
    • scalp /swing
    • scalp
  • Setup: such as a second entry, a wedge and many more.
  • Price action: the indication through shape and length a single bar, a few or a group of bars provides.
  • R refers to reward/risk: (It’s worth mentioning here that actual R can be many times in my favour, but never worse than planned R, minus the spread).
    • 1R shows that planned reward matches the planned risk.
    • 2R means the reward is twice planned risk.
  • Green line entry measure (GLEM) (note: my GLEM is a measuring tool for trade entry, target and stop positions: but like all good tools its successful use depends on the options I take – basically, which bar(s), closes or wicks, I decide to measure).
  • Swing: is 2R.
  • Scalp: is 1R.
  • R is always used to determine price per pip/tick.
  • ‘Break even’ is zero loss.
  • Spread: is the difference between the sell and buy price (bid-ask or bid-offer) and defines us, in my view, as ‘retail’ traders.
  • ‘always in’ is represented by a price close that is beyond a change of premise point and may be with or against trend; the stronger the change of premise point (minor or major) the stronger the ‘always in’.
    • GLEM must be with the ‘always in’ direction.

For example: In the first snip below the trend is ascending. The PB has closed above a minor ‘always in’ which, if the bar had closed below this point (the previous high) it would represent a low probability short. If the bar, however, had closed below the lower arrow, this would have been a trend line break (not shown) and a better probability of ‘always in’ short for an against the trend scalp. Until either of these happen the ‘always in’, as per the trend, remains long.

…..a few bars later the second snip shows another ‘always in’. I took the close of the last bar long to take a scalp, an exact measured move up of that bar, and to just below the major arrow, for a TR scalp.  Of note: an entry on close above the major arrow, depending on context and price action, could be a low probability for the longs, despite it being above a major ‘always in’ arrow.

Entry

The success of a trade will more often than not depend on the placement of the entry. I consider each of these points before every entry:

  1. Trend or TR
  2. ‘always in’ direction
  3. GLEM
  4. Minimum distance 
  5. Context

Scalp or Swing:

  1. The minimum measured move on my GLEM – or adjusted entry – is 10 pips, plus half-spread.
  2. GLEM with 5 minute bars can include:
    1. PB bar if all bars measured are represented within one 15 minute bar
    2. bars from more than one 15 minute bar as long as no PB 5 minute bars are within the GLEM
  3. GLEM can be re-measured after entry to include the subsequent bar if the subsequent bar is within one 15 minute bar, any PBs are considered with regard to the new measurement.
  4. Entries are either one scalp or one swing from a single GLEM:
    1. from another (independent) GLEM in the same direction, another trade can be entered while the earlier entry is still open
    2. not more than two open positions at any one time
    3. with two entries open, and one entry is break even, then the other is too

Scalp:

A scalp can be taken at any part of the cycle, but scalp’s only when:

  1. TR.
  2. PB against trend.
  3. late in a trend.
  4. When a swing or scalp is already open, a scalp can be taken.
  5. Prior to important news, where insufficient time to run a swing, scalp entries only.

Swing:

  1. If a TR is not clear, I take a 2R swing target.
  2. Not more than one swing to be open at any one time.

Early entry:

An early entry without an actual GLEM – which is also an entry on a signal rather than an entry bar: (note: such entries, by definition, have a lower probability than an entry with GLEM)

  1. An early scalp or swing, taken from a signal bar (rather than an entry bar) from a set-up, but before the ‘always in’ direction is established, can be taken prior to an anticipated momentum move in the direction of an anticipated ‘always in’ trade.
  2. Measure risk to one pip beyond a change of premise (a major change of premise is preferable).
  3. An expected GLEM is then drawn to determine estimated target.
  4. Once an entry bar(s), that satisfies GLEM, forms – remeasure R and adjust the trade accordingly. (note: the remeasure of GLEM, once GLEM is confirmed, requires some flexibility in the initial R).
  5. I do not take early entries on double tops/bottoms that are 20 bars or more apart, I wait for an entry bar.

Stop, entry and target (swing and scalp):

  1. From my GLEM decide on a stop-limit position
  2. Entry point is not less than 1R with respect to one measured move
  3. Set target at one measure move (scalp) or two measured moves (swing)

Spread on entry (swing and scalp):

Spreads may be expensive because someone (the broker) is selling them and is charging a price. I adjust and pay half-spread on both target and stop. Which means I always have a negative difference of a full-spread between a measured win and a measured loss. But I try to get the majority of my entries half spread free, or at the worst, cheap:

  1. From my not less than 1R entry point:
    1. I enter for a neutralized spread entry and if:
      1. entry bar is on PB, and close to entry point, then on-market entry with best judgement of half-spread allowance
      2. entry bar not on a PB, or on PB but not close to entry point,  then on-limit entry set at the entry point (note: entry on the unintended side of the trade is possible if not careful)
  2. GLEM that is measured from open and close (not wicks) I can enter on market if actual entry (with half-spread) will not be beyond the close.
  3. GLEM that is measured from wicks (trend only): I can enter on-market if actual entry (with half-spread) will not be beyond the wick.

