Learning Diary.....The Road Less Traveled!!


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amandeep86 said:
Subhadip Sir,

1.When not to trade is the more important then when to trade,Please share some examples of when not to trade.

2. As told earlier do we trade in direction of HTF ,Like 60 TF and 15 TF to enter in 5TF?
Or just see what is happening in 5TF as told in IDF ? Which is better
Well, when not to trade is the most important thing in trading.

When in sideways, please do not trade. It can be traded, I will show one day, but till you are clear what ur doing, please do not trade in sideways.

yes.I prefer still seeing 15 min TF for trades in 5 min or 3 min TF.

Nihil Ultra (Nothing Impossible). Stay focused. War is with Market,Ledger is the proof of that.Mirror knows the result.


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Subhadip said:
Originally Posted by View Post

Multiple timeframes is a great concept even for day trading and short term trading . This concept was developed by many and Dr Alexander Elders and Robert Krauz are the two names I associate with concept of Multiple timeframes.

There are many ways multiple timeframe concept can be used in our trading.Some of the applications are as under :

1) Trade in the direction of trend on higher timeframe.....suppose you are trading 5 min bar, take all trades in the direction of higher timeframe...say 30 min timeframe. So if 30 min timeframe is in uptrend, take all long trades and no short trades.....our sequence of trades should be long...add....book profits.....stay out....again long...add....book profits. But what if the 30 min is not trending and is in sideways phase ? Either dont trade in this period or even if you take trades, be very fast to get out on first sign of trouble....We daytraders want our trades to move in our favour quickly after we enter....and we dont like hanging around in a trade which is going nowhere.

2) When longer timeframe is trending, we trade more aggressively in direction of that trend....we give bit more room for our trades to work.....but when the longer term trend is sideways.....these trades are small , choppy and frustrating ,we enter and exit fast....grab whatever profits we can.....but in trending period we play for big win.

The Gem :clapping::clapping::clapping:

Nihil Ultra (Nothing Impossible). Stay focused. War is with Market,Ledger is the proof of that.Mirror knows the result.


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Originally Posted by Smart_trade View Post
The entire trading is based on two very important concepts.....1) Reward/Risk ratio or R/R and 2) Money Management ( MM )or Position sizing. Both these concepts are more important than which of our trade is successful and which is not.

I read a book called " Mathematics of Money Management " by Ralph Vince. This is one of the three finest books on MM by the author and some of the concepts in that book opened my eyes to what trading really is... I am giving below a small excercise from this book to stress a point that in final results, which of your trade made money and which lost money makes NO difference at all.....


Make 40 small pieces of paper,on 20 write SUCCESS and on 20 write "FAIL" and fold them and put them in a glass bowl. Then ask a small child in the family to pick up each slip from the bowl and you read whether success or fail.

The sttarting capital is Rs 1,00,000/- and At each trade you will risk 25 % of the capital. If the trade is success,you make double the amount of money risked on a trade and if it is failure,you loose the amount risked on that trade. So for first trade your cum equity balance is Rs 1,00,000/- and the amount risked is 25000/- so if the slip says success,you make 25000*2 =50,000/- and your cum equity is 1,50,000/- now and on next trade you bet 25 % of 1,50,000/-. so go on like this till 40 trades are over.

The final amount you will have is not dependent on the sequence of your winning/loosing trades,consecutuve looses,wins etc and final amount is over Rs 10,50,000/- Dont believe me ? Try it out. I have spent 3 hrs on this game early in my career and tried coin toss,various sequence of alternate win/loss,10 losses and 10 wins in sequence etc…But the final wealth is same not even a rupee more or rupee less.

What does this prove ? Have a competent system,backtest,have a good mm and trade with confidence. Your sequence of losses and gains make no difference in ultimate results of building your wealth as long as your method has a positive expectancy and edge. Hope you enjoyed the game and learnt something from it…..About expectancy, we will discuss later...

I am no way advocating risking 25% on every trade. This is just illustration because optimal f for this system is 25 %. But 25 % is way tooo high. Start with 1-2 % and put your profits to work for you….


Nihil Ultra (Nothing Impossible). Stay focused. War is with Market,Ledger is the proof of that.Mirror knows the result.


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Originally Posted by Smart_trade View Post

The traders have a misconception that if they follow any method /system they will make money....nothing is further from truth. They will make money only if the method has positive expectancy...if it has negative expectancy, traders if they trade that system , they will loose "systematically"

Let us see what this expectancy is and how we can find out expectancy of the method we trade. I will explain the concept in practical terms and also give example of a real trading method, its parameters and how to find expectancy of this method.

The expectancy is the amount you’ll make on the average on every trade per rupee risked on your trading method . Expectancy can be mathematically expressed as :

Expectancy = ( Probability of win X Average win ) - ( Probability of loss x
average loss )

In our MM game posted some posts earlier, we had our winners making 2 times our loosers and we had 20 winning and 20 loosing trades so the probability of win/loss both are 50 % or 0.5 So let us solve this equation :

E = ( 0.5 X 2) - ( 0.5 X1)

= 1- 0.5

= 0.5

This expextancy is a positive figure....so the method will make money...and it will make more money if we take more trades on the same.

But if the loosers were two times the winners......then this equation will give expectancy as -0.5 ......so that method will loose money no matter how faithfully you follow it......

Readers can get more information about expectancy in a fine book titled "
'Trade Your Way to Financial Freedom’ by Dr. Van K Tharp

The method will have more expectancy if it has either higher hit rate ie higher percentage of winners or higher average amount made on a winning trade....this is where importance of staying with your winning trades ,adding to your winners and cutting your loosers early comes into play.....

