Strategy Review
Following up on my last post, it's been a while since I've done a deep dive into the exact setups that I watch out for. It's about time that I do this, especially if I want to start fresh with a new EdgeWonk configuration.
Signal Identification:
Signal Identification:
Signal Identification:
Trading on the bottom level over on the 4-hour timeframe can be classified as a Level-Hold play. In reality, this is all hindsight since this level held up. More specifically, I need to analyze not how price reacts to the level but where we can expect momentum to pick up.
The setups that I watch out for are based on observations rather than long-run stats. As such, there is a need for me to resume EdgeWonk journaling in order to collect the latter.
Setup #1: Continuation Failure
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| EURUSD 1-Hour |
Signal Identification:
- After a price spike, price will slightly drift lower. It will either continue to drift lower or make another attempt to trade higher. This signal occurs when price attempts to trade higher but fails to sustain.
- For a spike up, enter short as price tests the relative high. This enables me to set a tight stop loss and scale into the position accordingly.
- If the trade fails, I am able to get out with a relatively small loss (tight stop). The reliability of this particular signal depends on the strength of the move.
Setup #2: Breakout Continuation
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| EURUSD 1-Hour |
Signal Identification:
- After a price spike, a floor or ceiling is established. In this particular case, we have a price floor that helps to set a directional bias. The entry occurs when this price floor breaches.
- This signal requires either monitoring the price action in real time or using a stop placement to take the trade as soon as the level breaches.
- The strength of this signal follows the Continuation Failure setup. It works best when I can see a very strong up or down move and stall.
Setup #3: Fakeout
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| NZDUSD 1-Hour |
Signal Identification:
- This signal is nothing new. Most probably call it a false breakout, I just call it fakeout for short.
- Unlike the other two signals, this requires the formation of a structural level. It occurs when price breaks above a range and then quickly trades below it. The idea here is that a bunch of traders who have gone long will have to exit and accelerate the momentum to the downside.
- For what it's worth, I have traded fakeouts in the past. However, these signals occur much less frequently now as I've observed fewer structural moves due to volatility during COVID.
Setup #4: Level-Fail
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| NZDUSD 1-Hour |
Signal Identification:
- This setup hasn't changed. However, I am going to be a lot more stringent in terms of how I classify a level failure, or "Level-Fail" for short, signal.
- Just like with the Fakeout, Level-Fail is not only structural but also preemptive.
- In this scenario, the pair stabilized after a downtrend. The level I plotted signifies that we're watching for a price breach to the upside. The level failure is a preemptive entry after seeing price exhaustion or weakness to the downside. It shows that it's probabilistically more likely for an upside breach rather than continuation to the downside.
Over the past year, I did have one more setup labelled, which is a Level-Hold play. Looking over my replay screenshots, I don't think that's an actual setup. Just because price hits a key level, that doesn't mean a decision can be made. I tried to justify this before by looking at the price drift behavior. However, that simply shows the volume is thinning out. Since I go for momentum plays, it's a bit counter-intuitive for me to execute on a price drift.
In fact, a price drift can be categorized as a Breakout Continuation play when you drop down to a lower timeframe.
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| AUDUSD 4-Hour |
Trading on the bottom level over on the 4-hour timeframe can be classified as a Level-Hold play. In reality, this is all hindsight since this level held up. More specifically, I need to analyze not how price reacts to the level but where we can expect momentum to pick up.
This comes down to more market microstructure analysis. Here's what happens if I did.
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| AUDUSD 30-Minute |
Dropping down to the 30 minute timeframe, this is where the microstructure gets interesting. Although price is failing to breach lower, this isn't exactly a signal to get in. What is a signal is a composition of my two labels.
The first is the Continuation Failure signal showing that price is failing to push lower. Once we see this, we look for a buy stop opportunity, which is labelled as the Breakout Continuation. Confluence wise, this provides an opportunity to hold the trade longer:
- Entry is based on a buy stop placement after we identify a Breakout Continuation over on the 30-minute timeframe.
- Since this signal is supported by a set of more structural levels over on the 4-hour timeframe, this trade can have more breathing room with another potential level to scale in.
In conclusion, I'm scrapping what I consider a "Level-Hold" setup because it really isn't a signal on its own. It's more so an observation of how cleanly price is reacting off of an arbitrary level that I've drawn.
This is something that I'll have to work on keeping track of in 2022. Specifically, asking myself whether I'm taking a trade based on an arbitrary level or momentum is actually picking up?