Divergence Trading

Workshop

Day One

presented by

Thomas Wood | MicroQuantSM

Naked Trading Part 2

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Naked Trading Pt. 2 Workshop

Naked Trading Pt. 2 Workshop • Becoming Consistent in Trading • Trading Psychology • Fundamentals of Candlestick Trading • Highest Probability Candlestick Reversals • Adding Filters to Candlestick Setups • Adding Momentum Filters to Increase

Probability of Success • How to Increase Success, But Still Have

Actionable Signals

Rules for Being Consistently Profitable

Rules to Become Consistently Profitable

• One of the most sought after aspects of trading is consistency.

• One of the most important things missing from most traders performance is…. Consistency.

• There are a few things we can do to help us become more consistent with our trading, and in turn, become more consistent with our profits.

Rules to Become Consistently Profitable

• Maintain a good reward risk ratio. By keeping a good R/R ratio (>2/1) it takes a lot of pressure off of us as traders to always be right.

• If we have a 2/1 reward risk ratio, we only need to be correct 34% of the time to be profitable because 1 winner pays for 2 losers.

• This will help smooth out our equity curve and minimize the drawdowns we experience throughout our trading careers. (You will have losses, it is part of trading, do not worry about them)

Rules to Become Consistently Profitable

• In order to become a consistently profitable trader, we first must become a CONSISTENT trader.

• If we are not consistently placing the same type of trade, using the same setups in the same markets, then we cannot expect to see consistency in our equity curve.

• The goal of trading should be to make our equity curve become as smooth as possible from lower left to upper right

Rules to Become Consistently Profitable

• One reason many large funds and many professional traders use algorithms in their trading, is because they ALWAYS do what they are coded to do.

• If we want to get the same type of consistency in our own trading, we need to make our trades follow a specific set of rules.

• The rules we follow can be anything we want them to be. We just need to make sure we are removing the variability in the types of trades we are placing.

Rules to Become Consistently Profitable

• One of the best things we can do to combat the inconsistency in our trading, is by creating, and FOLLOWING, a trading plan.

• Most traders do not take the time to create a trading plan, but this is one of the BEST things we can do to become more consistent as a trader.

• A good trading plan will include all of the following information:

Rules to Become Consistently Profitable

• When will I be trading? • What time of day do you plan on placing

orders and identifying setups? • Markets behave differently during different

times of day, so if we want to get consistent results, we need to be consistent with the time of day that we are placing trades.

Rules to Become Consistently Profitable

• What size account will I be trading? • This should also outline the number of

contracts/shares/lots you will be placing in each market. We want to keep our gains and losses consistent across all different markets so that we can maintain a good reward to risk ratio.

• We do not want to be risking $500 in GC then risking $200 in ES because we could have 2 losers in GC and 1 winner in ES and still end up negative.

Rules to Become Consistently Profitable

• What are my risk and loss limits? • In order to become consistent, we need to

make sure we NEVER have a “blowup day” where we have massive losses.

• We need to control our daily and weekly and monthly losses so that we can continue trading.

• We also need to limit the maximum amount we will risk on each trade, there is no “Loading the Boat” on one “perfect” trade.

Rules to Become Consistently Profitable

• What markets will I be trading? • We need to know what markets we will be

trading and stick to them. Each market moves differently, so if we want to get consistent results with the strategies we are using, we need to make sure the markets are consistently the same.

Rules to Become Consistently Profitable

• What type of trading will I be doing? • Am I a swing, day, position trader or am I a

scalper? If we want consistent results from the strategies we are using, then we need to be consistently looking for the same trade. That means, we do not cut winners short just because we decide “this is a scalp trade”

• Remember, we are removing the variables in our trading in order to make it as consistent as possible.

Rules to Become Consistently Profitable

• What strategies will I be trading? • This may be the largest section in your

trading plan. It should outline every aspect of the trades you are going to be placing: • Setup (setups and timeframes) • Entry Signal (setups and timeframes) • Initial Stop Placement • Stop Management (When to Breakeven

etc.) • Exit Logic

Rules to Become Consistently Profitable

• How will I monitor the performance of my trading? • How are we going to be monitoring our

performance? Daily, Weekly, Monthly? • How do we decide if we are doing good or

doing bad with our trading? What is a reasonable return we should be expecting? Etc.

Rules to Become Consistently Profitable

• If you have trouble following your trading plan, you may want to try writing it out by hand. Studies have shown that we are more likely to actually follow a set of rules if we manually write them out ourselves.

• Make sure you review your trading plan every day, a good trade is a trade that follows your plan. NOT just a trade that makes money.

Questions on Rules to Become

Consistent?

Trading Psychology, Preparing Your

Mind to Trade

Preparing Your Mind to Trade

• In order to become consistent with our trading and to make it easier for us to follow our rules from our trading plan, we need to get our mind ready to become a trader.

• Most things in life that have always helped us, such as not giving up, sticking to something, being a leader, etc. are not necessarily good for our trading career.

Preparing Your Mind to Trade

• We do not want to stick to a bad trade idea, we do not want to keep trading even after we hit our loss limit, we do not want to try and “get back at the market,” we do not want to “be the leader” so to speak and jump in on a move just because we want it to happen.

