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Trading the 6E Old School, With a Twist
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Trading the 6E Old School, With a Twist

  #21 (permalink)
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Cashish,

You've packed a tremendous amount of information into this thread already. I've read each post at least twice, and several of them multiple times. Thanks for all the specifics, such as the "short move", your 16-tick buffer around a pivot buy or sell number, and some of your favorite inputs for daily key numbers. Most importantly, thanks for presenting a different way to begin thinking about the development of a trading methodology.

The homework has been key. I started an excel file to collect data on average ranges for my trading period, and as I mine the past data and record each passing trading day, I should be on my way to gaining confidence how far a trend could run.

I hope you're having a good weekend, and I look forward to more posts (and more homework) next week!

I must constantly ask myself: Am I trading well? Am I following my rules?
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  #22 (permalink)
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There's no School like the Old School

Last week I presented a method to identify the time of day when a market is most volatile. This period of high volatility increases the probabilities for trading successfully. I also covered the trend reaction numbers and a few other significant price levels I believe traders must be aware of to trade successfully. In Old School Homework 3 I presented a method to calculate the short move which often occurs in the first hour of trading and often reveals the direction for the remainder of the session. @lemons provided an excellent example of price reacting to the SN, BN and Pivot, also provided was an example of several significant price levels accumulating in a tight range during a prolonged consolidation period. And lastly I touched on two trading nemeses that thwart many trading methodologies, mechanical and discretionary, we will return to these for sure.

Volatility

High volume and high volatility are closely related, more often than not they occur at the same time. When I dug deeper into these two areas of study I found high volume doesn't guarantee high volatility, or vise a versa. In fact inside bars often have above average volume. But be warned, high volume does mean high risk, if not the current bar maybe the next, or the next. I think of volatility (the range) as a container like a balloon on the end of a water hose, and volume as the pressure,,,,, it is going to explode. Volume can be used as a tool to predict volatility and more importantly volatility is predictable. By combining both studies I feel I can position myself to catch explosive price movements from one area of the chart to another, the trick is getting the direction right. I need to know two things, the size of the container and the pressure. In the real world of trading it ain't that easy. The market is dynamic and fluid, ever changing, and doesn't respond to the laws of Fluid Dynamics. So basically, I need a method to continuously monitor an expanding, contracting and moving container that is going to explode and at the same time warn (signal) me of the direction of the blast field.

Keeping true to my Old School methods I'll go back four decades and call upon the work of John Bollinger. Bollinger Bands are a great tool, and when used properly offer traders a huge amount of insight of a market's behavior and it's intention. The standard settings of Bollinger Bands (BBs) are a upper and lower band plotted +2 and -2 standard deviations from a 20bar simple moving average. BBs are my tool of choice for monitoring the markets volatility, but as you may have imagined my use of this tool may seem unorthodox at first. Volatility is predictable. The self-evident truth about volatility is, low volatility leads to high volatility and high volatility leads to low volatility. My intention is to present a method that can be used to monitor the markets volatility and signal me of the time to enter and exit trades along with real time confirmation to keep me in winning trades (does this sound like uncertainty?).

I promise I'll post a few charts to get through this one.

First, I have no use at all for the 20 period moving average line, so on my personal chart I don't plot it, but this period for averaging can be set to any value (to reduce lag time), I'll leave it at 20ma. Secondly, the standard deviation (SD) bands can also be set to any value I'll use 2.5 for this example. Depending on your visual preference you can use the bands or not, I'll show examples. So if I'm not using the 20 ma line and displaying the bands is optional what the hell am I using? The two measurements I will retrieve using these BB settings is +2.5 SD and -2.5 SD from the 20ma plotted by the bands themselves and the spread between the two bands will be plotted as a histogram. I already have everything I need to enter my trades, I outlined many of the basics last week. The spread between the two bands tells me if the volatility is increasing or decreasing, that's all I want to know, and BBs do the job simply and robustly.

Below is a chart of Friday's 2-6am session, I've exaggerated the study for visual effect. While trying to keep this presentation simple I've adjusted the color settings to indicate increasing (expanding) volatility with fuzzy green bands and decreasing (contracting) volatility with red bands, I left the 20ma on in black to show it may be used by some traders (the touch @ 4:40) I'm just not one of them. Also note that touch had no volume in it (black arrow). IMO, trading is an art, if you're looking for the perfect indicator, good luck I wish you well. But remember, all I'm asking from this indicator is to show me when the volatility is expanding and contracting.

