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Trading the 6E Old School, With a Twist


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Trading the 6E Old School, With a Twist

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

If you find the title of this journal intriguing, I invite you to stick around, participate and watch it unfold. I've read several of the threads on Big Mike's Forum and noticed that many members are new traders searching for direction in a foreign and often intimidating place to conduct business. My intention with this thread is to help traders find their way through a lot of the nonsense and develop "Their Own" method/strategy for trading the (6E) market using Old School studies. Later, I'll add the "Twist." My trading is very light during the month of December and I've committed to this thread until the end of the year. So join in and participate.

You will find nothing new here, no renko charts, order flow, Murrey Math or cumulative delta. But I believe if you are willing to follow along and do a little homework, you'll find a better understanding of price movements and in turn this information may alleviate some of the intimidation and fears created when entering orders.

When to trade? and When can I trade?

A whole thread could be written about this subject, and many have been. But I feel these are two very important questions and I also believe many floundering traders could turn their trading results around by honestly answering them.

The short answer to this question is when the market is moving (trending), since I don't know when that is going to happen, I need to put the probabilities of the time of day price movements happen on my side. Another consideration is, when can I trade? If I find the best time of day to trade is when I'm at work or when I'm taking my children to school then I have other decisions to make. Trading is a job, it demands my time. Just as I was expected to be on the job by my previous employer at (N) O'clock sharp, I've found this discipline to hold true for my trading as well. Trading is a job, and it is not easy work,,,, and the hours are terrible!!!

Old School Homework 1

1. Calculate the average daily range (in ticks/points) of the 6E Dec contract for the last 3, 5, 10 and 20 days.
2. Identify the hour of each of the last 20 days that had the highest range.
3. Calculate the average range of each of those 1 hour time segments over a similar period 3, 5, 10 and 20 days.
4. Calculate the percentage of each days range within the highest 1 hour range of that day.
5. Identify your current trading time (TOD) and compare to the above results.
6. If you could trade any of the 6E's 23 hours of active trading, using the above information, what would your session (hours on the job) be?

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 Cashish 
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There's no School like the Old School

IMO, finding an edge that fit my style of trading and my personality was the work of trading.

After calculating the data in Old School Homework 1 and identifying the time of day of the biggest moves of the entire 23 hour session, one hour stands out among all others. Over the last 20 trading days this one hour time period holds twice as many of the day's biggest moves than any other. The range of these one hour bars average 81 points and equate to an average greater than 50% of the entire day's trading range. Furthermore, the three one hour bars that follow hold another 25% of these big moves. In total 55% (11) of the largest moves over the last 20 days are within one, four hour segment of time. This means, 30% of the big moves happened during 4.3% of the trading day and 55% of these moves happened during 17% of the trading day. Blah, Blah, Blah,,,, So what, who trades 1 hour bars anyway? That's not the point, my intention was to present a method to identify a specific time of day to trade. A segment of time with the highest probability of an active market, which inturn offers tradable opportunities. How a trader adjusts his/her lifestyle to participate in a high probability time segment is of course a personal matter. Why do I get up in the middle of the night ? To quote Willy Sutton, "because that's where the money is."

If anyone actually did this simple exercise they may have noticed another interesting fact. I doubt anyone noticed it because, if they did do the exercise they probably just entered a few parameters in a simple moving average and looked at a few lines in a sub window and said, that's cool, and then changed the parameters again and went on about their business. Remember I'm old school, and I use a lot of paper, pens and adding machine tape. This works for me, I feel more connected to my studies when I can look at the results on an adding machine tape and then enter it into a notebook. If you've taken the time and accomplished Old School Homework 1 I congratulate you, you have identified an excellent trading session for most any type of trading.

Old School Homework 2

Trend Reaction Numbers
I don't think I'm the only trader that keeps a running list of these numbers on his desk pad. Of course I do the math on my calculator and write the numbers on my desk pad with a pen. This simple formula can make you or save you a lot of money, if used properly. This calculation is made from the prior day's High, Low and Close.

H + L + C
________ = X
3

2X -High = Buy Number (BN)
2X -Low = Sell Number (SN)

Like most things in trading these numbers seem to provide a contradictory purpose. The BN can serve as support in a rangebound market and also serve as a breakout sell number in a trending market. Vice versa for the SN, the SN can serve as resistence in a rangebound market and also serve as a breakout buy number in a trending market. I believe the 6E has multiple personalities, one for each of the three trading sessions. If you're a session trader like me, I suggest sticking with one sesion and learning it well. Many people speak of 10,000 hours of screen time, I don't buy into that with the 6E because the sessions trade so differently. If you think about it, traders come and go thoughout the day, I doubt there are many traders from Berlin trading the 6E at 1pm EST, OK, maybe one. My point is get to know your market, get to know the session you plan on trading. Then, like this morning, when right out of the gate the Euro fell 50 points taking a long under 3350 isn't so frightening.

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 rainbowchaser 
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Hello, just found the thread, sounds very articulated, thanks for the homeworks. Will work them out.
regards.
Ok Home work done, maybe biased on looking only to the Euro and NY session. All Times ET.

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 lemons 
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I got 8:00 GMT. Is it right ?
I have only M6E prices but is shoud be almost the same as 6E

I live in Europe it suits me well.

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 Cashish 
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There's no School like the Old School

Trend Reaction Numbers

I saw I needed to edit my last post, I totally omitted the significance of the
H + L + C = X number.
3

This number is referred to as the pivot point one of three significant numbers derived from this simple calculation. Using the formula in Old School Homework 2 I came to today's market with 3 price levels.

