September 6th, 2022
God damnit. I lost today lol. There are some very simple fixes to my strategies that I really am going to emphasize in this post. So today I took 3 trades and the first was a trend following play and the second and third were both trend reversals. To be clear, the market does 1 of 2 things: Follows the Trend, OR Reverses the Trend. Either way I think if I take my targets at 50 cents I could play both in either way and really crush it. Let me explain:
When Trading a Trend Continuation there are certain rules that must be applied
1. Always Trade in the Micro Trend Direction
2. Use the 2 Minute Chart
3. Wait for Sideways Consolidation and a Retest of the 7MA
4. Once the 20 is broken Continuation is difficult. Do not take any trend trade if this occurs.
Lets go into each rule and study their importance so that we can possibly figure out a way to classify each trade into a ranking system.
1. Always Trade in the Micro Trend Direction
-The Micro Trend is the trend that exists on the daily/1h/30m timeframes. As you can see in this chart above we have a clear downtrend in the market. This would be considered a Micro Downtrend
-The reason why we only trade trend with the micro trend (ONLY SHORT WHEN DOWNTRENDING) is because we want to following the prevailing money flow in the market. If there are billions of dollars of liquidity every single day and we are only trying to capture a 50 cent move on the SPY then we must follow that money. It would be ludicrious to think that we can play trends to the upside when we are already moving in a downward direction on a larger timeframe.
2. Use the 2 Minute Chart
-Above is a 2 minute chart and below is a 5 minute chart. Although it is obvious that these are the same day it is unclear why the 2 minute is better than the 5 minute
-The 2 minute chart is required in Trend Trading because in Trend Trading all of the entries are somewhat a "chase." It is very difficult to enter in trend trades because you have to be extremely aggressive and ready for a super fast scalp.
-The 5 minute is simply too slow to identify and make clear decisions when playing with the trend. It does not give enough insight into where the price action is about to go.
-When the 2 minute chart is trending below the 20 and the 7 you know that there is a strong trend
-Entries vary but in general anytime the stock moves slightly sideways and tests the 7 it creates an opportunity to continue the trend back to the downside.
-This is a perfect example of why these trend trading strategies require very fast execution and aggression whereas a reversal strategy requires extreme patience
Another Example:
-The SPY is below the 20 and the 7 and when it retests it creates the opportunity to continue the trend
Example:
-Again, we are broken down in a huge trend and when we move sideways with the 7 and the 20 above we have a strong potential continuation of the trend
-When we retest the 7 we create that opportunity to move to the downside more.
-It is important to know that every other rule I have applies to both of these strategies. Targets must always stay at 50 cents because if I have perfect entries then this is always the sweet number where I can have a tight stop but also have a clear target.
3. Wait for Sideways Consolidation and a retest of the 7
-This does not need any examples because it is a clear rule. Never go for a trend when we are above the 20 or the 7 when going for a micro (longterm) downtrend continuation trade.
-Anytime we are above the 7 or the 20 we are not trending down. That is consolidation UNLESS we are in a micro uptrend. That changes every rule in this post to be the opposite of what I have said since instead of playing a micro downtrend we are playing a micro uptrend.
4. Do not take trades betting on continuation when the 20 is broken.
-This is an example of a trade I took where I bet on continuation to the downside and I lost because I was taking the trade above the 20
-The 20 period moving average is very telling as to where the trend is at. If we held below the 20 on this trade the chances of it continuing back down is much higher.
When Trading a Trend Reversal these are the rules:
1. Use the 5 Minute Chart
2. Create a Trendline from the 5 Minute Chart
3. Wait for the break and be Patient
4, Draw a Horizontal line exactly where the Trend Broke
5. Wait for a Retest of that Trendline
6. Enter with Stop Above Previous High and a Target at New Lows (still 50 cents target no matter the circumstance)
Lets go into why we have each of these rules
1. Use the 5 Minute Chart
&
2. Create a Trendline only from the 5 minute chart
-The trend MUST be created only using the 5 minute chart. The reason why is because when we go for Trend Reversals we must be aware of the macro setup that is occuring. You cannot just take any trend break below the 5 minute time frame because it simply is not enough information for the amounts of money that are required for a reversal to occur.
-The 2 minute chart creates an entirely different pattern and trendline that is easily manipulated and causes tons of fakeouts. For Example:
-I know at a glance it looks even more detailed and better than the 5 minute chart but it is untrue because no matter how good this looks its much different than the 5 minute chart. This can create fakeouts much easier than the 5 minute chart does.
-I have to go to the 3rd and 4th rule to explain why its worse
3. Wait for the trend to break
4. Draw a horizontal line where the break occured.
Below is a 5 minute chart
-See where the trend is broken and we create a horizontal line exactly where the break occured.
-The 5 minute is almost exact on where the reversal begins and when we use this chart we have a clear entry point
-The 2 minute chart is above and you can see how the trend is different.
-The 2 minute break and horizontal trendline is much lower than where the 5 minute trenline occurs. This makes it more difficult to capture
-After reviewing this I see the efficacy of using the 5 minute but there is definitely strong potential that I am simply wrong and I could use the 2 minute for anything. I will iterate this strategy further daily to find problems and solutions to every scenario that I can find.
