One of the biggest challenge for a trader is to understand the current context of the price action. I would like to develop automated trading strategies which are context-sensitive. I am looking for your suggestions and feedback.
First of all, let us limit the context to short term swing trading. This is primarily intra-day.
To define the context, the largest time-frame I would like to consider is the short-term trend as seen over the past 5-10 days. This to me is the largest time-frame relevant to intra-day traders. For example, the equity markets started an uptrend after the July 4th holiday which moved up for a week before consolidating and then reversing on Thursday. I would like to be conscious of this big-trend.
Within the big-trend there are both with trend movements, counter-trend movements and consolidation movements. As a short-term traders we would like to be conscious of the context of the current short-term trend. I want to use this information for:
Entry Criterion: Scaling in/All In
Position Sizing
Profit Target Selection: Scaling out/Single Target
Stop Selection
Capturing Context:
Elliot Waves:
This is certainly a tough area and one which looks much better in hind-sight. However there are clear patterns which can be useful, especially those which start showing ending patterns. Last week FatTails opened that thread on Elliot Waves. I did some study on that and found the patterns I observed quite interesting in defining the context of the trades. We had come up with a short term target of 1066 for ES which it duly reached (and some more).
Market-Volume Profile: I have found Volume Profile to be a useful tool for the following:
Defining the multi-day context (big vertical moves will typically be followed by back-and-fill consolidation; multiple days of consolidation will led to vertical moves, location of VPOC during consolidation to see how it is developing)
Using the opening auction to help determine the type of the day
Defining areas of expected congestion and areas of potential vertical development.
I am curious to learn what tools do others use to define context. More importantly how do you incorporate the context into your trading strategy, especially automated strategies.