Sell Number (SN) 1.3467
Pivot 1.3420
Buy Number (BN) 1.3353

Since I've opted to create another post rather than edit the previous one, I wanted to give an example of "knowing your market." The 6E is full of surprises, it can rocket off in any direction with extreme intensity whenever the wind blows up Angela Merkel's pantsuit (e.g. yesterday afternoon EST). But it also has many tradable characteristic, one being price rotation around whole numbers (00s and 50s). I give the 6E a wide berth when prices slow down and rotate around whole numbers, I give it 16 points on both sides. If I plan on taking a short at even, I'll enter my order 16 ticks above and let price rotation work both sides of even and see if I can't get a fill. If this rotation begins to tighten up I may move part of my position closer. This morning was a great example, at 2am prices began to slide with some nice momentum, my BN was sitting on 3353, since this is 3 points off 50 I put my buy order under the market at 3335. I got filled on the first touch. When London traders came in they wanted a piece of the LONG pie too, and spooked the market 1 tick lower to 3333, that gave me 2 ticks of MAE.

Thanks, for all the thanks

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 rainbowchaser 
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Cashish View Post
There's no School like the Old School

Trend Reaction Numbers

I saw I needed to edit my last post, I totally omitted the significance of the
H + L + C = X number.
3

This number is referred to as the pivot point one of three significant numbers derived from this simple calculation. Using the formula in Old School Homework 2 I came to today's market with 3 price levels.

Sell Number (SN) 1.3467
Pivot 1.3420
Buy Number (BN) 1.3353

Since I've opted to create another post rather than edit the previous one, I wanted to give an example of "knowing your market." The 6E is full of surprises, it can rocket off in any direction with extreme intensity whenever the wind blows up Angela Merkel's pantsuit (e.g. yesterday afternoon EST). But it also has many tradable characteristic, one being price rotation around whole numbers (00s and 50s). I give the 6E a wide berth when prices slow down and rotate around whole numbers, I give it 16 points on both sides. If I plan on taking a short at even, I'll enter my order 16 ticks above and let price rotation work both sides of even and see if I can't get a fill. If this rotation begins to tighten up I may move part of my position closer. This morning was a great example, at 2am prices began to slide with some nice momentum, my BN was sitting on 3353, since this is 3 points off 50 I put my buy order under the market at 3335. I got filled on the first touch. When London traders came in they wanted a piece of the LONG pie too, and spooked the market 1 tick lower to 3333, that gave me 2 ticks of MAE.

Thanks, for all the thanks

Hi Cashish, already edited my previous post with the homework. Certainly the main action is before the London Open and extends just before lunch time NY. Of course these days news about the Euro have been pretty intense.
If you plz post a picture of this morning trade or entry that you are refering will be greatly appreciated. regards, Z.
Thanks for starting the thread. Looking forward for next steps.

ok according to your pivot formula the numbers derived from today's (12/6/2011) HLC are:
BN= 1.3353
Pivot= 1.3391
SN= 1.3449
Hope did it ok. I am going to plot them on my chart and will trade them tomorrow.
Thx.

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 rainbowchaser 
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This is the 60 min chart that was employed to come out with the stats for Homework 1. Of course I rounded the numbers and removed the decimals to make it cleaner. The green and red dotted limes are HOD and LOD. The black horizontal line is the London Open and the white one the cash close at 16:00ET. Those i always have on the charts but did not take part on the counting. Indeed the excercise helped to see where 90% of the action takes place. Nice homework, thx.

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 Cashish 
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There's no School like the Old School

Thanks fellas for your enthusiasm

I have a crude outline of what I wanted to cover in this thread during the month of December, my time is limited. I'll do my best to answer every question so please, ask away. Remember, this is not a trading method, it's nothing more than MY way of ascertaining when the highest probabilities for successful trading exist in the market. There's a lot of discretion in my trading style based on studies I've not covered. Therefore, I ask for your patience before I post any charts showing actual trades. I do feel, as I post more information the trades will become obvious if you follow along and understand the studies.

Quick Review

As you may have guessed I'm not a very geeky guy, I confess I envy those you are.

_CET___GMT___EST
__8______7_____2
__9______8_____3__XXXXXX
_10______9_____4__XX
_11_____10_____5__XX
_12_____11_____6__X
__1_____12_____7
__2______1_____8__XXX
__3______2_____9
__4______3____10__ X
__5______4____11__ XX
__6______5____12___X
__7______6_____1___XX

If you use your imagination, the table above is suppose to represent a bell curve. Well done @lemons and @rainbowchaser you both identified the London open as the "Prime Time" to catch a big bar (move).

To review I wanted to wave a flag of caution, when looking back in any market there are things to look out for. In this exercise I asked to go back 20 days, within that 20 day period there was a US Holiday, prior to that was the US time change, the European time change, another US Holiday and if you go further a rollover day, can you see my warning?

I also wanted to address the averages I requested, 3, 5, 10 and 20. Usually if you look at those averages the 5,10 and 20 will be within a few points of themselves, however the .. 3 .. will be skewed significantly, I use the lesser of the 20 or the average of the 5,10 and 20. As an example, today during the London "first hour" the market tagged today's SN 1.3448, if I entered there with a short position my target would be 81 points (the lesser of the averages) or 1.3367. I don't want to get into a debate over a few points on the average calculations but I use the High, Low and settle price posted on the CME Group website for my calculations. Another thought, "rounding numbers." I don't round them up or down (old school) my theory is, most moves in todays markets are augmented by computers and to a computer a number is a number, I don't think computers struggle with discretionary decisions like me, (e.g...should I take profits at the Pivot (1.3390) or 1.3373 or wait and hope for 1.3367 or 1.3352) ,,,, maybe they do.

