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[HC]

Naked Chart Trading

A kind soul introduced me to a thread called "Technical Analysis Fallacy" (TAF) in foraxfactory.com.  I find that this thread is very helpful to me and I share here my learning journey.   I also wish to express my gratitude to fti, the thread starter there as I have learnt much from him.

First of all, the original TAF thread:

http://www.forexfactory.com/showthread.php?t=57639, and its continuation at

http://www.forexfactory.com/showthread.php?t=104773 (you may need to registered to in order to view the content on this one)

Here is a thread started by his follower to share experience and chart on this trading method:
http://www.forexfactory.com/showthread.php?t=204471

The original thread is VERY long, but it is worth your time reading it (at least the first 200 pages as it contain most of the teaching, those after page 200 or so are more of live trading commentary).  I have personally gone through TAF thread 2 times myself: 1st time I just concentrate on fti's postings to get what it is about, and the 2nd time combing through all postings.  I am doing the 3rd time on and off to refreshing my memory and see if I have missed anything.

This thread here is not to compete with forexfactory but to aid our members to get a quicker insight to what fti's is teaching about.

[
2009-08-07 HC Edit: fti has returned and the original thread continues.
2009-11-05 HC Edit: fti followers has started a thread to share experience, link added.
]

[HC]

That said, many would like to know the result first: how profitable is that method?

Well, it depends on the skill level of the traders.  Many fti's students (according to what they posted) can clocked around 1% (of account balance) a day.  Quite a few clocked 5% sometimes, and there are some who doubled their account within a few months. There is even one that double his account within a day (see http://www.chartistsunited.com/forum/index.php?topic=547.msg2621#msg2621).   I think 0.5-1% a day is quite reasonably achievable.

Next question: What is the risk?

Blow your account, if you are not careful.   Some give back a month or a week's of trading profit for just 1 mistake.

[HC]

Trading Method

1. The main trading strategy is to ride a trend, by scaling in positions of varied lot size, and scaled out when approaching resistance or momentum is lost.

2. I find this the most challenging: pace the market movement and get a feel.  No indicator, pure price chart (thus naked chart).  Look at Day chart and hourly chart to gauge the trend  and overall picture, trade the 5 minutes chart.  There is no magic indicators, the most are just 2 MA (12 & 48 SMA in M5 chart) for initial directional guilds, but as trade progress, one has to react to price movement and act accordingly.

3. Entries are based on price action and "feel", so are exits.

4. Entry lot size are scaled in and exit are scaled out as momentum is lost.  Retain the first entry if you wish.  Entry size is discretionary, depending on trader's trading capital, risk appetite, chart pattern, price action.

5. Entry levels are discretionary too,  depending on trader's trading capital, risk appetite, chart pattern, price action.

6. No placing of stops loss orders, when price move against entry, consider rescue (average down essentially.  Yeah, I heard you, average down is taboo in trading, but just bear with me for a while, I will come to that later.)

[HC]

OK, here is one chart that shows what fti did some time back, posted in real time in TAF thread:

The minus sign are the short entries, the numbers are the relative lot size.  As you can see, once fti catch a trend, he pressed on aggressively.  When momentum is lost, those added positions are scaled out.

[HC]

This is the continuation from the above chart.  After the first round of attack, a scout was left behind (far away from price) and when the trend continues, initiate another round of attack.  But this time somehow fti don't like the price action, so the attack is not as fierce and he exited all at the bottom of chart.

(Has anyone count how many pips he clocked in this 2-3 hours period? )

[HC]

Now some clarification:


1. Attack, levels and lot size

Attack is initiated when the price action and chart landscape allow it.  How many levels of attack and what is the lot size of each attack is judgemental.  It varies from trader to trader, and changes as one gain more experience. At time there is no attack but just initial scouts and scout was closed out then later redeployed.

For beginner the attacking lot size sequences (fti called it skew) can be as simple as 1,1 or 1,1,1.  Gradually adjust the skew as one get more experienced.  Fibonacci sequences 1,1,2,3,5,8,13 can be use as reference. (Here is a trading journal by someone called dongsky who only do scout + 2 levels of attack and his result is impressive: http://www.forexfactory.com/showthread.php?t=237739)

The attacking force should not overstay in the battle field.  Once there lost of momentum or sign of trouble, got the attacking force out first.  The scout (1st entry) may stay if one wishes.



2. Rescue, levels and lot size

Unavoidably, trade will run into situation that price move against his position and suffer a unrealised loss (open drawdown).  When that happen, the trader has to see if he is still in line with the trend in larger time frame (say hourly chart) and how much time/staminas he has.  If still in line with the larger time frame trend, initiate recuse operation (average down with increased lot size) and the movement in M5 chart is deemed to be temporary as scout still right in overall direction.

