Hi Steve,
I read your article last night. Below are my thoughts and comments. It’s quite long but hopefully you will find some value in it.
It sounds like you are conflicted about the differences between your pre-open, macro analysis and the trades you take. It seems like you are trying to justify your trading as it does not necessarily match your macro analysis and you are trying to dissociate the two. You must dissociate the two as they have nothing to do with each other.
The way I see it, the pre-open macro analysis is just that - an analysis of current market structure, where you identify current market conditions, where we are at in the longer-term development of value, whether we have been rotating or extending, where support and resistance areas are, etc… From this, we can then form “what if” scenarios so that we can be as prepared as possible for the coming session by trying to think of all the possible scenarios that could occur and how we would react to them. If you are going to grade yourself on your macro analysis, you do not want to do it based on how accurate you were in forecasting the day’s direction – we cannot predict what will happen; and really don’t want to. We want to grade ourselves based on how well we identified current areas of potential support and resistance - did you miss any and hence were caught by surprise with a reversal? Did you miss a few? And at how well we anticipated every possible scenarios – did you come up with only a couple and were surprised when the market did something you did not expect at all? Did that happen only once; or more than once? These are the things you’d want to grade yourself on that foster the proper attitude and mindset and best prepare you for the coming session.
Also, bear in mind that this is a loose strategy, a framework and you are free to trade the developing structure as you wish. What I’m trying to say is that in your macro analysis, you’ve come up with possible scenarios, so when one comes to materialize you are ready – if we hit this price level on declining volume and diverging breadth and $tick, go short. Ok, good, now you’re short. From there you should have a good idea as to where the market might reverse and you’d want to go long – it might be 20 pts away. Does this mean that you have to stay in your short until then? No. It depends on your preferred timeframe for trading. If you like scalping, then scalp the crap out of that sucker all the way down until that level is reached, there’s nothing wrong with that at all. Market Profile is not a trading system or methodology, it’s just a way to look at the market and organize the data. We can trade what we see from the data however we like. Jim Dalton is primarily a swing trader, Pete Steidelmayer developed the concept when he traded in the pits, I doubt that he ceased being a scalper while he traded in the pit. MP was primarily used by the locals in the pit – who are scalpers. I like to hold for whole legs of a move. I know this guy who holds for the whole move. Is any way better than the other? Absolutely not. I am a terrible scalper and there is no way I could hold a trade for a whole move and let the trade retrace against me 10-15-20 pts and hold until the close. What I do works for me, and it should be the same for you.
And now with exits: I think that the only way to grade your exits on an equal footing is to grade them according to the strategy. You have a quiver of strategies – you use tick fades, VWAP patterns, divergences, asymmetric opportunities at range extremes, etc…Each strategy has its own P/L ratio, risk/reward ratio and is valid in its own timeframes. A tick fade might only be good as scalp trade where you think in terms of ticks rather than points. As such your expectations for that trade are different than when you take a position at a range extreme and plan to hold until it reaches the next level. Similarly, a counter trend trade in a trending market will have different expectations than a trade in the direction of the trend. But do you have to grade these trades differently? I think not.
I think your grading system is totally wrong as it emphasises perfectionism. Sometimes the trades don’t work out, and it’s not our fault. We enter trades based on probabilities, it’s never a sure thing, and we shouldn’t think that way. A lot of the time there is no difference between a good trade and a bad trade, there is no way to tell that the market will reverse on you and trigger your stop.
What makes sense to me is to grade your exits based on the strategy, timeframe, current market conditions (volatility), and how well you managed your trade. For example, if you enter a trade and expect to stay in for 15 pts but bail out after 5 because you are being impatient, that deserves an F. If however you get out of that trade because you’ve been in the trade for a long time and it really isn’t moving that much, volume is dropping and deltas are starting to reverse, then you get an A. If your trade location is good, the trade never really works out in your favour and are stopped fairly quickly, you deserve an A for honouring your stop. If however that trade moves in your favour by some good margin and you let it turn into a loser, you get an F (if a trade has moved in my favour 4 pts, I move my stop to a tick above breakeven). Also bear in mind that sometimes losses are not a matter of exits but of poor trade location too.
I grade my entries based on how much heat I took or how quickly I get stopped out – I might be right about market direction but too early. You can do the same thing with your exits and it could take 2 forms: The first where you calculate how far the market moves in your favour after you exit. The second is the same but the other way around – after the trade reached max profitability, how much did you let it retrace against you before you got out. But watch out for perfectionism as you’ll never catch the entire move. A trade needs room to breathe and develop. But at the same, you should have a very good idea of how much you can usually milk out of the market with each strategy given current market conditions and should tighten your stop as you approach that level. For example, I know that I can expect roughly 20 pts per trade with my trading style and current market volatility so tighten my stop as I approach that level and often get out, unless the market just accelerates in the direction of the move.
Let me know what you think.
Marc