A Synthetic Trading Session

What is all this nonsense about, tall bars, average moves, percent of this or that, who really gives a shit? I think the answer is nobody. The only reason I ran down this rabbit hole in first place was to find myself a time of day that put the probabilities for me to trade successfully in my favor, that's all. As I studied the "bell curve" I began focusing my efforts within that time frame. However, I found one important factor was omitted from the results, the German Open. When I began studying the effects of the 1 hour bar preceding the London open I found another mountain of statistics to evaluate. My findings where significant enough to base all my studies around the German open. For instance, did the German high hold against the London high this morning, how about the German low on Monday or the low of yesterday,,,, OK OK OK,,, give me a break. This brings up the topic of volume. I want to qualify my following statements here as my opinion, strongly, and I refuse to get into a pissing match over volume. Volume studies are an important part of my method, (the twist) and I plan on showing this at a later date. IMO, The volume numbers of the Forex Cash market is a mystery, as a futures trader I have accurate volume data from the CME for the contracts I trade. I also believe the futures market is the tail,,,, the DOG is the FX Cash Market. When the tail starts to wag (price moves) I have no way of knowing whether that dog is a Bullmastiff or a chiwawa, that's a fact I have to accept when trading futures. This is an important consideration at the open, during the time I'm watching the early range and my anticipated range. As the day progresses the "size of the dog" is usually revealed, and my volume studies come into their own.
This touches on the topic of uncertainty, which I plan to address this weekend.

So with all this information and the fact that I'm human and cannot sit (nor do I wish to) at my computer for 23 hours a day I defined my own trading session, 2am to 6am EST. I found it important to me to have a stopping point, a time to take off my traders hat and return to the role of husband and father. This works for me, but let it be known, I enjoy trading and given a weekend by myself, you'll find me right here grinding out numbers looking for a new mousetrap.

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 lemons 
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Thank you Cashish to turn my attention to best trading time and Pivots.
Nice price movment today.


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 Cashish 
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There's no School like the Old School

Old School Homework 3

Sorry fellas, you're not getting the day off. The whole idea of trading is based on individual expectations and risk. I may believe, according to my analysis the market should go lower (my expectation). Another trader may have a bullish opinion of the same market, we both may be "right" depending on several factors, one being time. A long term trade for me is 4 hours, for the trader who takes the other side of my trade may plan on holding that position for 4 days. We both have an opinion of future market direction and we both are willing to risk a portion of our capital on the chance we both may make a profit. I want to minimize my risk and protect my capital in every possible way. This exercise gave me a guideline for evaluating price movements at the open and also assured me I didn't have to "risk the farm" on trades I entered at the open. Since my synthetic session starts at 2am and ends at 6am I only have to analyse 4-1hr bars. Below is a chart with a simple open, high and low study programmed to calculate for 2-6am. Look back over the last 20 trading days and retrieve the average of the smallest of the distances from the open to the high or the open to the low, the smallest of these two moves of the opening bar (1hr). Today's opening bar was 9 points up and 10 point down, so the short move was to the upside. This is called the failed move, false move I just call it the short move. While you are retrieving the average of the points in the short move of the opening bar of the last 20 session, also look at how many times the short move held throughout the entire 4 hour session. In this example it held, prices fell and never ticked higher than the 2am opening bar. Enjoy


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 lemons 
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Old School Homework 3

M6E between 10.nov - 6. dec :
64 % and average minimum move 10 ticks

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 Cashish 
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lemons View Post
Thank you Cashish to turn my attention to best trading time and Pivots.
Nice price movment today.



@lemons ,,,, I agree, nice price movement. That is about as perfect as it gets That's the kind of chart you would see at a Support and Resistance Workshop. Just before they tell you the indicator costs $3000.00


lemons View Post
Old School Homework 3

M6E between 10.nov - 6. dec :
64 % and average minimum move 10 ticks

Correct, 64% of the last 20 trades retained the 2am short move thru the entire 2-6am session. I failed to mention in the Old School Homework 3 that I calculate the 3,5,10 and 20 averages also. If you do, you will notice as I described previously (the nature of a short {fast} average) that the 3 ave is much larger than the (longer) 20 ave. This larger short average can come in handy on a day like today. If you keep a running average of these moves you may find they align themselves nicely with upcoming events like today's widely anticipated ECB rate decision and press conference. Most everyone agrees if you put enough lines on a chart something is going to line up. But there is one more (for now) worthy of an honorable mention, the mid point or simply the 50% line, not of the 2-6am session but the entire Globex Session. I have 9 significant levels on my chart right now between 3399 and 3414. I'm short with a target at 3389 and one at 3370 I'll bail out of both at 6am. This session was about as exciting as watching toenails grow.