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The chart below addresses several signals a trader can take from the BB study. Remember, the self-evident truth about volatility is, low volatility leads to high volatility and high volatility leads to low volatility. With that fact in mind and looking at the first few bars of this session we can see that 20 minutes before the 2 o'clock open volatility began to expand, also note the volume stayed relatively flat. During this expansion from 1:40 to 2:20am prices moved 45 points, to me that's a nice move. The entry signal is when both bands are expanding. Staying with this move the BB also signaled a time to exit (if you were in a position). The exit signal for a down move is when the upper band contracts and turns down. The reverse is true for an up move. The exit signal for a up move is when the lower band contracts and turns up. If low volatility begets high volatility and high volatility begets low volatility a judgement call is necessary to stay in the trade when prices rotated around the pivot price. Think about this, if we weren't aware of the pivot in the first place and based our trade on the BB study ONLY we would exit (maybe). One important consideration when making a judgement call when using the BB study is, the angle of the bands. In this case obviously we're making a judgement call while we're looking at the lower band, but while looking at the angle of the upper band, it's "all systems go." A final thought about this particular judgement call is the fact BBs are dynamic they're constantly moving until the bar closes. So if you were sitting with your finger on your mouse watching this chart build, you would have most likely seen this particular band flash red, green, red, green. And while doing so, you would know exactly at what price level the band turned from red to green. And I'll take any bet, that price was 1.3361 the pivot.

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As promised, on the chart below the spread between the two bands is charted as a histogram, I left the bands on the chart for comparison and evaluation. Many questions arise when I compare the two methods of displaying the exact same study with the exact same settings, why? If I look at the move UP from the pivot to the high I notice on the histogram there is no question what so ever if I should have stayed in the trade or not. How can this be? The answer is the histogram is charting the contraction and and expansion of the spread,,,, the distance between the two bands, think of these bars as "little tape measures" measuring distance. Look closely at the "Up move exit signal" and you will see even though the lower band turned up the upper band continued its ascent, hence volatility continued to increase.


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Again, I barely scratched the surface on the use and implementation of BBs, I hope this effort is taken as such. Honestly I was surprised how well this study fit this chart. I don't use 5m charts and had no idea what I'd see when I put the study on. Volatility can be a friend or your worst nightmare, I consider it advantageous for traders to monitor volatility. This is one method that works very well. A quick look at a sub window just before entering a trade may be all it takes to be just a little more confident in placing that order or staying in a trade and targeting that next significant price level.


Last edited by Cashish; December 11th, 2011 at 06:59 AM.
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  #23 (permalink)
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Hello Cashish great thread. It seems as though some pictures are missing from your last post. Looking forward to where you are taking us.

Thanx.

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  #24 (permalink)
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dc618 View Post
Cashish,

You've packed a tremendous amount of information into this thread already. I've read each post at least twice, and several of them multiple times. Thanks for all the specifics, such as the "short move", your 16-tick buffer around a pivot buy or sell number, and some of your favorite inputs for daily key numbers. Most importantly, thanks for presenting a different way to begin thinking about the development of a trading methodology.

The homework has been key. I started an excel file to collect data on average ranges for my trading period, and as I mine the past data and record each passing trading day, I should be on my way to gaining confidence how far a trend could run.

I hope you're having a good weekend, and I look forward to more posts (and more homework) next week!

Hi DC Thanks
I'm glad you're here and I'm glad you're finding the thread informative. Confidence is key, it builds on itself,,,, Inch by inch it's a cinch,,, Yard by yard it's hard.

As fate would have it my weekend was turned upside down Saturday morning due to a strange sudden illness in the family. I'm reasonably sure all will work out fine but a jolt like that one was a bit much.

After I took care of people and things I found myself some solitude and threw myself into another post for the thread. As you might say, I'm trying to stay on task and conclude what I'm attempting to do before the holidays.

Thanks again for your kind words and support.

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  #25 (permalink)
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dakine View Post
Hello Cashish great thread. It seems as though some pictures are missing from your last post. Looking forward to where you are taking us.

Thanx.

Thanks for that, I keep doing something wrong I guess.

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  #26 (permalink)
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Cahsish, interesting thread. Looking forward to it.

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  #27 (permalink)
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There's no School like the Old School

Thanks everyone for the comments, "Thanks," and PMs. My decision to continue this thread is based on this past participation information, thanks again to all.

