Pneumatic Test - Failure Incident-LNG-Shanghai-China on 09.02.09
The Failure Test · Sample Trading Plan Setup: – The market must be trending. – Must have a...
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The Failure Test A Classic Counter-Trend Trading Pattern
Transcript of The Failure Test · Sample Trading Plan Setup: – The market must be trending. – Must have a...
The Failure TestA Classic Counter-Trend Trading Pattern
Outline Why trade counter-trend at all?
A deeper look at support and resistance
Failure test trades– What is the pattern?
– What are the best setups?
– How to manage them
Risk management concerns
Some examples
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Two Styles of Trading With Trend
– Seeks to enter a position in alignment with the pre-existing trend, or at the beginning of a new trend
– Common structures are pullbacks and breakouts– Ideal entries are often around “centers”
Counter Trend– Looks to take positions against the current dominant trend on
the trading time frame– Is there any true counter-trend trading?– Hope is to be able to capitalize on a shorter trend against the
main trend– Trades often come around extremes
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Comparison of the Two Styles
With Trend
Trades can often be held a long time.– “Ride your winners”
Winners tend to be larger than losers
May reward a more passive mindset
Counter Trend
Trades tend to have limited expectation– Important to take profits
proactively
Losers are often bigger than winners
Often require aggressive (decisive) psychology
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Why Trade Counter Trend? More trades
May be clearer and easier to manage
Immediate gratification– Psychologically, a double-edged sword
More than a trade setup– A good set of trading patterns is a toolkit for market
analysis
– Trend trades fail into successful counter-trend trades
– Trends end via successful counter-trend trades
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If the only tool you have is a hammer…
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Support and Resistance Be careful
– One of the most over-used and abused concepts in technical analysis
– Your eye will create these out of nothingness Be especially careful of horizontal gridlines
– Are your levels better than random levels? Are you sure?
What levels will you use?– Calculated levels– Visible chart points Important previous highs or lows Previous pivots Does it matter if market is trending or not?
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Resistance, Once Broken, Becomes Support.
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S/R in Action
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Price Action Around S/R The characteristic pattern of S/R holding is price
rejection– An immediate and sharp move away from a level
– Seems as if price “doesn’t want to be there.”
If there is no price rejection, probabilities tilt toward S/R breaking.
May add a short-term moving average as a tool to train your eye to see the essence of the price action
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Price Rejection
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Lack of Price Rejection
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The Failure Test Price probes beyond a level, finds no conviction, and
quickly reverses– Can occur in a trending market or a trading range
– Consider relationship to higher timeframe trend
Objective entry pattern with a clearly defined risk point
Other names:– Spring or Upthrust (Wyckoff)
– 2B (Victor Sperandeo)
– Bull or Bear Traps
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Failure Test: Trade Location
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A Third Possibility
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Failure Test: Entry Trigger
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Stop Location:Consider the Tradeoffs
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Questions to Ask How good is the pivot?
– Is it visible to everyone?
– Are there likely to be stops clustered there?
Was the pivot really penetrated? Were stops triggered?
What is the risk?– How does the market trade? Gappy?
How will you manage a gap opening?
What is the potential in the trade?– What is your profit-taking plan?
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Price Action After Entry Price rejection is good.
Consolidation near the entry is bad.– One or two inside bars are ok.
Will you re-enter if stopped out?
In the best trades, price moves quickly away from the entry and does not come back.– Not meaningful per se, but has implications for market
analysis.
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Failure Test Failures One of the most important things to know about any
pattern is to understand how they fail.
There are several common variations, but all have one thing in common: no price rejection.– Failure by consolidation near the level
– Failure by large gap
How to manage?
– Failure with second entry
How and when will you tighten stop?
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Sample Trading Plan Setup:
– The market must be trending.– Must have a reason to be looking for counter-trend trade
Climax Entry
– Failure test pattern Risk
– ½ of a “normal” trade risk Stop
– At previous trend extreme Profit target
– Take first profits at 1x initial risk via resting order (24 hour).– Second target is 2x initial risk– Further exits are discretionary
Reentry if stopped out– One re-entry, same risk level, but second entry must be clean.
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EUR / USD
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S&P 500
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Gold Futures, 2011
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Soybeans
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Gold
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Be Careful of This Environment
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A Sample Intra-day Entry Adapt Failure Test Pattern, but use HOD and LOD as the
reference levels.– Could do this with awareness of important levels on daily chart.– Could also consider the Taylor Rhythm.
Do not trade in first half hour or last hour of the day. 5 min S&P Futures bars
– Keltner Channels (2.25 ATRs +/- 20 XMA)
Previous HOD/LOD must have been outside Keltner Channels. Must be at least 3 bars between entry bar and previous
HOD/LOD. (Avoid “sliding” trends.) Must have >.75 point failure back inside HOD/LOD. Wait for the close of the bar.
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4/11/13
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4/12/13
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4/15/13
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4/16/13
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4/17/13
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4/18/13
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Review Simple, effective counter-trend trading pattern.
Consider differences in trading range, counter-trend and with trend entries.
Understand what should happen after the trade entry.
Understand how the pattern fails.
Consider different implications on different time frames.
Understand the risk of the market you are trading.
Have a plan.
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Waverly Advisors, LLC:Research Products
Tactical Playbook – Available on Interactive Brokers - IBIS– In-depth Monday report
Technical setups for all major asset classes Exact trade recommendations Macro perspective on major events and risk factors
– Daily update Updates to positions, stops, and trade management decisions
Options Market Outlook – Contact Waverly Directly– Proprietary, quantitative analysis of options market
Incorporates both volatility and directional analysis– Macro risk factors and cross-asset perspective– Actionable trade ideas
Hedging Covered Call writing Opportunistic Trades
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Contact:
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Corning, NY 14830
(607) 684-5300
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Andrew BarberCEO, Macroeconomic [email protected]
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Chris NoyeManaging Director, Head of [email protected]