Wow, that was exciting, I'm going to give the last one about 2 more minutes.
Edit: Bailed out at 3388

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 Cashish 
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There's no School like the Old School

A Quick Review

What's the meaning of all this crap, this short move that short move, this one held that one failed, this percentage that percentage. Why even bother with all this? The purpose of this weeks exercises were to enlighten traders of the bigger picture, hidden price levels in the market that can and often effect price movement, sometimes dramatically. I'm willing to bet, the formula for the trend reaction numbers are older than most traders here on futures.io (formerly BMT) and those numbers still have the power to stop a trend dead in it's tracks. These big moves that happen during this session or any other session stop for a reason. My job as a trader is to identify that reason calculate my risk and either enter or exit my trade. All the numbers we've discussed have the power to turn a market. The trend reaction numbers, BN, pivot SN, yesterdays O,H,L,C the prior day's O,H,L,C the H, L of the week, the contract H and L all these numbers need to be identified and respected. @lemons surely made that obvious with his excellent post. There are more numbers of course, but I feel these are the Old School numbers struggling aggravated traders must be aware of.

The notion of short moves that either held or didn't is IMO a direct reaction to these numbers, or combination of numbers. These short moves were identified using 1hr bars, who among us trades off 1hr bars, I certainly don't. The 1hr bars are a quick way to cover a lot of ground, now that these short moves have been identified I can drill down to the time frame I'm trading and look inside these 1hr bars, and see the "lines in the sand" these moves ran into. There are three reasons why prices either held or failed during the short move.

1. Continuation of the trend
2. Reversal of the trend
3. Consolidation

When I lower the time frame of the bars from 1hr down to a more common day traders time frame like 5m many of the short moves that held or didn't hold were right in the middle of a nice strong up or down trend. A few of the failed short moves are buried in an expanding contracting consolidation period, that even a Newbie trader wouldn't touch with a ten foot pole, and yet many pulled through and the short move held. And lastly, nearly as many were reversals plain and simple, several right off the numbers described above. That's the point of all these exercises, to become aware of price rotation around these price levels from yesterday, 2 days ago or a week ago. Another significant bit of data I can take away from all this is my markets average/normal size of rotation. If prices are rotating around a whole number unimpeded by yesterday's close or today's BN chances are the range will tighten up quicker, and leave the area sooner, in search of the next level of consolidation.

Old School Homework 4

No papers to turn in this time (but posts are most welcome), all self study. Look back over several days at random, calculate the trend reaction numbers and plug them into the following day's chart in the time frame you normally trade, take notice how prices react to these numbers. Do the same with the prior day's close, or any of the numbers we've discussed this week. One of Gann's 4 Essential Qualities is Knowledge, go get it!

I want to thank everyone who's peeked in at my ramblings this week, I especially want to thank Big Mike for the privilege he's given all of us, Thanks.

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 Cashish 
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I have 9 significant levels on my chart right now between 3399 and 3414. I'm short with a target at 3389 and one at 3370 I'll bail out of both at 6am. This session was about as exciting as watching toenails grow.

Wow, that was exciting, I'm going to give the last one about 2 more minutes.
Edit: Bailed out at 3388

I'm posting a chart showing definitions of these levels. True, some of these levels are much more significant than others but I felt this was a good example of what can accumulate during a prolonged consolidation. This is only an example but several lines have been omitted, one that I probably should have added was Friday's settle at 1.3404, that was 5 trading days ago, and we're still sitting on the same number when I made the above quote! We'll probably be sitting on it again by morning.


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 Cashish 
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Who would have figured ?



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 Cashish 
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There's no School like the Old School

I'm finding it very difficult to put my opinions about the market into words. I hope the basic concepts are being presented in a way that is clearly understandable, yet thought provoking. I'm actually a very quiet introverted kind of guy.

I want to restate my intention, My intention with this thread is to help traders find their way through a lot of the nonsense and develop "Their Own" method/strategy for trading the (6E) market using Old School studies. Later, I'll add the "Twist." ......... and I've committed to this thread until the end of the year.

When I started trading I soon realized I needed a trading plan, the problem was I had no idea what that meant. All I knew was, I wanted to trade. I could write volumes from A thru Z of my stupid mistakes and warn you of the effects they may have on your trading, but I won't. Why, because we learn from our own mistakes, not from the mistakes of others.

Uncertainty

If I boil down all the adverse behaviors that have plagued my many years of participation in the futures market to one word, it's uncertainty. I know for a fact, for me to trade successfully I have to embrace uncertainty during every trading session, day after day after day. Let me clarify my distinction between uncertainty and risk. Simply, risk is a dollar value, uncertainty is the strength of my commitment to that risk. A simplified example may be, I enter a long and place my stop 20 points under the market, price goes up and the trade looks good. Then prices rotate a bit and take away all my profits, I dump the trade with a 5 point loss. Prices then turn again and move toward my original target, but I'm not in the trade, Why? Because I was not committed to my risk, I became uncertain about something, the market's direction, the time it was taking for the trade to unfold or (God forbid) the analysis I spent months perfecting!

My Grand Father once said, "Marriage is as simple as bacon and eggs, the chicken is involved, but the pig is committed!" I have to be committed to all my trades, if not I'm just exercising the industry, by providing liquidity for other traders, profits for my broker and the exchange. So how do I "man up" (sorry girls) and really commit to all my trades? First I have to define my risk, this is personal of course, but it also has to be realistically engineered around the volatility of the market I'm trading. And I have to be absolutely comfortable with my defined amount of risk per trade, not sort-of or kind-of, but absolutely. Furthermore, if for example I have an edge that generates a 60% win rate, on paper I should expect 4 losing trades out of 10 entries. Therefore, I have to be 100% absolutely committed to losing 4 trades in a row. I don't want to reinvent the wheel here so I'll make a book suggestion for further study and the best explanation I've seen anywhere. Trading in the Zone by Mark Douglas If you don't own the book, buy it. If you do own the book, read it again. If you're really cheap, go to the book store and sit and read the last chapter.