When I look at a chart I can quickly see if yesterday's close/settle (Friday) was higher or lower than the close/settle the week before. During the week I can watch daily settlement prices and tell if the close was above or below the previous day. What I'm looking at is the past. ALL the information I base my trading decisions on is historic past price movements, ALL the information. All the market generated information on my chart is an indisputable fact. OK, OK unless the exchange adjusts a price for some reason. If I see the close of the last 1hr bar is higher than the previous 1hr bar I accept that as a fact. Factual information is hard to come by in the market, and the truth is, all the market information available to me is historic. Was the close of the last 1hr bar higher or lower than the previous bar, how about the 30m bar, or the 5m bar, this is all factual historic data. How about the last trade (tick), was it higher or lower,,, or the same. Everything I see on my chart is the past, everything! If it happened 25 milliseconds ago it is the past.


The Bigger Picture


Last week my intention was to point out a few significant price levels I use to get a bigger picture of the market. I'm sure we can all agree most of these are/were historic price levels. With the exception of the TR Numbers which are a projection of a range that may or may not materialize in the future. In my last Old School post I introduced Bollinger Bands and gave a brief overview of how they can be used to monitor a markets volatility. I also mentioned balloons, explosions and blast fields. In this post I invite you to open your mind and retain that metaphor.

If I attach a balloon on the end of a water hose, turn on the water and walk away, the probabilities are very high that the balloon will explode. One point worth mentioning is, I can increase or decrease the time it takes for the explosion to happen by regulating the flow of water that's entering the balloon. In my previous post I described the markets volatility as a container, like a balloon and volume as the pressure (like water). I also stated, "volatility is predictable." I'm sure those who find this post of interest will refer to the earlier post for clarification of today's post, I hope you do. The predictability of volatility is, low volatility begets high volatility and high volatility begets low volatility. What's high and what's low? That's for you to find out (Old School Homework 6 for those who wish), obviously it will be different for the session you are trading. I went so far in my previous post to suggest the direction of the blast (explosion) could be identified with the BB Study. In the chart below I've incorporated the "little tape measures" within the BBs for a pretty intense visual effect, I must say.

This is this morning's chart 12-12-2011. On the left side the BBs indicated volatility was at an extreme low point. So what, it was the middle of the night!!! Well, low volatility invites high volatility and high volatility invites low volatility. If I can recognize a period of high/low volatility in my session, I can exploit it. How many ways can you think of to explode a balloon? One, you can poke it with a pin, and two you can just keep blowing til it blows up in your face. Open your minds fellas and think of significant price levels as pins. When price action/increased volatility touches one or more of these pins the balloon will often deflate. Did you identify the location of a (the) pin on this chart before the 2am open?

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The pin popped my balloon on the 3:05 and 3:10 bars and the balloon deflated, low volatility invites high volatility and high volatility invites low volatility. The second balloon was created when testing the low of the day that deflated the previous balloon. Everybody likes tests of previous lows, even Dr. Al Brooks but I want to offer this consideration, a test of the previous lower BB (blast field). In this chart that band is +/- 20 points under the low. If prices can exceed the (extreme) limits of the prior balloon often another (balloon) will form in the same direction. This gives me a bigger picture of a profit zone and if I know of any pins in that direction I have a profit target. I had a pin sitting at 1.3253 this morning and the market just couldn't reach it, why? My short answer would be Friday's TR numbers. So here we are again, gazing into the past looking at historical data and calculating probabilities and direction of future movements.

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  #28 (permalink)
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There's no School like the Old School

Final Comments on Bollinger Bands

The most common use of BBs is mean-reverting or counter to price direction. The idea is that when prices exceeded the extreme levels of the +2SD or -2SD band price would retreat to the safety of the mean (the 20 period ave). Traders would buy or sell the the instrument counter to the price direction and close out the position at either the average line or the opposite band. With standard settings the average is a 20 period and Bollinger suggests a simple average. Depending on your software all these parameters are adjustable. A common problem with trading methods utilizing moving averages is, if prices stop moving and begin to consolidate the average line will "come to" price instead of price "coming to" the average. Bollinger suggests using a volume indicator to forecast direction. I've touted that volatility is predictable, this needs clarification. I agree with Bollinger that volatility is predictable but there is an if and it's a big if. Since volatility is related more to the increase and decrease in price rather than volume, it is more predictable if you limit the price series (e.g. 20 period).

I use the BBs to identify volatility, and with volume, direction nothing more. All my orders are limit orders, my profit targets are usually sitting on a significant price level seconds after I enter the trade. My desired intention is to exit the trade while the volatility and momentum is still increasing, if either begins to wane, I look for the door. Often it appears other traders have the same game plan. As prices approach the target area with increasing volatility, profit taking begins and volatility and volume evaporate just ticks from the target. I want to be filled and flat before any reversion to the mean begins. But that's trading and not the end of the world, but knowing the characteristics of your market is most beneficial.

