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    Thread: Obie's trading journal

    1. #1
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      Default Obie's trading journal

      Hello traders !

      I am here to post some of my trading ideas and demonstrate the effectiveness of the unique strategies that I trade with - a method like no other. It is based on the Market Profile methodology, not because the Profile method is magical, but because it is the best method that can allow a trader to remain sceptical of any current market sentiment. Scepticism, as we shall see, is a very valuable quality for a forex trader to have. If you are tired of losing money while following all the textbook recommendations, then this thread will make your burden lighter and your journey shorter. But acquiring the requisite knowledge will take some work!

      This is not really a single strategy, but a combination of different strategies, research findings and empirical observations. Some of the concepts we will meet are deep-rooted, so the determined trader should be prepared to consult the books I will recommend here.

      First, let me explain the name of this approach to trading. 'Rational' means that while using the strategy, we will not be married to our sentiments and market outlook. Indeed, some of the best traders in the world change their outlook/sentiment faster than observed changes in the London weather! We will be neither strictly bullish nor strictly bearish. Rational also means that we will make use of ideas from the field of Statistics and statistical research. Hence, a major theme in this method is that of 'Mean Reversion' - the idea that prices tend to move back to the mean if they stray too far from it.

      We will also be guided by observations from Market Microstructure. Market Microstructure is the study of the behaviour of market participants and the nature of markets. In this regard, we will be using ideas from Market Profile methodology. We will also be mindful of the empirically observed tendency of bank traders and Hedge Funds to actively manage their inventory within the trading day. Among other things, institutional traders inventory management causes their net exposure per day to be equal to zero. For example, if the big institutions have been buying for the most part of the day, they have an increased tendency to sell before the end of the trading day, so as to balance their books.

      I also want to take a moment to talk about the true nature of financial markets. Financial markets are largely random - maybe not completely random, but up to 80% random. Mathematical Statisticians have discovered that random phenomena often mask or conceal their true nature by appearing to have regular patterns or design. This is astonishing because it can explain why, in spite of the statistically observed randomness of financial markets, prices in the markets appear to follow fairly regular patterns. The assumption of randomness has far-reaching implications. First, it means that we cannot accurately predict where prices are headed, but we can nevertheless make money, thanks to the non-validity of the “Strong Form” of the Efficient Market Hypothesis (EMH). We don't need to be right to make money. We should be guided by genuine skepticism at all times, for no one knows what the markets will do next. For those who are interested, "Fooled By Randomness", by Nassim Taleb is required reading.

      Using this method, one can reasonably expect to earn up to 40% on his trading capital per month. Ideally, we will stick to the age-old recommendation to risk only 1 - 2% of our equity on each trade. Risk management is key in this method. I will not try to double or triple my trading capital per month, for such a proposition is not sustainable in the long run.

      The few indicators we will use include the Market Profile indicator, the Average True Range (ATR) indicator, a Weighted Average Price (WAP) Moving Average, and Bollinger Bands. These are used as guideposts. They don’t predict price movement.

      Having introduced us to this uncommon approach to trading, I would like to answer a few questions for the benefit of those who may be interested to learn. After that, I will get started trading using this strategy. I will exclusively trade on the 1 Hr chart and I will trade only one major currency pair, namely the EUR/USD pair. We may get one or two trades per day. I will use Technical Analysis chart patterns for purposes of contrarian trading. This method can be used to trade any financial Security/Asset, except perhaps options, where it has not been tested.

      For those interested in learning the Market Profile technique, "Markets and Market Logic", by Peter Steidlmayer, and "Mind Over Markets", by James Dalton are required reading.

      This method can be combined with other strategies, provided those strategies do not contravene the cardinal rules that we will observe while using the method (such as skepticism, randomness, non-determinism of the chief variables driving the markets).

      Thanks everyone for reading thus far !


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    3. #2
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      Welcome Obie to this amazing section called Trading journal Your explanation and details are amazing and looks like you are a very serious trader which makes me think, this is going to be epic trading journal. I am looking forward to more updates from you and I wish you a lot of green trades, profit and many many pips!