The whole idea behind everything I've written thus far in this thread is to aid in defining my personal risk. Let's look at one example, The Short Move. I identified these moves using 1hr bars, I can also gauge the height of these moves by the averages over (N) period. By drilling down to 5m bars I can see the rotation of price during this first hour of trading. I know only two outcomes are possible, price will go up or down. Price will either continue in the original direction or reverse direction. For the latter to happen price must do one thing,,, correct, cross the open. If the range of the first hour is beyond my risk, comfort level and I see no area to comfortably enter a trade, I stand aside, and wait for another opportunity. The short move (1hr) can be broken down to 12 5m bars or whatever time frame I'm trading, the idea is to enter a trade based on the price rotation and the surrounding significant price levels I have already identified, some (significant price levels) may be profit targets once the trade is underway. I hope this makes sense.

Old School Homework 5

Evaluate your thoughts about risk and uncertainty. Ask yourself and honestly answer hard questions regarding dollars and cents. Take a good look at your trading to date, are you realistically setting your stops based on price rotation, and do you let your trades work in the market to their predefined fruition? And lastly, what might need to change to make my trading more profitable/successful, my tolerance for risk or my commitment to my analysis/trades.

Thanks, enjoy your weekend

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 rainbowchaser 
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any reading on Volume (meaning a book...) that you may recommend ?
have a great weekend and thanks.

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 Cashish 
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rainbowchaser View Post
any reading on Volume (meaning a book...) that you may recommend ?
have a great weekend and thanks.

In no particular order (maybe age ), I believe these three men have contributed more in the area of market volume analysis than any others, Richard W. Arms JR, J.Peter Steidlmayer and Jim Dalton.

When these men first published their works, the markets and the data available to them was much different than the markets of today, but the underlying theories/concepts of their work continue to thrive. IMO, most all of the "newfangled" volume studies attracting traders today are based on (at lest in part) the work of these three men, but heavily "spiced" with the new refined/defined data that just wasn't available 30 or 40 years ago, or two years ago for that matter.

To answer your question and suggest A Book, I'd have to suggest, Perry J. Kaufman's 4th Edition of New Trading Systems and Methods. This book will offer inquisitive traders a limited yet detailed overview of all their works and the work of many other legendary technicians. With a thorough understanding of several basic concepts which appeal to you personally, further study can be directed to their latest publications. I believe my method had to be mine, and mine alone, I own it. It has absolutely no appeal to many traders, but it's my baby and I guard it as such.

I sense a bit of anticipation of things to come in your query, assuming so I sent you a PM containing a link you may find interesting, some of the theories align well with my intended presentation. Next week (I hope) I'll present a simple method based on today's available volume information to identifying trend continuations or reversals. I turned this information into an indicator I call "oil cans." I hope you stick around and continue to participate on the thread. Thanks @rainbowchaser

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 dc618 
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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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 Cashish 
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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.



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.




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.






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.

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 dakine 
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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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 Cashish 
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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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 Cashish 
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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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 kman 
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Cahsish, interesting thread. Looking forward to it.

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 Cashish 
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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?



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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 Cashish 
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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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  #29 (permalink)
 ollivermilton 
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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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 Cashish 
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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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 Cashish 
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Trading the 6E Old School, with a "TWIST"






You know I had to

How 'bout those babes


There's no School like the Old School

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 lolu 
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Cashish View Post
There's no School like the Old School
... As promised, on the chart below the spread between the two bands is charted as a histogram,


Cashish,

I suppose that your chart is not on NinjaTrader. In any case, how do you get the spread between the two bands charted as a histogram ? Could this be achieved on NinjaTrader ?

Lolu

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 Cashish 
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lolu View Post
Cashish,
I suppose that your chart is not on NinjaTrader. In any case, how do you get the spread between the two bands charted as a histogram ? Could this be achieved on NinjaTrader ?
Lolu


@lolu

Your supposition is correct, I use Ensign Charting Software. All the indicators on all the charts I've posted are standard studies within the software, I simply put a check in a box and the histogram appears. Since my programming IQ is well below room temperature I'm happy with the program. I'm sure this visual could be programmed and displayed on NT and probably has been by someone. Good luck in your search and thanks for visiting the thread.

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 Cashish 
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There's no School like the Old School

Chubby Checker and Dick Clark

What do these two men have in common? They're legendary. Their style and methods have been imitated for decades, but the fact that they were the first qualifies them as legendary men in their field.


Richard W. Arms JR, J.Peter Steidlmayer, Jim Dalton and Sun Tzu

These four men are also considered legendary, but one name stands out, Sun Tzu. I'll assume most of us are familiar with the book, The Art of War. In my previous post introducing the topic of volume I made reference to the "Heavy Hitters" in the market and the size of the positions they may be controlling in the market. Many people compare the market and their personal interaction in the market as a battle, I don't. I've never been in a battle and I'm thankful for that, but my perception of a battle is, (to simplify.. sorry Veterans) it is a very stressful situation and when I trade I want to avoid stress at all costs. But Sun Tzu's teachings can be quite beneficial to traders on a factual level as well as a psychological level. Of a book filled with great information and insight I'll focus on three topics and how I relate them to the 6E. Although I'm not directly involved with the heavy (bull/bear) hitters in the market, (they're battling each other) they do define the landscape.