Momentum

This is going to be a very short post on a very complex subject. Before the market opens I have an idea at what price level I'll initiate a short or long position and depending on direction where my profit target will be placed. While the session begins to unfold and direction becomes clearer I become more and more confident in my analysis. Patience is an important element of trading, but seconds count in the market and I may have only one opportunity to enter on my predefined entry price. Once the entry order is filled it's "game on" and the first indicator I look to for confirmation of my decision is my momentum indicator. By now you should be able to guess I use the Stochastic Oscillator. And you would be safe to assume how I use it is probably a little weird. I use it only for indicating momentum since direction has been indicated with a combination of BBs and volume I'm not interested in the bounce off the 20 and 80% lines. Since volatility can increase and decrease on low volume (over night sessions) and volatility is more an indication of price movement I want my momentum indicator calculating price rather than volume. By using a hybrid setting for the %K and %D lines I can combine a fast and slow stochastic using one indicator. My only concern is the spread between the fast line and the slow line, this spread can be charted as a histogram or two expanding contracting lines. Simply, if the spread is expanding between the fast and the slow lines, momentum is increasing, if the spread is contracting momentum is decreasing. If momentum continues to increase as prices approach the target a decision can be made to take some profit off or move the whole position to the next level. If momentum stalls and I can't identify why (e.g. whole number, H, L or C) it is an indication my analysis is flawed or the market is changing, this in turn alerts me of a "wiggle" or a period of consolidation. A final note, most of the time the only time I look at this indicator is when I'm in a trade, this is usually minutes not hours. This example is yesterday's 5m chart showing both the histogram and line chart.

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Last edited by Cashish; December 13th, 2011 at 05:32 PM.
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  #29 (permalink)
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hey cashish thanks for your journal...
i just started reading it but i already enjoy every post from you!
good work!
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  #30 (permalink)
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There's no School like the Old School



Price, Time and Volume

All the decisions of all the traders (Technical) in all the markets are based on these three bits of information. How individual traders decipher this information and arrange it in their studies is as unique as the traders themselves. Some traders, like point and figure followers disregard time completely and display only price. Students of Equivolume Charting also have little or no regard for time but combine price and volume in a unique display. Why would a Technical Trader disregard any one of only three data points available to them? For the answer you have to look into the past. All of these data points have evolved over time, what once was is gone. Time of course has always been a constant, (e.g. Opening bell, Closing bell) but many of the trading methods still in use today have their roots in an era when the markets traded but a few hours a day. Today's 6E trading hours have evolved to an almost continuous 24/5 market and anyone anywhere in the world with a trading account and an internet connection can participate at anytime. Price most obviously has been a constant but it too has evolved. I don't recall the exact date, but I remember when currency movements (in the D Mark) at the CME were limited to 200 points. Now there's no limit and we have all seen those 250 and 300 point swings (in the 6E) during a single session. Of the three, time, price and volume, I believe volume data has evolved the most. Many of the old school methods of trading and charting were cutting edge in an era when volume data was basically unavailable intraday and only available at the end of the day.

One of my intentions of writing this thread was to show how Old School Methods can still be used today to trade the 6E successfully. The whole idea of a trading system or method is to identify nonrandom price movements. Our chances for success are greatly enhanced if we first identify the norm. After we have identified what's normal for our particular market in terms of ranges, short moves, volatility and volume we are better prepared to exploit deviations from that norm to our benefit. I offered a few examples of how I use Old School studies and I hope direction for further study if traders feel so inclined.


Volume

The many changes in the delivery and content of the volume data I receive from the exchange to my PC has been both an aggravation and a blessing. I've significantly changed the way I trade in a direct response to these changes. The learning curve was steep and I was forced to revert to and spend many months on my simulator while getting my head around what I was trying to do. With that being said, more importantly perhaps was getting my head around what others, or my competition was trying to do. I'm not a market marker, and my success is highly dependent on "tagging along" on the pant legs of the heavy hitters, or the crowd. In the last sentence lies a key. If you think of a crowd what do you picture in your mind, three or four guys sitting around drinking a beer, or tens of thousands packed into a stadium watching the World Cup? How about your assumption of the markets "heavy hitters" are they throwing around 5 or 10 contracts, or are they controlling hundreds or thousands of contracts? Can you spot the commonality between these two groups? _____VOLUME_____ Individually, most retail traders involved in the market are insignificant, furthermore many professional traders are as well (but you'll never hear one admit it ).

The following portion of this thread is "The Twist," referenced in the thread's title. Where the new tempo of market generated information and the (more) modern methods I use intertwine with decades old methods that have generated trading signals for many traders for many years. I'm excited about the topic of volume and hope I can present examples that are informative and comprehensible to new students of these volume studies.

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