I am reading Chapters 20 and 21 of Thinking, Fast and Slow by Daniel Kahneman and it tells me all I need to know. I lose big time when I start trading PA that is essentially random while
- I react to big bars when prices are reverting to the mean
- when I see a big green bar I buy (when on tilt) and when I see a red I sell (again, when on tilt) but
priceis not going anywhere, and a big green bar means it has come too far from its mean and wiillrevert.
Mark Austin is so successful because he trades market function i.e. he finds market inefficiencies and turns them into trading opportunities because he know that most of the time, the inefficiency will be resolved. In other words, he exploiting the market’s tendency to revert to the mean. He is looking for levels, but he is mostly not trading PA patterns – which are very malleable in their interpretation and almost impossible to trade consistently.
So which of my trades are market funtion trades?
- 3Min Bolli: this trade works because Algos trade at KLs and the fast move into it is the result of an order vacuum below (for a sell) or above (for a buy) the level. When the orders are triggered, the market moves in a pattern that is predictable enough to trade.
- Gap fill: futures, cash and ex-gaps: because the market abhors a vacuum
- Daily cash chart levels and daily, weekly and monthly pivots: because there are orders there (of course this is a rather circular argument but trading the DAX requires an understanding of where the orders are most likely to be.
- Compressions at KLs: because the market eventually has to decide one way or the other; its function is to trade and to trade, it has to move.