Know Your Opponent
My opponent in the market is Myself. The real battle in the 6E is being conducted by participants at a level far beyond the reaches of my meager account. If I believe differently, or if I believe my positions in the market are anything more than liquidity for the heavy hitters, I'm fooling myself. If I trade 4 contracts during the day and at the end of the day the total volume in that market is 250,000 contracts, I can be proud of making 0.0015999% of those trades. That's how important my trades are! Remember, I'm wandering around shell shocked on someone else's battlefield, this ain't my fight. The real opponents in this battle, are using extremely heavy artillery and firing from great distances (big picture). Although I'm not involved in the great battle (big picture) I may find myself in a hand to hand skirmish with another foot soldier. While involved in my skirmish I must remain mindful of the heavy artillery silently flying overhead. In a regulated market like the 6E there are some rules of warfare (e.g. position limits) but those too can be blurry. Even though this ain't my battle I need to know what tools and/or methods (artillery) the major opponents in this battle are using, because I don't want to get caught behind either's enemy lines. Many of the tools and methods used by the major opponents are based on volume data. Some methods are extremely complex mathematical models designed by individuals with IQs much higher than than average retail trader. We're talking large corporations and governments here who's methods of trading include, minimal impact algorithms based on Percentages of Volume (POV), Gamma Weighted Average Prices (GWAP), Time Weighted Average Prices (TWAP), and Volume Weighted Average Prices (VWAP) to name a few. These models are often executed at speeds limited only by the speed of electrons! This is how I interpret Sun Tzu's command to, Know Your Opponent, as it pertains to the 6E.

Know Your Battleground

Since the major opponents in the 6E base their methods on "the big three," time, price and volume like all of us little guys, not only can we know the battlefield we can map it. The work of Richard W. Arms JR, J.Peter Steidlmayer and Jim Dalton are well know for giving traders avant garde views of the markets based mostly on volume. These methods of charting the markets have evolved in the resent past with the changes in the quality, speed, granularity and descriptiveness of the data retail traders can now receive on our PCs. Arms, is quoted to say, "If the market wore a wristwatch, it would be divided into shares (insert.... contracts), not hours." Remember your history, Arms was devising his methods (Equivolume) with EOD volume data only, IMO, genius. Steidlmayer, on the other hand had limited intraday data available for his Market Profile charting/trading method. My understanding is, every 30 minutes transaction slips at the CME were processed and an estimation of contract by contract volume could be ascertained, again IMO, genius. Both Dalton and Steidlmayer continue to open new doors in the field of volume studies and of trading volume information. With the help of the work of these men I adhere to Sun Tzu's command to, Know Your Battleground. My method of "mapping" the battlefield consists of a Price Histogram (evolved from Market Profile) and Equivolume Candles (evolved from Equivolume Charts) displayed on different time frames.

Win Without Fighting

When I look at these previously mentioned pieces of heavy artillery used by the major opponents on the battlefield, (minimal impact algorithms based on Percentages of Volume (POV), Gamma Weighted Average Prices (GWAP), Time Weighted Average Prices (TWAP), and Volume Weighted Average Prices (VWAP) ) I notice they are all derived from averages. In previous posts I suggested identifying many averages to ascertain the norm or a benchmark to calculate deviations of price movements, simply a baseline. To heed the command of Sun Tzu and Win Without Fighting I must position myself close enough to the front line of the battlefield and at the same time keep the artillery of the "advancing" major opponent at my back or "on my side." If I get "to close" to the front line I may find myself trapped behind enemy lines. To chart the location of the constantly shifting front line I'll use the VWAP study. The VWAP defined is, the total traded value (price) divided by the total traded quantity (volume) over a given period (time). The VWAP is widely accepted as a popular benchmark value of a market over a period of time due to the accuracy of it's intraday performance.

Let's Review

Chubby Checker and Dick Clark are legendary.

I've identified the major opponents (forces) in the market and to a degree some of the methods they use that may effect my decisions to enter, exit or stay out of the market entirely.

My reconnaissance of their methods define the vastness of the battleground. My method of charting the battlefield consists of a Price Histogram (evolved from Market Profile) and Equivolume Candles (evolved from Equivolume Charts) displayed on different time frames.

To chart the location of the constantly shifting front line I'll use the VWAP study.

A Request

I use Ensign Charting Software, (E-10 version) and IQ as my data feed for the program. All these studies are standard within the Ensign Software and the settings are easily changed within the program. I'm not promoting the software in any way. I also use NinjaTrader, although I only use the DOM feature for order execution.

My request is, Please Do Not use this thread to conduct searches for indicators to fit your personal trading program. Please conduct your individual search elsewhere, thank you. The futures.io (formerly BMT) forum is equipped with a very convenient search engine and I would suggest it to begin your search, please honor my request and DO NOT post requests on this thread, Thank You.

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 Cashish 
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There's no School like the Old School

Again, I want to restate my intention, My intention with this thread is to help traders find their way through a lot of the nonsense and develop "Their Own" method/strategy for trading the (6E) market using Old School studies. Later, I'll add the "Twist."

