Simultaneously trend reaches a climax illustrated by price movement on the charts. This moment everybody start to jump on board the trend, whatever the price, whatever the direction. Smart traders go against the crowd by closing positions into such spikes and they occasionally experience stress due to trade exits or probably not. Other traders prefer to set targets for their trades. Target levels are frequently set near the next resistance level for long trades, or support level for shorts. Sometimes targets are based on a multiple of a market movement, or swing, already apparent on the charts. Other times, targets are set at a multiple of risk with no particular reference to the chart. As a day trader, there are certain psychological aspects to the stress exit which are important. A day trader can usually get into a trade quite quickly at the open. However, the exit may not come for a long time. Indeed, if no other trigger has arisen, the trade may be exited in the last few seconds of the market session. Ensure to decide your way forward whether to use an exit strategy or choose a strategy that lets you walk away.

Most of the traders want to be liberated from staring the screen for hours. This is to avoid psychological stresses as the market swings up and down. To avoid stress unnecessarily set a target, a stop loss, and a market order to exit at the end of the session if neither of the other two orders works. Another idea is to set an automatic trailing stop loss of fixed size. The trailing stop loss order may be connected through an OCA (one cancels another) group to a market order exiting the trade at the end of the session if nothing else has happens to experience minimal stress due to trade exits.

Only those with practical trading experience will really understand, but believe me, the most stressful trading hours are those spent watching each market tick. Even if you are winning, you go through the torment of seeing large paper profits severely eroded during pullbacks. Sometimes, you surrender and take a small profit while it is still on the table, only to see price turn right round and race back up to new highs.

If you are a day trader, I strongly urge you to adopt an exit strategy that can be automated, so that your trade is left to work as planned without your being tempted to tinker with it. Come back at the end of the session and check your results for a minimal stress or even not.

Backtesting is just the procedure of using chronological records to experiment the act of some trading approach. Data Mining involves probing through data in order to establish patterns and find probable correlations between variables.

The Multiple Hypothesis Problem

Let’s presume that we backtest the approach against ten years of chronological marketplace data. The results are not very encouraging. Conversely, being violent and stumble traders as we are, we decide not to give up so easily. What about a ten day moving average? That might work out a little better, so let’s backtest it! We run another backtest and we find that the results still aren’t stellar, but they’re a bit better than the 20-day results. We decide to explore a little and run similar tests with 5-day and 30-day moving averages. Finally it occurs to us that we could actually just test every single moving average up to some point and see how they all perform. So we test the 2-day, 3-day, 4-day, and so on, all the way up to the 50-day moving average.

Now certainly some of these averages will perform poorly and others will perform fairly well, but there will have to be one of them which are the absolute best. For instance we may find that the 32-day moving average turned out to be the best performer during this particular ten year period. Does this mean that there is something special about the 32-day average and that we should be confident that it will perform well in the future? Unfortunately many traders assume this to be the case, and they just stop their analysis at this point, thinking that they’ve discovered something profound. They have fallen into the “Multiple Hypothesis Problem” pitfall.

Overfitting

Overfitting is a category of setback of the above problem. In overfitting we first look at the past and then build a single complex hypothesis that fits well with what happened.

Not likely, but we could always keep altering the model and taxing the approach in diverse samples (out of sample testing again) to see if our performance improves. When we stop getting performance improvements and the only thing that’s rising is the complexity of our model, then we know we’ve crossed the line into overfitting.

Conclusion

Data mining is a method to use our chronological price data to propose a feasible trading strategy, but that we have to be aware of the pitfalls of the multiple hypothesis problems and overfitting. The way to make sure that we don’t fall prey to these pitfalls is to backtest our strategy using a different dataset than the one we used during our data mining exploration. We commonly refer to this as “out of sample testing”.

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Open trade is a fantastic opportunity for the smart trader who knows how to identify supply and demand. Most of the time, our entry is within seconds to minutes of the opening bell. Prices gap up because there are more buy orders at the open morning than there is available supply at the prior day’s closing price. They gap down because there are more sell orders at the open than willing demand at the prior day’s close. Therefore, market prices are almost always at price levels where there is a supply and demand imbalance at the open in the morning trade technique.

The input is to not stare at candles on your screen as red and green pictures and patterns. You must recognize what is happening behind the scenes in the morning trade. Whether you’re trading stocks, futures, options, or forex, the logic and rules never change. Again, the market imbalances are greatest at or near the open of trading in all markets. By the end of the first hour of trading each day, a large amount of novice trading capital is simply transferred into the accounts of the astute trader. If you can’t see the novice trader in markets, you most likely are the novice trader.

The dramatic price decline can only happen because there is much more supply at that level than willing demand. The dramatic rate of decline suggests a strong supply and demand imbalance at that level. Now, notice what happens the morning of the upgrade. Our job is to find this novice trader and simply take the other side of his or her trade and make the best of morning trade.

When you enter markets at price levels where supply and demand are out of balance in a big way, especially at or near the open of trading, moves in the market are typically very fast. This trade and the thoughts and rules that went with it are not meant to impress you. I mean to impress upon you the importance of looking at markets for what they really are which is simply an ongoing supply and demand equation. Opportunity exists when this simple and straightforward relationship is out of balance. Everything else in and around markets is just noise that is meant to invite you into markets at the wrong time and in the wrong direction.

The Foundation: Quantify Supply and Demand

The movement of cost in any and all free marketplace is a task of the regulations of pure deliverance and claim. Low risk/high reward exchange emerges when this simple and straight forward relationship is out of balance.

The Simplicity of Markets

Trading and investing market consists of three components: buyers, sellers, and a widget being bought or sold. These widgets may be shares of a stock, S&P futures, foreign currencies, bonds, and many more corporeal and insubstantial “widgets”.

A market is always in one of three states:

First, it can be in a state where claim surpasses supply which means there is rivalry to buy and that leads to higher prices. Second, it can be in a condition where supply exceeds claim which means there is rivalry to sell and this leads to waning prices. Third, it can be in a state of stability. At equilibrium, there is no rivalry to acquire or vend because the market is at a price where everyone can acquire or vend as much as they want. However, as the market moves away from equilibrium, competition increases which forces price back to equilibrium. In other words, competition purges itself by forcing markets back to equilibrium.

The greater the supply and demand disparity, the greater the opportunity

While many “professionals” would have you broaden your horizons and portfolio by buying many different stocks or a “ladder” of bonds for example, a much more efficient, lower risk/higher reward approach is to recognize the markets with the greatest supply/demand imbalance and risk your hard earned capital there. The thresholds in markets where prices turn are the price levels where supply and demand are out of balance, period.