• If we can become aware of the emotions we have while trading, then we can combat them by following rules, or telling ourselves that “I know I want to do this, but this will hurt more than help”

Preparing Your Mind to Trade

• We can also do things to convince ourselves that our strategies work, even if we find ourselves doubting. One thing we can do to help make ourselves “believers” is to keep a trade log.

• We want to track every trade we place and be able to go back and see that our strategy has worked hundreds of times in the past. If you do not have this record, go back and look at historical charts. Find the setups you are going to be trading, and take screen shots of them.

Preparing Your Mind to Trade

• The reason we do this is so that we can say to ourselves “look, it has worked 500 times and if I had stuck with my plan, this is how much I could have made” this will help to make us believe in ourselves and control the emotions that arise when we start trading.

• We also do not want to look at our trading account as money necessarily, meaning do not go “well there goes a vacation, or a new car” etc.

Preparing Your Mind to Trade

• The value of our account is just a tool to let us participate in the fluctuations of the market. The goal is to follow our rules and the consistency and profits will come. We want to be able to look at our account value objectively, not with any emotion involved. It is a game, we win the game by following the game plan, the game plan is written out for us in our trading plan.

Questions on Trading Psychology,

Preparing Your Mind to Trade?

Fundamentals of Candlestick Trading

Fundamentals of Candlestick Trading

• How do you read a candlestick? • There are two parts, the “Body” and the

“Wick” • The Body of the candle is the distance

between the open and the close of the price bar.

• The Wick of the candle is the highest high and lowest low above/below the body. So the total range the candle moved.

Fundamentals of Candlestick Trading

What is a candlestick chart?

Fundamentals of Candlestick Trading

• Why do we use candlestick charts? • Goal is to give us a way of analyzing market

psychology based on price action. • When we look back through history, certain

price patterns appear over and over, these patterns can tip us off to how a market will typically behave in specific conditions.

Fundamentals of Candlestick Trading

• With any candlestick reversal pattern, there are a few rules you want to follow.

• The price bar must CLOSE before we can say “that is a bullish reversal” so we do not enter because a candle “looks like a hammer” we wait until it closes, then we can decide if it really is or is not a hammer.

Fundamentals of Candlestick Trading

• When we go to enter a trade, we have three different options depending on how aggressive you want to be: • Enter on the open of the next bar • Enter on the break of the previous bars

high/low • Enter on the break of the high/low of the

previous bars body

Fundamentals of Candlestick Trading

• One of my favorite ways to use candlestick patterns is as a signal that a market could be preparing to reverse direction.

• There are a lot of patterns that candlestick traders use and many traders have different requirements for a candlestick to be “good” for a setup.

Fundamentals of Candlestick Trading

• There are four main bullish patterns that I watch for when trading. • Hammers • Inverted Hammers • Dragonfly Doji’s • Bullish Engulfing Patterns

Fundamentals of Candlestick Trading

• With all of my bullish reversal patterns, I want to have the close of the price bar HIGHER than the open. So I want to see the buyers “win” the price bar for a bullish reversal.

• I want to see all bullish reversal patterns be located at the bottom of a down move.

• With a hammer or inverted hammer, we want to see the “wick” roughly 2x or more, the size of the “body.”

Hammer Candlestick Reversal

Inverted Hammer Candlestick Reversal

Dragonfly Doji Candlestick Reversal

Bullish Engulfing Candlestick Reversal

Fundamentals of Candlestick Trading

• There are four main bearish patterns that I watch for when trading. • Shooting Star • Hanging Man • Gravestone Doji’s • Bearish Engulfing Patterns

Fundamentals of Candlestick Trading

• With all of my Bearish reversal patterns, I want to have the close of the price bar LOWER than the open. So I want to see the sellers “win” the price bar for a bearish reversal.

• I want to see all bearish reversal patterns located at the top of an up move.

• With a shooting star or hanging man, we want to see the “wick” roughly 2x or more, the size of the “body.”

Shooting Star Candlestick Reversal

Hanging Man Candlestick Reversal

Gravestone Doji Candlestick Reversal

Bearish Engulfing Candlestick Reversal

Questions on the Fundamentals of

Candlestick Trading?

Adding Filters to Candlestick Patterns

Adding Filters to Candlestick Patterns

• Trading Candlestick reversals alone is a valid way of finding trade setups. However, we can increase the probability of success with candlestick trades by adding filters, or other indications that a market should move the desired direction.

• The more things we have pointing to a specific direction, the higher the probability that we will have a successful trade.

Adding Filters to Candlestick Patterns

• One of the easiest filters we can add for our candlestick reversals is Exponential Moving Averages.

• We can apply an 8 EMA as a “gravity line” and have a requirement of the market being pulled away from the 8 EMA. This is for counter trend reversals.

• We can also apply a 50 EMA and if price is below the 50, we only look for shorts, if it is above the 50 we only look for longs. This is essentially a very simple trend filter.