I believe traders learn much more from their own mistakes, than they learn from the mistakes of others. I'm no exception, I've made many mistakes. IMO, a very common mistake traders often make is not fully understanding the indicators they're using. Many of these indicators are math (processor) intensive, but with a bit of effort they can be manually calculated. I found this exercise of manually calculating each indicator on my chart gave me a thorough understanding of exactly, What the hell I was looking at! I'm not suggesting calculate an entire day's worth of data, just enough to understand the math behind the indicators you are depending on to generate trading signals. For myself, if I don't fully understand the indicator I'm basing my entries and exits on, I find it similar to trading on someone else's opinion. A personal example of this is my use of the Stochastic, these parameters are all set in single digits, far from the normal suggested settings.


Volume and Price Histograms

I'm usually pretty good at remembering the names of people I meet. I went to a wedding recently and saw a several people I hadn't seen in many years and only had to ask my wife the name of one. But when the 6E fell below the Oct lows I needed a little help in remembering the significant price levels in an area of the market I hadn't traded in over a year! This is one of the many benefits of the Price Histogram (PH) study, not only does it remember the area, it remembers the significant prices themselves.

The PH Study evolved from J.Peter Steidlmayer's Market Profile chart. I'm not going to get into his work but I will reference a few of his terms in my description of the PH Study. First, What the hell am I looking at! Well, depending on the settings most commonly we're looking at the largest of one or two things. 1) The largest amount of time the market traded on a price, or 2) The largest amount of volume the market traded on a price.

As a basic example if the volume is 400, and the formula is Price and the bar spans 4 prices, then the 4 counters (horizontal line) for the 4 prices will increment by 1. If the formula is Volume then the 4 counters divide the volume equally and each counter (horizontal line) will increment by 100. If the bar spans 8 prices, and the formula is Price the 8 counters still increment by 1. But if the formula is Volume the 8 counters will divide the volume equally and increment by 50.

During the predefined period, (e.g. (N)days, (N)minutes) one price will retain the largest value of the above calculations, that price in MP terms is called the point of control (POC), in MP "offshoot" studies it's often refereed to as the peak volume price (PVP). With this basic understanding of the Price Histogram (PH) and the differences in the formulas used for their calculations the study which charts the volume traded is commonly referred to as a volume histogram (VH). I use both studies, but for simplicity I'll focus on the volume histogram (VH) and refer to it as VH.

To make a point I'm presenting another example. Many traders use a 20 period moving average for a reference point in their trading. This moving average (MA) can be calculated many different ways, simple, exponential, weighted or smoothed are a few common formulas, and most often these averages are calculated from the closing price of the bar. But the notion of more data points while calculating an average has always been a more accurate method. As a simple example a 20ma calculated by first finding the average of the bar's (O+H+L+C / 4) and then averaging that number over the preceding 20 periods will return a much more accurate representation of price within the 20 periods compared to a simple 20ma calculated only on the close. End of example.

In the above example lays one flaw of the VH study. If a 1 minute bar has a range of 50 points and a volume of 5000 contracts traded most VH studies will divide the value of 5000 equally among the 50 points and plot the histogram as such. Even though we sat at our trading stations and witnessed 70,80 or 90% of the volume trade at one end of the range or the other the calculation is returned as an average over the range of the entire bar. Obviously the answer to this dilemma is to calculate and chart the volume within each tick. As you might imagine this would be an extremely CPU intensive task and other factors like the processing speed of the charting application would surely come into play. But I assure you, the heavy hitters I've refereed to in previous post are more than capable of charting this market data on a sub second level. Enough, I just wanted to point this out. I believe when "the stars line up" and the heavy hitter's algos parameters are met, the speed and frequency of their executions can trap traders "behind enemy lines" and torture them (apply heat on a trade) until they finally give up (stopped out or close trades for a loss).

To recap the last two paragraphs, know your indicators know what, how and when they're calculating your data, know their assets as well as their liabilities.

Anyone familiar with MP is likely to understand the theory behind the Value Area. From the POC an area of 70% (standard settings) is designated the value area. This area is a (close) estimation of 2 standard deviations (SD) from the POC. This 2SD is a number that keeps showing up in many indicators, (e.g. Bollinger Bands and later VWAP) the reason is studies have shown often 80% or more of the trading takes place within this area. Similar to the BBs the idea is if price ventures out of the value area the probabilities are high they will return to the POC. In a defined range, (stationary range) this theory has a higher rate of success, but it is a common practice still used by many traders. Most of the time I give no thought to the value area of the VH, so little thought in fact, I don't chart it. My main focus is charting the shifts of the POC from one level to another level throughout the trading session. These shifts of the POC indicate the highest levels of volume over the defined time frame of the study.





Volume Weighted Average Price

This study (VWAP) has been around quite a while now and its definition is still widely misunderstood. To define; The VWAP for a given period is the total traded value divided by the total traded quantity. That sounds simple enough, and it is. But if we reflect back to the VH and remember how the data (intraday) was averaged for each bar we will see the value of the VWAP study. No trade is left behind in this monster, if your settings are not set to calculate on the close of the bar this CPU intensive calculation will bring many processors and programs to their knees. When I say monster I'm talking about a new calculation of all the intraday data beginning with the opening tick for every tick traded until the closing tick of the session. Did someone say CPU cooler! Obviously, this tick by tick calculation is just out of reach for most of us retail traders, but remember the heavy hitters and the vast resources available to them. Although we may choose to not calculate each tick real-time we can calculate the VWAP on the close of 1 minute bars on several instruments without much trouble using today's powerful CPUs. The accuracy of the VWAP Study's intraday performance has made it one of the (if not thee) most popular benchmarks of a market's value. Small trades at extreme prices will have little effect on this average, instead the average will be dominated by the largest trades. This is a very slow moving average when trading volume is low, but when big volume comes into the market it's quick to shows its worth. As like many other indicators traders often plot SD lines set at +1, -1 and +2 -2 from this average. Often traders will execute trades based on the same theory as MP and BBs, that is buy or sell at the extremes and anticipate a return to the mean. Since the VWAP is charting the volume at every price over the entire day (if that's the setting) the SD bands do not contract like the BBs which are only referencing the preceding 20 bars (if set to 20ma). With that in mind the SD bands of the VWAP provide an excellent indication of the markets total volatility prior to the last traded price.