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      Oh dear, that is some long introduction mate, lol, please pardon my sarcasm, lemme get my popcorn and reserve the front seat because I sense that we are going to have a very interesting episode with your journal, having said that let me officially welcome you to the prestigious journal section.


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    7. #4
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      First, let me explain the name of this approach to trading. 'Rational' means that while using the strategy, we will not be married to our sentiments and market outlook. Indeed, some of the best traders in the world change their outlook/sentiment faster than observed changes in the London weather! We will be neither strictly bullish nor strictly bearish. Rational also means that we will make use of ideas from the field of Statistics and statistical research. Hence, a major theme in this method is that of 'Mean Reversion' - the idea that prices tend to move back to the mean if they stray too far from it.
      Wow, awesome introduction brother Obie! You already got a fan! I love the way you introduce your journal with lot's of informative knowledge. And what I love best is the approach that we should not be married to one ideal views on the market, instead we should be neutral and that is the way we should survive in forex world. That is one attitude that am trying to master in my trading for a long time now but not making any real good progress yet. Bring it on bro, I will definitely learn a lot from you! Keep it up!

      Welcome to Journal Section where the sea of real self learning truly begun!
      Am still hibernating, will wake up one day, all depends on fate. Hope to see you all-soon! Miss you all friends!


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    9. #5
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      Quote Originally Posted by NikitaBelle View Post
      Wow, awesome introduction brother Obie! You already got a fan! And what I love best is the approach that we should not be married to one ideal views on the market, instead we should be neutral and that is the way we should survive in forex world. That is one attitude that am trying to master in my trading for a long time now but not making any real good progress yet....
      Yeah, thanks NikitaBelle. I understand how difficult it is for a forex trader to stay detached from any dominant sentiments in the market. I have even heard something like "Bulls make money, Bears make money, but Pigs get slaughtered". Nothing could be further from the truth. Ask yourself, how can the bull be 100 percent sure he ought to be a bull at the precise instant of time? Same goes for the bear. We can never be sure about such things and indeed, we can never be 100 percent sure about most things that involve human decision-making. In trying to be rational, human beings have a strong tendency to change their minds especially when making such decisions in an environment composed mainly of random phenomena and variables.

      I will post some charts and talk more about the RMP method and the indicator settings today.


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    11. #6
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      I want to dwell a little on Market Profile methodology and why it is the best method for trading rationally while remaining skeptical in the midst of random price movements in the forex market.

      The major theme in MP is the concept of value. Value is derived from applying a Normal Probability Distribution to the forex markets (that is there is an implied assumption that financial markets are normally distributed). The Normal Probability Distribution or "Gaussian" Distribution is a major topic in basic college Statistics. In an MP graphic/indicator, the Value Area is the area or region bounded by Mean minus 2 Standard Deviation on the lower end and Mean plus 2 Standard Deviation on the upper end. Again, this is just an application of the Normal Probability Distribution to observed intraday prices in the forex markets. From the Normal Distribution, we know that approximately 95% of prices will fall within Mean plus or minus 2 Standard Deviations. This implies that prices outside that region very likely belong to another probability distribution - which is the same thing as saying that the market is trending.

      The MP method is actually not accurate, since research has shown that forex prices do not follow a Normal Probability Distribution. The have been shown to follow a so called Log-normal Distribution. That notwithstanding, for practical trading purposes,the assumption of a Normal Probability Distribution for forex rates is good enough, provided one remains skeptical and practices strict risk management. On the other hand, for purposes of risk management, a Gaussian Distribution fails while the Log-normal and Power Law Distributions shine in this area and are therefore the prefered probability distributions.

      Notice that we are talking about probability distributions here because of uncertainty in the future movement of prices.


      The Normal Probability Distribution
      Name:  Normal Probability Distribution.png
Views: 235
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      Chart Showing RMP Setup
      Name:  Eur_Usd Chart Showing Setup For the Rational Market Profile Strategy.png
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Size:  37.4 KB
      Last edited by Obie; 08-22-2017 at 05:30 PM.


