Hey guys, please I am wondering about which approach to follow, whether breakout trading using horizontal previously tested SR levels when in a trend, taking trades in the direction of the trend, or waiting for the pull back to either the trend line or MA and taking trades on the sign of a reversal?
My problem is that i don’t really know how to read pullback well as some pullbacks can just consolidate on the trend line and i wouldn’t know what to do again or i might have entered a trade before the consolidation and i then get stopped out after, but with SR levels and areas i can simply wait for retest to follow the trend but it takes a long time for price to get to key areas. So if you suggest pullbacks over breakouts for trend following, then please how can i spot an entry into pullbacks properly?
Breakouts are low probability, high risk/reward trades. They don’t occur that often but they can be dramatic.
Trading with the trend following a pullback is a high probability low risk/reward trade. All trends have pullbacks, so every trend will have entry opportunities. Most traders look for price to show it is resuming the trend before getting in. Profits can be maximised by pyramiding the position as price moves further along the trend.
There isn’t any way to be 100% confident that either a breakout or a pullback is not a trap so don;t waste your energy on looking for something that doesn’t exist. Just trade whichever feels better for you, though always use a stop-loss to manage your losses - there will be losses, that does not mean these strategies don’t work.
Try to rephrase the question and think about your problem statement from a different perspective. Anecdotally speaking, I feel a lot of traders (not investors, not algo guys) will tell you the practice is more of an art than that of a science. So, can you approach trading as an art, and the charts are your canvas?
If you’re with me that far, now try to insert your question again.
Can 1 artist ask another artist how they should paint their next masterpiece? To some extent, maybe…Maybe the other artist can give some tips and pointers on certain methodologies of painting, or, the best equipment to use to accomplish certain styles of painting. But, can the other artist make the strokes and create the art themselves?
What I’m getting at—
Trading is more about viewing the markets from your own perspective.
A perspective that takes years, and quite frankly, lots of money (including tears of pain and joy), to fully develop and appreciate.
You’ll get great tips on this site and be miles ahead of most who simply try to venture out on their own.
But, you won’t get a black and white answer (aka- another artist grabbing your hand and making the paint strokes for you).
You need to develop a way of interpreting price action that makes sense to you, and then stick with that.
That is your edge, and, how you create masterpiece after masterpiece.
Thanks @tommor I’m thinking I’ll find a way to know if a pull back is real or not, but do you have any ideas on how I can know real pullback ending vs fake pullback ending. That is how to determine the trend is continuing from a pullback, because sometimes I see it break the trend area only to continue back up
I don’t think you can say there is a 100% accurate indication that a pullback is real and the trend will resume. so don’t put absolute faith in MA’s, trendlines, round numbers, fibonacci retracement levels, prior pullback limits etc.
Of course, you can see that some trends will be longer established, more consistent, with shallower pullbacks, with shorter duration pullbacks, but none of these matters will guarantee the pullback will be real and not fake.
My overall advice is plan for a failure using pre-set TA rules and then trade the pullback using that plan. But in general traders spend too much time tying to avoid losses and too little trying to increase gains.
Word of caution w/ “backtesting”. The actual process can be very subjective, unless you are using some type of programmatic, non-subjective way of interpreting price action. Simply looking at charts, you’re more likely than not going to be coming from a place of “I’m trying to prove hypothesis X” - so, you’re going to be naturally looking for ways to prove that hypothesis to be correct, because you subconsciously don’t want to be wrong (this is a natural human trait).
Context is a big deal, and, when you’re scrolling through charts you’re not going to have the context around what was happening in the macro market on the day that your technical set up occurred.
Best way to test a theory is to use forward-testing. E.g. put money you can afford to lose (aka market tuition) on the line.
Back-testing is an emotionless activity.
Forward-testing is primarily emotion-driven-decision-making.
Thanks @tommor, I understand that there’s no way to predict 100% the direction, i am just trying to add filters that help improve the odds of the pullback movement. Please can you suggest any to me, I’ll be very grateful for it.
What if you backtest with a strategy tester like in mt4 using an empty script for the EA script or indicator script, so one can maintain the price action approach, and the movement of price is simulated and not known before hand when it comes up but is replayed?
Yes, I know. And we all do it. But consider this - If 80% of your trades are winners and 20% are losers, you might be tempted to put in a whole lot of time and effort and research and energy to reducing the 20%. so let’s say your efforts are very very successful and you cut the number of losers by a tenth. So now you have only 18 losers, which means you have 82 winners.
But let’s suppose your efforts at increasing the winners is equally rewarding, and you increase them by a tenth. So now you have 88 winners and therefore only 12 losers. Which is better, 82 winners or 88 winners? And remember to take account that one use of your extra time was 4 times more productive than the other.
I have to say my 80:20 example shouldn’t be taken literally, I’m not saying an 80% win rate is necessary, achievable or even desirable. What I mean is broader - where you get 80% of your reward is where you want to put in 80% of your effort.
What I’m saying is reinforce your strengths, get better where you’re already good, don;t be afraid of failures along the road, they don’t mean you’re lost.
Ok- that is clearer and I agree; that is where the effort should be.
My point was coming from a place of taking your post literally.
A lot of people out there talk about the need to capture 80% “win” rates and completely discount a strategy with high Reward vs. Risk. A 40% “win” rate could be sustainable (measured via sharpe and risk of ruin ratio) if you’re capturing > 2:1.
I think you can paper trade using an excel sheet and have an initial balance in the excel sheet and with each trade you take you subtract from that balance so it seems like a real trading environment. I think it’s also possible to get past news, i haven’t really checked though. I very much agree that nothing beats going live, but I’m just looking for the closest alternative to it
I have found that using some technical indicator to give you more of a visual clue, quite helpful. Either stochastic or macd crossings. So then you would be looking for levels of confluence. Here is an example.
So typically you will have more confidence entering the trade. And as mentioned ,this is your edge, now you have to trade your edge. You should find that you have slightly better than 50% hit rate, which is fine. It comes down to money management then to maximize your advantage. Also remember that having an edge is very important, and to keep on repeating that over and over, because there is no guarantee that your next trade will be successful ,you could have 10 losing trades in a row, but you have to complete at least 25 trades, and then make minor adjustments if necessary. Trade your edge. I came across these graphs, it is from Goldman Sachs dealing desk operations. Interesting to see that when they are right, they are right in a big way, and when they are wrong, they are wrong in a small way. And also, their winning days far outnumber their losing days. . . Aim for these results.
Try this for a month, and then fund an account with real money that you’ve had to earn and tell me the difference. Simulation trading will never trigger the emotional aspects of the game- ever. It’s a great tool to learn a platform and get comfortable with the primary concepts of trading. But until you have money on the line, there is no comparison.
But I think that the demo and backtesting period help you to see clearly unlike the live periods, because when live your judgement might be clouded by emotions and you won’t be able to find tune your strategy to the market properly but in demo all that is cut off.
I actually think of it as two demo sessions, where the one with fake money is used to fine tune the strategy till it works and the second session is live with small money which is used to get emotions under control, all these before really going “live” with a good amount that makes profit. Do you agree with this @FOREXunlimited ?
. Aim for these results.