Breakout bar

Stop is at the start of the breakout bar, adjusted by at least one pip and half spread. However, for the breakout bar to be valid, my GLEM has to still provide a suitable (validation only) stop from the zero% measurement. I don’t permit PB entries and corresponding PB stop positions.

Management of my trades

Exit:

(out of the money) when to set break even, 50% loss or on market exit:

Each scalp and swing always has a stop and limit order. Exits detailed below often give me a measured loss that I accept as part of the trading experience:

With Trend:

  1. PB negatively closes in relation to the entry bar, having first closed positively in relation to the close of the entry bar, then: 
    1. break even, or
    2. if (negative) PB continues exit on-market at the 1st close that goes against a (positive) PB attempt at break even
  2. If the first PB bar is beyond the 50% PB:
    1. exit at the 50% PB on my GLEM
    2. and/or if close is beyond a change of premise, then exit on-market
  3. If a PB bar, other than the first PB bar, closes at or beyond the 50% PB on my GLEM, then set break even.

TR or against Trend:

As for with-trend with the addition of: If close is beyond 100% PB on my GLEM exit on-market.

(out of money) Breakout bar exit:

Exit from a breakout bar (on my GLEM the stop is one pip plus half spread beyond my measure point) with a 50% or more PB on my GLEM with a:

  1. close:
    1. set exit at the 50% PB, or
    2. (if price action favourable) exit at break even
  2. wick only from a trend bar – exit at break even

(In the money) when to exit or set break even:

  1. Strive to exit on-limit, at target, less half-spread.
  2. Exit on market when:
    1. a move to target can be considered as ‘close is close enough’
    2. price action indicates a change in ‘always in’

A faltering early entry and when to exit

Exit at break even an early entry (signal bar only) if: Close is (negatively) beyond the open of the signal bar but not above a current change of premise.

Exit on market an early entry (signal bar only) if: Close is (negatively) beyond the open of the signal bar and above a current change of premise.

Signal bar only, no entry bar, and with an estimated GLEM this entry is low probability 

Considerations

Scalp:

A 60% success rate is required for this strategy to be profitable:

  1. A scalp is a minimum of 1R.
  2. I enter TR scalps from the first third of the TR, the first third is determined by the direction of the trade.
  3. Do not move scalp stop to breakeven.
  4. I allow PB’s and assess them when the PB bar has closed.
  5. As the trade progresses a new GLEM can develop and traded. The rules for the new GLEM  (a scalp or swing in this example) apply to the open scalp.
  6. An adjusted entry is allowed (I consider this an advanced trade) to achieve a minimum distance; however, the adjusted entry including half-spread is only to, but not including, the 50% PB on my GLEM.
  7. If I notice a mistake with my entry, unnoticed wedge for example, I look for best out.
  8. If 11 bars since the entry (at the close of the 11th bar not including the measured bar), I set break even.

Swing:

A 40% success rate is required for this strategy to be profitable:

  1. A swing is a minimum of 2R.
  2. I move swing stop to breakeven after a premise level is formed between break even and target.
  3. New premise points, and therefore possible change in the ‘always in’, are continually generated as a trade progresses – I take breakeven, or best out available, on a ‘always in’ direction change.
  4. As the trade progresses a new GLEM can develop and traded. The rules for the new GLEM  (a scalp in this example) apply to the open swing.
  5. As new bars are generated I measure with my GLEM and adjust (albeit rarely and reluctantly) swing target and stop – adjustment of stop being in direction of trade only.
  6. If I notice a mistake with my entry, unnoticed wedge for example, I look for best out.
  7. If my swing entry goes on so long I’m now concerned about a significant news event I set break even.
  8. If 11 bars since the entry (at the close of the 11th bar not including the measured bar), I set break even.

Scaling into a winning trade

I will only scale-in to a winning trade when:

  1. The entry makes no more than a total of two open entries at any one time.
  2. The scaled-in entry stands on its own merits, independent to the already open entry in terms of:
    1. trend or TR
    2. ‘always in’ direction
    3. GLEM
    4. minimum distance
    5. context

Scaling into a losing trade

Usually not taken. However, the following scenario is a consideration: I’m in a swing that, contextually, I get wrong. The trade has gone against me and I’m looking for an out. A scalp, that in itself is good contextually, and meets my GLEM requirements, can be entered to minimise the probable loss from the swing. (I consider this advanced trading).

One thought on “Algo to trade by

  1. Great strategy. Good to refer back to every so often. “It helps the ego but rarely the pocket”, funny how it often seems easier to overcomplicated things. The best strategies are always the simplest.

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