The trader has to decide the lot size and price level to initiate rescue and when to exit the rescue army and/or scout.  The objective of recuse operation is to have "no loss" but it can be result in profit at times.  There are times that the first rescue may not be sufficient to recover the loss from scout, exit the rescue army with whatever profit it has and then redeploy rescue.  If recuse army get stuck, a even bigger rescue have to be done later.

But if trader find that he is trading against the trend, cut and get out.  Flip attack direction if appropriate.

[There is a risk of having margin call if rescues are not deploy correctly, see http://chartistsunited.com/forum/index.php/topic,547.msg3026.html#msg3026]



3. Position sizing

Some students have come out with this after learning to trade this way for a while: scout size = 1% of your leverage account size.  Eg: leverage 1:100, a US$10k account can start scout with $10,000 x 100 x 1% = $10,000, which is 0.1 standard lot.  The skew applied as ratio for attack (scout is size 1).

Personally I find that this is quite a good gauge.  Beginner may wish to start even smaller to get use to this method of trading.

Here is another post that discuss position sizing: http://chartistsunited.com/forum/index.php/topic,547.msg4279.html#msg4279



4. News releases

Avoid trading when major news release is coming out.  Do not initiate positions.  If already in market, try tone down the lot size if exit is not preferred.


[HC Edit:
2010-02-16: add a link to a later post that discuss the position sizing
2010-06-20: add a link to dongsky trading journal
]

[HC]

5. Disadvantage of this method of trading

fti can babysit his positions 24 hours if necessary.  If the trader cannot babysit the all the time, don't do too many levels of attack.  However, there are times when trade (with rescue) is stuck and price just simply don't move and the trader run out of time, he has to bite the bullet.  This is not an issue with fti, but it is with most of us.

The snow balling of positions (open drawdown) can be very stressful, and this is something the trader has find out how good he can still able to function when facing such adversity.  As mentioned earlier, having margin calls is possible if the trader is not careful or over confident.



6. Adaptation

As mentioned in 5, not many of us can babysit the position round the clock, so some kind of adaptation has to be done.  Among some of the ways discussed, I found the following useful:

a. Use a shorter time frame (M1, M5, M15, H1 chart), and limit each trading session to just a few hours.

b. Have a last line of defence on open drawdown, say 10% of account size or 3 times your average daily profit.  If the overall open DD goes beyond that, just cut and preserve trading capital to fight another day.

c. Some find having a daily profit target (in pips or $) useful.  Once reached, call it a day.

[HC]

"Damage is part of battle, Recovery is essential, Victory is the objective."

The above quote by fti aply reflect the essence of this trading method.

[jjs]

Hc, thanks for summarizing a nearly 400-page thread.

I have  read up to page 23 and fti hasnt touched on the trading strategy yet.  My impression thus far, or what I read reminded me of, is the military training that I received in National Service.  His dealers are trained not to think but to act and react instantaneously and spontaneously according to the situations.  It's like a set drill.

Will continue reading...

[HC]

jjs:

Do continue to read that thread,  there are many jewel along the way that I can't quote them all.

[jjs]

I've finished almost 70 pages now.

To me, the following are some of the best pieces of advice anyone can receive:


1. Don't create fixed mindset, flow with the market as best you can.

Interest rate opnion sure snooked you mindset.

Moreover swift 2to 3 big fig moves are not so uncommon.

So that thinking is wrong. Markets do regularly do these moves.

esp when fundamental figures are released. 5 big fig (500pips) volatility mindset is more realistic. Thats why you must be babysitting positions always.

Although the way the market took down was wierd, be wary that it can happen, therefore be mindful of the MM. Never risk more than 10% of your account on a single trade. If you do be fast to react if adverse.



2. Spiral for rescue uses big money to save bad positions, therefore do not overstay.

When riding profits, add to them in linear small,

so as never to allow a good position to turn bad.

You may find that over time, your positions that makes better ROI

are those that started out badly timed but in the right directional trend.



Normally the good first entry trades have lesser ROI,

this is due to the human nature.

Mankind seems to find courage and bravery in adverse situations.

This is one of the reasons to have a fibo spiral rescue and a linear constant attack.

The rescues are of shorter tenure and the attacks should have a longer attack tenure(multiple attack sequences).

This allows for rescue of capital on bad timing and ability to ride on long trends moves.

As on longer tenure trend rides, you may have short strong attacks when you detect opportunities, but do not overstay the strong attacks for too long, leave only the smaller positions to ride.

It is always very difficult to ride trends with large positions, easier on the mind with small positions.

The strong attacks can help by stretching the trend for the overall position, but be mindful of overstaying, it is truly very hard to ride with large positions as it will make your mind unstable with greed/fear factor.

Remember this lesson.