Adding Filters to Candlestick Patterns

• When we are trading with the trend, using the 50 EMA as a filter for directional bias, then we are looking to time an entry on a retracement using a candlestick to show us when the market is ready to resume the underlying trend.

• When we have a candlestick reversal going counter trend, we are looking for the market to enter consolidation, not completely reverse trend.

Adding Filters to Candlestick Patterns

Adding Filters to Candlestick Patterns

Adding Filters to Candlestick Patterns

Adding Filters to Candlestick Patterns

Adding Filters to Candlestick Patterns

• Although using EMA’s as filters is still a valid way of trading, and will have better success than using just the candlesticks alone, we can further improve our success by adding the MQ CycleFinder indicator as a filter as well.

• When we have a bearish candlestick reversal, we want the MQ CycleFinder indicator to show a bearish (red) histogram bar.

• When we have a bullish candlestick reversal, we want the CycleFinder to show a bullish (green) histogram bar.

Adding Filters to Candlestick Patterns

Adding Filters to Candlestick Patterns

Adding Filters to Candlestick Patterns

Adding Filters to Candlestick Patterns

CANDLESTICK FILTER QUIZ!

CANDLESTICK FILTER QUIZ!

Questions on Adding Filters to

Candlestick Trading?

How to Read MQ Momentum and

MACD

How to Read MQ Momentum and MACD

• You can read the MQ Momentum and MACD indicators essentially the same way.

• They are both made up of two indicator lines, then a histogram showing the spread between the “fast” and “slow” lines.

• The further the fast line is away from the slow line, the larger the histogram bars become.

• The closer the indicator lines are together, the smaller the histogram becomes.

How to Read MQ Momentum and MACD

• When we are looking at the indicator to determine momentum, we are looking at both indicator lines AND the histogram.

• We want to see the indicator putting in higher high and higher lows on bullish moves and lower high lower lows on bearish moves.

• Just like when we are reading price action, we are looking at the “pivots” not just the line angling down or up.

How to Read MQ Momentum and MACD

• We also want to see increasing “strength” on the histogram in the direction of the trade we want to place.

• This can be higher bullish histogram sets, and/or higher bearish histogram sets, to show bullish momentum. Or lower bullish histogram sets and/or lower bearish histogram sets for bearish momentum.

How to Read MQ Momentum and MACD

How to Read MQ Momentum and MACD

Questions on How to Read MQ

Momentum and MACD?

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

• Now that you understand how to read the momentum indicator, we can start talking about adding this momentum filter to different trade setups.

• One of the best filters to add, in my opinion, is a momentum filter. The reason I like adding momentum as a filter is because it will often times make the market jump your direction much faster. So we have less time spent with unrealized losses, and less time risking money in the market trying to “get that winner.”

Adding Momentum Filters to Breakouts

• If we are breaking support or breaking through a trendline, we want to see the MQ Momentum indicator lines also breaking through previous “swing lows” or see our histograms showing growing strength in the direction of the breakout.

• If momentum does not agree on the direction of the breakout, than the probability of a false break is much higher and it is better to pass on the trade.

Adding Momentum Filters to Breakouts

• When drawing trendlines, we are not just connecting previous bars lows together, we are connecting pivot points.

• It is better to connect 3 or more pivots, if we cannot connect 3 or more, we connect the two most significant pivots.

• (when I say significant, I mean the market hit a price point, then moved the opposite direction for a significant distance)

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

• Adding a momentum filter can increase the success of your support and resistance/trendline breakouts significantly, however, for those traders that want to increase the probabilities of a successful trade even more, we can add additional filters.

• Two things you can watch for after a support or resistance/trendline break is for a bull/bear flag or a trendline retest + bull/bear flag.

Adding Momentum Filters to Breakouts

• A bull/bear flag takes place when you have an up/down move, then the next price bar has a lower high or higher low than the previous price bar, and the momentum histogram stays green/red the entire move.

• You enter the flag on the third (or more) price bar when it breaks the previous bars high/low.

Adding Momentum Filters to Breakouts

• Once you form the flag and trigger the entry, after the trendline break, the market should move your direction very quickly (2 price bars) and should not go back below/above the low/high of the flag.

• A lot of times we are able to significantly increase our reward risk ratio by using this setup because the stop is placed fairly close to the entry, just beyond the bottom/top of the flag.

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Questions on Adding Momentum

Filters to Breakouts?

Breakout + Momentum Quiz!

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Adding Momentum Filters to Breakouts

Questions on Momentum Filters and

Breakouts?

How Many Filters Do I Need?

How Many Filters Do I Need?

• There is a limit on how many filters you want to add to your setups.

• We need to balance the desire for higher probability trades, and the fact that we have to actually have trades to place.

• The best way to check to see if you are using too many filters is to check your trade log. How many trades have you placed over the past week, day, month etc.? Are you reaching your goals for trading?

• Day Trading I want to have about 2-3 trades per day for $300-$400/contract.

FINAL Q&A!

Want the Indicators You Saw Today?

• ValueCharts Futures Trading Room Bundle: • MQ Momentum • MQ CycleFinder • SS Momentum Trender Pro • ValueBars

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• MQ Momentum Indicator:

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