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Tick chart orientation
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Tick chart orientation

  #21 (permalink)
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Here are a couple of pics showing the aftermath of the bars from quiz questions 1 and 2.

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler
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Tick chart orientation-quiz-1-answer.jpg   Tick chart orientation-quiz-2-answer.jpg  
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  #22 (permalink)
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Here are some more concrete suggestions on how to take with-trend trades using this basic chart setup.

1. Only take with-trend trades when the instrument is acting like it's in a trend; i.e., bouncing off the SMA. If the past touch or two of the SMA have not resulted in bounces, then sit on hands and wait.

2. During a trend, the SMA can be expected to act as support/resistance. This is therefore generally a good entry area. Do not chase by entering when price is already well above the SMA (for uptrends) or below the SMA (for downtrends). During an uptrend, try to buy at or below the SMA; during a downtrend, try to short at or above the SMA.

3. You might want to seek additional confirmation before entering, by waiting to see price start to resume the direction of the trend. My approach here tends to vary depending on how "mature" the trend is at the point of entry. Some rules of thumb:
  • 1st touch of the SMA: This can't be traded; you can't anticipate a first bounce off the SMA. All possible entries with this system will deal with the second or later touches of the SMA.
  • 2nd touch of the SMA: If price bounced off the SMA on the first touch and went on to make a new swing high or swing low, you might consider an entry at the next touch of the SMA. The trend is not confirmed at this point, so the entry is somewhat risky. For this reason, I like to wait to see at least the beginnings of a bounce off the SMA before entering.
  • 3rd touch of the SMA: This is a good entry point; the trend has been confirmed at this point, and so it is usually safe to enter at or near the SMA on the third touch.
  • 4th or later touches of the SMA: The longer a trend continues, the more "tired" it becomes. I will sometimes trade a 4th touch in a strong trend but am generally wary of trades beyond the 3rd touch.
4. With regard to exits, I tend to take profits at or a few ticks beyond the prior swing high/low. This is a scalping method; I'm not trying to capture an entire trend move here, but rather to simply catch the bulk of one single directional push during the course of a trend. The goal is to get out with a profit before price reverses to test the SMA again, then contemplate a reentry at that point.

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"If you must forecast, forecast often."

-- Edgar Fiedler
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  #23 (permalink)
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Here's an annotated chart showing potential entry and exit points during a CL trend move.

Comments or questions are welcome if any of this is unclear at this point.

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler
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Tick chart orientation-cl-trend-trading-example.jpg  
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  #24 (permalink)
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12SMA


worldwary View Post
So how can we use this tick chart setup for trading purposes? First some general comments, then on to some specific techniques.


The first thing this tick chart setup can do is give you an important clue about whether your instrument is currently trending. Here's my rule: if the tick chart shows that your instrument is acting like it's trending, then assume it is trending until proven otherwise. If your instrument is acting like it's not trending, then assume chop until proven otherwise.


How does a tick chart look during a trend? Set aside HH/HL concepts for the moment; those are there as well but the setup I'm discussing boils the question down to a more intuitive visual.


As discussed above, during a trend, the 12SMA on the base tick chart tends to act as support/resistance. Thus, during a trend, price will tend to bounce off the 12SMA rather than slice through it.


I've attached some charts below to show some examples of trending versus choppy behavior.

One of the best KISS methods of identifying chop - super stuff and thanks for sharing! I wonder how I can replicate the "standard trading session" concept to the 6E so I can calculate the tick size per trading session (250-350 bars) - should I base it on every Opening Session, i.e. Asian, Europe and the US? Any suggestions would be welcome.

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Bengaltiger View Post
One of the best KISS methods of identifying chop - super stuff and thanks for sharing! I wonder how I can replicate the "standard trading session" concept to the 6E so I can calculate the tick size per trading session (250-350 bars) - should I base it on every Opening Session, i.e. Asian, Europe and the US? Any suggestions would be welcome.

Good question. I'm not entirely sure as I don't trade this instrument. I'd be inclined to use regular US trading hours only -- unless it turns out that there is similar volume at other times.

One thing I haven't mentioned yet is that you will not want to use this method during periods of really low volume, like after hours or market holidays. This is intended for use during active trading periods only.

I know that the Euro is traded actively in the forex markets during the European equity session but I'm not sure about 6E. For regular trading hours in 6E, I'm eyeballing the charts and it looks like maybe 400 ticks or so would work.

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-- Edgar Fiedler
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  #26 (permalink)
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I'm watching the markets dance around near this key support/resistance level (1295 on SPX), trying to figure out which way it's going to break. Was yesterday's close below this level a "bear trap"? If it reclaims 1295, could it reverse again and turn into a "failure of a failed breakout"?