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    13. #7
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      Name:  Eur_Usd Chart Showing Setup For the Rational Market Profile Strategy.png
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      The settings for the indicators we are going to use are as follows:

      Bollinger Bands Indicator :

      period - 20, Deviation - 2, Shift - 0


      PZ_Market Profile Indicator :

      Sessions to display - 5

      Median line color - Green

      Area color - Orange


      Average True Range Indicator:

      Period - 14


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      Quote Originally Posted by Obie View Post
      Attachment 69816

      The settings for the indicators we are going to use are as follows:

      Bollinger Bands Indicator :

      period - 20, Deviation - 2, Shift - 0


      PZ_Market Profile Indicator :

      Sessions to display - 5

      Median line color - Green

      Area color - Orange


      Average True Range Indicator:

      Period - 14
      Let me understand some things right. You are going to trade the market profile range example, if the price gets out of the market profile range you are going to search for an opportunity using your indicators to buy, or sell the price you think is overbough/sold back to the median pivot of MP. What settings are you going to use for the value area?


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    17. #9
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      Quote Originally Posted by FlyingShark View Post
      Let me understand some things right. You are going to trade the market profile range example, if the price gets out of the market profile range you are going to search for an opportunity using your indicators to buy, or sell the price you think is overbough/sold back to the median pivot of MP. What settings are you going to use for the value area?
      I cannot change the Value Area dimensions. It's determined by the code within the indicator. But the PZ_Market Profile Indicator shows the Profile graphic for a 5 day period. After the fifth day, it starts a new profile for the 6th day and subsequently builds it up for the next five days, while still retaining the old graphic together with its median line. Like I said before, the MP method is useful, but it is not the holy grail. First, financial markets are not normally distributed, but nevertheless, a normal distribution is a convenient assumption for the profile method - and for my own variation of it. We do not read too much meaning into a "Value Area" because We cannot prove that the bound is in fact the real value - or for that matter whether the concept of "Value" is even correct, as applied to today's markets. Skepticism is my watchword and we will see how useful this lack of faith in anything will play out in actual trading!

      ---------- Post added at 06:26 PM ---------- Previous post was at 06:07 PM ----------

      I want to give a brief illustration of my trading method. Suppose price approaches the Value Area High (VAH), I will immediately start looking for reasons to sell in the neighbourhood of the VAH. The price should at least touch the VAH. Now, I expect to be wrong and I will set my stop loss at 2 ATR (i.e. 2 times the value of the Average True Range). If my stop loss gets triggered, I may or may not enter a buy order, depending on what the long-timeframe participants have been doing, expected inventory adjustment of institutional traders, where the closest Median Line is located and what the Bollinger Band indicator is telling me. Also, when the scenario is just too vague, I will use a 72 Period Linear Weighted Moving Average. I will be guided by the belief that in the neighbourhood of the mean, all prices are equal. This is a purely discretionary method, based on several insights from actual observed financial time series behaviour and also on pure tact !.


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    19. #10
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      I also want to take a moment to talk about the true nature of financial markets. Financial markets are largely random - maybe not completely random, but up to 80% random. Mathematical Statisticians have discovered that random phenomena often mask or conceal their true nature by appearing to have regular patterns or design. This is astonishing because it can explain why, in spite of the statistically observed randomness of financial markets, prices in the markets appear to follow fairly regular patterns. The assumption of randomness has far-reaching implications. First, it means that we cannot accurately predict where prices are headed, but we can nevertheless make money, thanks to the non-validity of the “Strong Form” of the Efficient Market Hypothesis (EMH). We don't need to be right to make money. We should be guided by genuine skepticism at all times, for no one knows what the markets will do next. For those who are interested, "Fooled By Randomness", by Nassim Taleb is required reading.
      Wow, that is really a gem! You know why, because I also believe that indeed price moves in random, 80%, so the remaining 20% must be caused by news, smart money and other factors, so if it is the case then, why can't we just open random trades and just leave things as they are, wait for the market to decide...so why all the indicators and why we need to strive to perfect our analysis and create perfect methods when we can trade randomly and expect random profits and loss? Isn't trading becoming easier if we just trade in random with out much expectation?
      Am still hibernating, will wake up one day, all depends on fate. Hope to see you all-soon! Miss you all friends!


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