In next post we will apply this concept to a real swing trade method, list the method parameters to understand the expectancy of the method based on actual trades generated by the method ......


Nihil Ultra (Nothing Impossible). Stay focused. War is with Market,Ledger is the proof of that.Mirror knows the result.


Active Member

Whenever I see traders learning this method I am reminded of the following opening paragraphs in New Market Wizards by Jack Schwager. It is reproduced below :

The Jademaster
One cold winter morning a young man walks five miles through the
snow. He knocks on the Jademaster's door.
The Jademaster answers with a broom in his hand.
"I want to learn about Jade."
"Very well then, come in out of the cold."
They sit by the fire sipping hot green tea. The Jademaster presses a green stone deeply into the young
man's hand and begins to talk about tree frogs. After a few minutes, the young man interrupts.
"Excuse me, I am here to leam about Jade, not tree frogs."
The Jademaster takes the stone and tells the young man to go home and return in a week. The following
week the young man returns. The Jademaster presses another green stone into the young man's hand and
continues the story. Again, the young man interrupts. Again, the Jade-master sends him home. Weeks pass.
The young man interrupts less and less. The young man also learns to brew the hot green tea, clean up the
kitchen and sweep the floors. Spring comes.
One day, the young man observes, "The stone I hold is not genuine Jade."
I lean back in my chair, savoring the story. My student interrupts.
"OK. OK. That's a great story. I don't see what it has to do with making money. I come to you to find out
about the markets. I want to learn about the bulls and the bears, commodities, stocks, bonds, calls and
options. I want to make big money. You tell me a fable about Jade. What is this? You ..."
"That's all for now. Leave those price charts on the table. Come back next week."
Months pass. My student interrupts less and less as I continue the story of The Trader's Window.
-from The Trader's Window,

While amateurs go broke by taking large losses,professionals go broke by taking small profits...... William Eckhardt in New Market Wizards


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Early Reversal Line (ERL):

In the simplest terms ERL is nothing but a Pivot High (in an Uptrend) / Pivot Low (in a Downtrend) that has been broken and the price has closed at a visual distance from the body of that Pivot High / Low. The bodies of these Pivots (PH in an uptrend and PL in a Downtrend) form the ERL. In an Uptrend, the Body High (Open) of the Bearish Bar associated with the PH will form the ERL, and in a Downtrend the Body Low (Open) of the Bullish Bar forming the PL will form the ERL. The wicks / tails are ignored.

So two basic requirements for ERL:
1. We need clear visible bodied pivot, and
2. A visual distance close away from it.

No mathematical formula for measuring visual distance is there… sometimes 20 points is enough and sometimes 30 seem less.. we just need to go with our eyes… just ensure that the Pivot have been broken convincingly. Visual distance is how far the price has moved from the line and how strong a bar has closed with respect to the line. For an ERL to be operational, this is an aspect that needs to be considered.

Hence, in case of a pre-existing uptrend, once price breaks the Pivot High the ERL exists...and once we get a close above that ERL line at a visual distance then that ERL is activated / operational. (Similarly, in case of a pre-existing downtrend, once price breaks the Pivot Low the ERL exists.. and once we get close below that ERL line at a visual distance then that ERL is operational.)

Visual trend forms visual ERL .. minor forms minor ERL .. major trends form major ERL..Based on our method we trade the relevant ERL..

Nihil Ultra (Nothing Impossible). Stay focused. War is with Market,Ledger is the proof of that.Mirror knows the result.


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How to use ERL in Trading:

1. Rejections
Let’s say that we are in a pre-existing Uptrend and we have a clear cut breakout above our Pivot High, we have our ERL. We know that once this breakout closes at a visual distance from the ERL our ERL will be activated / operational.
Now, if the price collapses and the Bar closes below our ERL, we call it a Rejection.
Hence, Rejection is nothing but when a Bar closes below ERL (in case of uptrend) or above ERL (in case of downtrend). And we reverse our position above or below the Rejection Bar High (Low) +- F as the trend may be.This becomes more Potent if the Rejection forms a Pivot above the ERL.(If Trade is not Hit with filter above / below the rejection bar that bar will become the pivot).

2. Failure
Failure is nothing but the bar that breaks the pivot and goes away at a good visual distance but eventually the same bar falls back and closes below the non-operational ERL line (body of pivot).

When we don’t look at the ERL?

1. The Pivot has to be from the same Trend for ERL
Assume we are in a downtrend, our SAR is at the latest Pivot High. Now, if the latest PH is broken we reverse our position to Long. That PH cannot be considered now for ERL in case of our new uptrend as it is from a Previous Trend. ERLs are early reversal signals and should be based on the price action in the current trend, not the previous one. Hence, in the new uptrend, wait for the price to form a new higher PL and then let it take out the previous Visual Pivot High at a visual distance for it to be considered as an ERL.

2. Ignore the ERL in Sideways Market

There may be many ERLs formed within the Sideways but we ignore them altogether. The ERL play will resume once the Sideways is taken out and Up / Down trend resumes.

The Visual Distance is just a bar closing over a potential ERL that is obvious Visually.............There is no percentage or mathematical calculation to it........Visually,a breakout bar over a potential ERL and a visual close outside of this potential line activates it.

The concept of ERL::

Nihil Ultra (Nothing Impossible). Stay focused. War is with Market,Ledger is the proof of that.Mirror knows the result.


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amandeep86 said:

I have marked few trades based on ERL failures ,Please check which of following 6 Trades are correct.

if we make this is used as a trading setup ,will it be something counter trading trends which is against the Flow Principal.
Number 4 is a classic example.

Nihil Ultra (Nothing Impossible). Stay focused. War is with Market,Ledger is the proof of that.Mirror knows the result.

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