I feel like this guy:




The dangers of "analysis paralysis." This is why I try to keep my trading rules simple. Once you start second-guessing yourself, things get very confusing.

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler

Last edited by worldwary; June 7th, 2011 at 03:53 PM. Reason: Fixed link
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  #27 (permalink)
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So far we've discussed setting up tick charts and using the SMA as a trading guide. Now I want to add another wrinkle: a method for gauging when an instrument is overbought or oversold and ready for a quick reversal.

One useful feature of tick charts is that price tends to hang out pretty close to the SMA. During an uptrend, price will bounce off the SMA, extend some distance above the SMA, then reverse and come back down to the SMA again. During a downtrend, similarly, price will "hit its head" on the SMA, bounce lower, extend some distance below the SMA, and then reverse and come back up to the SMA again. The SMA in effect exerts a "gravitational pull" on price. What goes up, must come back down.

Take a look at the attached charts. The first shows a typical downtrend as we've seen before. The second chart shows the same trend, but with envelopes drawn an equal distance above and below the SMA. Note how price tends to stay within the channel: the SMA on one side, the envelope on the other.

This leads to another key maxim of this trading method: When price is above the upper envelope, it has become overbought and is vulnerable to a quick selloff back to the SMA. Similarly, when price is below the lower envelope, it has become oversold and is vulnerable to a quick rally back up to the SMA.

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler
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Tick chart orientation-ym_sma_with_no_envelopes.jpg   Tick chart orientation-ym_with_envelopes.jpg  
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Some words on how to set up the envelopes as shown in the prior post...

Start with the base tick chart and the 12SMA. Apply envelopes spaced 10 ticks above and below the 12SMA. Take a look at the chart to get a sense of how close this comes to matching the typical "max distance" from the SMA. If you see a lot of places where price shoots way past the envelopes, then they are too tight. Try moving them out a few ticks and check again.

There is no substitute for trial and error here. You want to see how the envelopes perform in a variety of market conditions: low volatility, high volatility, uptrend, downtrend, etc.

A few specific comments on this calibration process:

1. You may find it more helpful to define the upper and lower envelopes as a "range" rather than a single line, if you find that, for instance, one setting appears to work best during chop, while another works best during trends. In this case you might apply 2-3 envelopes, spaced maybe 10, 12, and 14 ticks from the SMA. This will give you more flexibility to recognize overbought and oversold conditions in different market "moods." See pics below.

2. The envelopes should not be so wide that they are rarely touched or exceeded in a typical trading day. The envelopes should be touched multiple times, at least once or twice per trend move. If the envelopes are so far from the SMA that they are hardly ever touched, they will be less helpful to you.

3. Some rough levels that might work as the outermost envelope for different instruments that I trade (all approximations; feel free to adjust or to apply multiple envelopes as shown in the pic to get a more nuanced view):
  • YM: 14-15 ticks
  • CL: 20 ticks
  • TF: 15 ticks

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler
Attached Thumbnails
Tick chart orientation-multiple-envelopes-chop.jpg   Tick chart orientation-multiple-envelopes-strong-trend.jpg  
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  #29 (permalink)
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Quick note about contract rollover.

Every time contracts roll over from one month to the next, tick charts get messed up for a few days when volume is split between contracts. That will probably be the case in the equity futures today and tomorrow, maybe also Monday.

Compare volume between the June contract and the September contract in the next few days and make sure you're trading the higher volume contract. Even if you are on the high volume contract, tick charts can be expected to produce fewer bars than normal for a few days.

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler
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  #30 (permalink)
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Piecing together what we've covered so far:

1. During trends, price tends to channel between the SMA and the outer envelope.

2. During chop, price tends to slice right through the SMA and reverse direction near the envelope (or at least one of the inner envelopes).

It's taken a while to get there, but these observations form the foundation of the system I'm teaching in this thread. Based on these ground rules, here's the game plan:
  • During trends: enter near the SMA; take profits near the outer envelope; look for reentries on retrace back to SMA; watch for signs of trend exhaustion.
  • During chop: short near the upper envelope; go long near the lower envelope; watch for a bounce off the SMA, which could be a signal that chop is ending and a trend is ready to resume.
  • Countertrend trades (advanced): Short when price extends above upper envelope; go long when price falls below lower envelope; keep stops tight; take profits near SMA (unless accompanied by other signs of likely trend reversal, in which case hold for a larger move).
Sounds simple in theory, but there are a lot of moving parts. The trader's primary task is to determine, as early as possible, whether the market is in trend mode or chop mode. Get that right and the profits will flow. Get it wrong and you'll find yourself fighting the market. Proper money management (i.e., keeping losses small relative to wins) is the key to making profits stick.

I'll walk through aspects of the gameplan in more detail in later posts. Let me know if there's any angle of this that you want me to focus on specifically.

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler
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