3. Remember that retracements can be in abc wave sequenses , but in levels these should conform to the Elliott's wave finding. Waves that take back more than 50% of initial impluse wave are not trend strong and can mutate esily to reversal. So when that happens be wary to wind down your expanding spiral as it progresses taking out non losing levels to reduce exposures. In this sequenses do not add aggressively to trend ride , as already determined, that the trend is not strong impluse.



4. Again, do not allow your position to control your mindset, use the dance to adjust your positional mindset. When indoubt, wait for clearer mind. If unclear, use benefit of doubt.

- fti

Link can be found here: http://www.forexfactory.com/showpost.php?p=1812957&postcount=961

[jjs]

There is a lot to unlearn and relearn.

First it was no stop-loss.  Then averaging down (and to a certain extent pyramiding up).

And the latest is a trader has to trade, else there would be loss of opportunity cost.  This is as true for professional as well as retail traders.  I used to think, even until recently, I dont have to trade daily.  Now I have to re-examine that.  It makes sense.  Margin account requires working capital.  The money should be put to hard work.  It doesnt mean recklessness, however.  Every trade must be properly planned and chart carefully studied.

Have been demo trading what fti has taught.  Results are encouraging.  A word about the rescue effort / process.  fti mentioned it could take up to 24 hours to rescue a position in a 5-min chart.  Of the 3 rescue efforts that I had to do so far, all went beyond 2 hours with last evening session being the longest at almost 4 hours.  Of the 3 rescue efforts, 2 were successful and the other one "failed".  "Failed" because I abandoned it too early, else that would be another one in the cap as well.  I'd only hope that I would continue to have the same mental strength when I go live.

Back to some more reading...

[HC]

jjs:

1. I am glad that I pointed to you something you find useful.  Let us learn together.

2. On "trader has to trade", what I experienced is to trade only I see the opportunity and the odds is in my favour: trading only in the direction of my trend bias, I have enough time to close this trade (before I run some errands or some big news is coming out), and I am not tire or distracted.  I still "stick to don't have to trade everyday", as trading (even rescue) is much easier when I am at the right side of the market, though trading M5 chart the opportunity is present almost everyday.

3. On rescue, I don't always did it in just one operation.  There are instances that I did a rescue, exit the recuse army with small profit while the price continues to go against the scout, and initiate another rescue operation when price again show sign of going in the scout's direction.  There are times that the rescue operation don't totally recover the open drawdown but just reduce it, I will close it if the chart don't looks right for me to rescue.

4. I try not to initiate rescue too soon; my scout can bleeds 20-40 or more pips and I am still watching it with no action.  There are times when price move suddenly against my scout my too much, and the observation on higher time frame chart started to cast doubt on the initial direction, I just kill the scout as I think rescue can be messy.

5. The more naked chart reading/trading, the more I appreciate the Art Of War's application: need of careful planning (timing, resources and strategy), attack and rescue based on (chart) terrain, there are time that we has to be patient, time to be be swift (in attack and rescue), and there are times to give up some troopers to preserve the army.

Hopes that I am on the right track and don't mislead you. .

[HC]

This more experienced student just did a super aggresive way of trading fti's teaching, and he doubled his account in 1 day (actually in 6 trading hours only):

http://www.forexfactory.com/showpost.php?p=2390722&postcount=3768

Note:

1. Even he also agreed that the money management part is crazy.  But he did it just to prove how powerful this trading method can be.  The norm for him is 0.5 to 2-3% of account balance each day.

2. Notice that yesterday is not a very strong trending day for the market.

[jjs]

Hi HC

Sorry for not replying earlier.  Just got back from another trip.  Actually from a cruise...and the nights on board the ship were spent reading Curtis Faith's Way of the Turtles.

Agree with you on the "has to trade" section.  And that M5 charts really have plenty of opportunities.  What I learnt is that rescue is always possible if I am in the direction of the trend.  Like you, I took small profits from the rescue efforts bearing in mind that the rescue units should not be in the market for too long, sometimes only for a couple of bars.  And by the time that the trend was in line with the scout again, I am already making a good profit.  Sometimes, I am already in the money even though the scout is still losing.

What I am trying to reconcile at this point in time is that, by using this method, my swings were in the region of 6-10% either side of breakeven, ie my open DD could be as much as 10% whereby I'd close my trade (my only failed rescue).  On the other hand the profits were as high as 10% on a successful rescue attempt.  I bear in mind that these trades were made when I was still grappling with the method (actually I was just guessing that this was the correct way of doing it) and that the DD could possibly be much better improved.  My demo account is currently up 25% from about 4 maybe 5 actual days of trading, number of trades made was 6 if I can remember correctly.

I agree that this is a very powerful trading method.  In fact, when I log in onto my trading platform, I was actually looking forward to a mis-timed entry so that I could practice the rescue (crazy)