Execution Quality

I don't have anything new to share in this end-of-week update. I'm still trading with the minimal risk of $5 per trade. Rather than focusing on the P&L, I am working on my execution quality. This need comes from the idea that my three setups can generate great payoffs when they work. When they don't, I simply take on a small loss. The priority right now is to minimize these small losses by improving my execution quality.

In order to discuss this concept, there are a few things to cover first.
  • Explanation of how I backtest.

  • The three setups that I look out for.

  • Run through my recent trades that fall under one of these setups and identify my entry issues.
How I Backtest

I understand that this method is far from perfect. In fact, it is very prone to hindsight bias in two ways. The first is always being able to pick the best entry point. In reality, the entry is far from perfect. The second problem is that you'll have tendency to identify the signals that work rather than seeing all possible signals.

Keeping that in mind, here's how I backtest. I call this a "Replay Mode." When the markets are closed (weekends), I will review the price movements for the past week and plot my levels on a separate Tradingview chart template. As I do this on a weekly basis, I gain familiarity with the price movement. This also helps me to visually plot the payoff structure for each setup. Once I have the capacity, I'll likely migrate over to an Excel format to have a more precise measure of the R-multiple.

Setup #1: Fakeout


I zoomed in on an arbitrary week to show this. This is probably one of my longest setups since I have had absolutely no success trading continuation breakouts. That's the idea here. Price will break above an established level but fail to hold higher. In this case, price stalls just above the level and then makes a sharp move lower. This would be the momentum move. I'll look to get in short when price drifts back up to the level. The drift doesn't always have to touch the level. Ideally, the entry is when price fails to climb higher than the previous candle.

Setup #2: Holding a Level

Although this is visible in the photo for the previous setup, I do have a better visual.


This is a really standard play off of support and resistance levels. The idea here is simply to take a trade as long as the level holds.

Specifically, the momentum is bearish here. The price drift is towards the upside. When this occurs, I look to go short (or long) whenever price stalls at the level. However, there are a few key details to ensure that this setup is successful.
  • Price must've previously held clean at this level. This means that price didn't breach the level, which may signal a weaker hold.

  • The previous price reaction off of this level must be strong. If the previous price reaction off of this level was weak, it's rather difficult to expect that the selling strength will be replicated or be even stronger.
If you take a closer look at the chart, the second "Level Hold" signal might not have been spotted in real time. Although price drifted higher, it didn't touch or stall at the upper resistance level as with the first "Level Hold" signal. This is an example of hindsight bias that is very difficult to filter out. I can only pair backtesting with forward testing in order to focus on my execution quality.

Setup #3: Leading a Level Breach

This is the idea of spotting when a level will fail, which I just call "Level Fail."


While everyone else is watching price to break below the support and then sell, I believe that you can "lead" this signal. Of course, doing it in real time is incredibly difficult and it's where my losses stemmed from earlier in the year. Similar to the previous setup, here are a few key details to ensure that this Level Fail setup is successful as well.
  • Price must have previously breached the level and then traded back above it. This is a good indication that other market participants aren't recognizing this level legitimately, meaning that it's more likely to fail when price trades towards it again in the future.

  • When price crosses above this level, it must have a drift characteristic. If price makes a sharp move back above this level, then it's more likely that this may be a fakeout play. In this particular image, price drifted above the level and then stalled with an inside candle. This would be the most optimal entry to get short.
This would conclude the three setups I constantly watch out for, which are essentially price behaviors around key levels. I should also note that these tend to work best on structural levels. There are times when I get too nitty-gritty with these levels. When that happens, I overtrade by generating a lot more conflicting signals rather than a methodology to flip a trade when it doesn't work out the way I wanted it to the first time around.

Trade Review

AUDUSD

This trade is active as we speak. I am anticipating this level to hold. This is largely explained by the Signposts on the chart itself. It matches the characteristics of price drifting closer towards the level and then experiencing a sharper selloff reaction. I also have a similar position over on EURUSD and NZDUSD since there is a potential shift as outlined in the US dollar index (DXY).

GBPJPY

This was another trade I took, which got stopped out earlier today. It's the same idea here where price is drifting towards the support level. After seeing it stall and attempt to trade higher, I entered long. I don't necessarily think that this was a bad trade. It simply didn't work out. There was another opportunity to re-enter, which I missed.

EURGBP

Bad luck? I think so. I wouldn't have flipped this trade and went long with a "Level Fail" signal. It doesn't match my criteria since price did not previously breach above this level.

These are some of my most recent trades. For the rest of this month, I don't plan on sizing up. I intend to stick with this small dollar risk amount to continue to improve my execution quality. Seeing longer tails and inside bars definitely helps.