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How Do You Deal with Choppiness?

My experience is that you do not know it until you are in it. Then you do not know what to do with it, getting in and out at the wrong times. Then when you finally decide to stay away from it, the big move takes off.

Any advice?
How long have you been trading for jellob? I think that after a number of years your chop-dar (choppiness rader) starts to develop and you can sometimes sense when you're about to enter into tight Z-day.
I have been trading for almost one year. Recently I have been writing a program to gauge volatility. While it does tell you whether something is volatile, it has little predictive value, since volatility trends, like stock prices, can be choppy. Some stocks can stay volatile for a long time while some get crazy for a day or two but no more.

I have heard that guys like John Henry and Bill Dun base their trading decisions on prices alone. What are they doing to address the choppiness problem?
I don't know either of them so I couldn't say for certain but my guess would be that their mental rule set for picking up or anticipating volatility is fairly complex. Do they use software or experience with their price-based trading?
They only crunch numbers. Now I am sure that their asset allocation strategies are more complex, but to my best knowledge, their trading decisions are fairly simple. So if my understanding is correct, the genius of their systems is not in the indicators, but in position managements.

At first I thought that my volatility program can help me pick volatile stocks to trade. However, it does not seem to solve the volatility problem.
On WoodiesCCI web site I remember listening to an audio or reading an article by one of the traders on that site saying that it was possible to make money with just money management and using a random entry strategy.

This had me intrigued and so I back tested it. I think I ran about 10,000 back tests using his money management strategy with random entries and not a single one of them over 3 years showed a profit.

I'm not knocking position management because it's important that you have a good one but I have become wary of the position management adding value in gaining profits.

trend & breakout traders struggle with low volatility / range days / chop

counter-trend traders tend to make their money during choppy range bound conditions and conversely lose money fighting strong trends, most short term intra-day traders fall into this group

if we could somehow know when to be using a trend strategy during the times with the market is trending, and use the counter-trend style during range bound conditions, it would certainly make trading in real-time a lot simpler and less stressful... is there a magic indicator we can put on our charts to solve this problem ?

the ebb and flow from trend to congestion and back is an inherent nature of the markets, and since the styles required to profit in the two conditions are opposite of each other, this makes it difficult to stick with a trading style over time. Some traders try to switch styles in real-time, i personally have not seen many do this with any lasting success.

In real-time, I like Market Profile, specifically the concept of day types. With some training and practice you can develop a reasonable feel for where the market is with respect to the trend (outside value) and congestion (developing value area) phases. I combine this with longer term charts, I recommend becoming adept at reading the 60 minute chart. This is a pretty powerful combination. The idea is to have a consistent approach and view of the market, which when applied over time will enable you to develop a reliable feel for the market condition in real-time... this takes a lot of day in and day out experience... sorry no secret magic indicator.

A technique you might consider at some point is trading two separate strategies, in two separate accounts. One strategy designed for trends and another for ranges, if applied consistently they should balance each other out over time.

Beyond that, there are a variety of hedging strategies to control risk and smooth out the equity curve.
pt_emini, do you use the 60 minute chart on a continuous or RTH timeframe? What is your opinion of a volume based chart that proxies a 60 minute chart in place of it?

All my research is done on the hourly chart because the best trades, I found out, are those which you hold for the entire day. While you may give up some profits in late-day reversals, over the long term, you are still better off. The problem is, like you said, when the stock goes into a range, or worse -- when it gaps up or down and reverses.

What do you mean by market profile? Do you mean using technical analysis on a daily chart? I have tried using different time-frames, but so far all my tests are done on the hourly-chart and a smaller-time frame. Perhaps I should try something more long-term.

I understand that markets go through ebbs and flows of trending and congesting. My original idea is to trade only when the stock is trending and to sit tight when it is congesting. It will be great if the market stays trending or congesting for a period of time, like days or even weeks, but the market does not seem to operate that way.
Here is a definition and example of Market Profile. If you hunt around in the glossary you will find many terms and explanations that are Market Profile trading techniques. Market Profile Day Types is a classification of types of trading days according to Market Profile.
Originally posted by day trading

pt_emini, do you use the 60 minute chart on a continuous or RTH timeframe? What is your opinion of a volume based chart that proxies a 60 minute chart in place of it?

I only use RTH for the 60 minute chart.

Longer term Volume or Tick based charts that approximate the same patterns found on the 60 minute chart work as well or even better than the 60 minute RTH chart does. A drawback with the tick & volume charts is you have to fine tune the chart bar setting for each individual market, which is a pretty arbitrary process.

Also there is a timing involved with the Market Profile and the 60 minute bar close which sync up with every other MP bracket. The bars on tick and volume charts have no set timing for when the bar will close.
Originally posted by jellob

My original idea is to trade only when the stock is trending and to sit tight when it is congesting. It will be great if the market stays trending or congesting for a period of time, like days or even weeks, but the market does not seem to operate that way.

The nice thing about MP + 60 minute chart is on trend day's, they work together. For example, on a day that is in an uptrend all day, each new bar on the 60 min chart will be making new highs right along with each new MP bracket forming the trend day pattern. The charts confirm each other, thus no conflicting signals.

The problem of course is, most days are not trend days.

There are some basic clues from MP and other sources that give a reasonably early heads-up on the day type.

Looking at the longer term trend, spanning say 10 or 20 days. It is not uncommon for a trend to be comprised of a lot of range bound days (new value areas), connected together by a series of gaps or brief 1 or 2 bar directional moves. As this structure of value areas develops the 60 minute chart likes to form a channel with the 20 ema acting as a trendline. The objective here is to look for successful tests of the 20 ema as opportunities to build a position in the trend. For example, in an uptrend, new value areas will form above the rising 20 ema, often testing the ema intra-day then breaking out (or gapping up on the open) to form a new higher value area the next day...ect. This whole process is time consuming, thus it takes a lot of patience to ride one of these longer term trends.
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