Equivolume Candles

With the improved access and quality of time and sales data on an intraday level I devised a method of visually displaying the intensity of the fight between the bulls and the bears at key levels indicated by the previous studies. Nothing really new here just a unique display. This display is simply the percentage and the quantity of trades traded at the Bid and Ask. Using the equivolume display the candle (pipe) is expanded width-wise as the volume inside the candle increases. Also, in real-time the color of the pipe changes with the percentage of trades traded at the Bid vs trades traded at the Ask. This information has many uses, one of my personal uses is, when used in conjunction with the extreme readings of the Bollinger Bands, the continuation or reversal of a developing or existing trend can often be ascertained. These "pipes" can take interesting shapes, and those shapes can signify different responses by the market, I call them "Oil Cans." Since we all know our car engines run better when there is an ample supply of oil in the crankcase. I've often told my children, "Money is like OIL, it makes life run smoother."

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 Cashish 
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There's no School like the Old School

I was pressed for time when I posted the "Oil Can" chart and couldn't get back to this project before my "Edit Time" expired so I'm posting another. I've added some explanation as to what the oil cans are representing and labeled the data above and below each oil can for an accurate and quick reference. This data can be viewed many ways, per the example in the sub window. This can also be viewed in 2 sub windows using a bid/ask display along with the standard volume display.

The Oil Cans

I wanted to explain in more detail what I look for when using the bid/ask volume data. The most basic and simplest explanation is, I want to see significant price levels penetrated in an up move with high Ask volume and I want to see significant price levels penetrated in a down move with high Bid volume. In this example I drew one line at 1.3050. When trading the Euro whole numbers are usually a point of concern and this indicator is very good at "getting a read" on the value bulls and bears are placing on that price, at that moment. The next time prices test this level the outcome may be different, as this example shows when 1.3050 was tested later. Another example on this chart is the test of the previous early session high (since 2am), the 7th bar on the chart, I look for percentages greater than 60% (obviously more is better). OK, OK,,, What about the 5th bar on the chart? Why not go short there it has 63% Bid volume? Great question, but if you look closely at the oil can you can see a small black hash mark on each side, the one on the left is the open and the one on the right is the close. This is another significant indication, only one of these 5m bars closed in the lower range of the bar prior to prices hitting 1.3050. Furthermore, the momentum indicator I refereed to up thread should help confirm direction, mine did. OK, How about that one little tiny bar at 2:25? Thin bars signify low volume, short bars signify tight (small) ranges, look for a "change" or a continuation if already in a trend, since this move is just getting "its legs" look for a "wiggle" in your momentum indicator. Nothing is as it seems, even on a day old chart! But those of us who trade at this time of day will note it's 2:55am when price hit 1.3050. Also, there were a few other significant price levels in the upper area of this chart as well as the lower area. If you did your "Old School Homework" you would have identified them prior to the 2 o'clock open. This move from the Open or the low of the 2:20 bar was definitely tradable and all the entry signals have been explained in previous posts. I hope this post assures readers that "Oil Cans" are a lot more than a goofy looking chart.


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 Cashish 
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There's no School like the Old School

I've been pushing this project along this week because all hell is about to break loose at my house in the next few days. In this post I'm going to attempt to bring it altogether. I'm sure I'll omit (forget) some things but the basic concept should emerge.


Bringing it All Together

For this example I'm going to use the price action of the 6E March 02 contract from 2-6am est on 12-15-2011.

Assuming I've defined the time of day of my trading session and several of the averages (volume, range and volatility) that define a "normal" trading day, I take my seat at my trading station and anticipate the opening tick of the session.

First I identify preexisting conditions and preexisting significant price levels. The usual suspects are, Yesterday's O,H,L,C, the H and L of the current week, the Globex session open, Yesterday's VWAP, POC and it's shifts and the Trend Reaction numbers calculated from yesterdays H,L and C (settle). I write these numbers on a "cheat sheet" which is printed on my desk pad but I also suggest marking them on a chart.

Price level chart


It helps to have many screens. The above are charts with significant price levels identified, below is the "Trading Chart" with my indicators. These indicators also supply me with (more) significant price levels. To identify them I'll post a key.

2am Open = Yellow line
2am High = Blue
2am Low = RED

VWAP = Black line
VWAP +/- 1SD = Red line
VWAP +/-2 SD = Blue line

Bollinger Band 20ma = Red Dots
BB 2SD Expanding = Green
BB 2 SD Contracting = Small Red Dotted line

Stochastic in Sub Window
Fast = Blue
Slow = Black

POC of 2am VH = Bold Yellow line

"Oil Cans"
Ask volume = Red
Bid volume= Blue


The chart above is the 2 o'clock open. I notice several things to take into consideration.

1. For 6 hours the range has been small (21 points), low volatility
2. The BBs are expanding, (increasing volatility)
3. The opening bar has below ave. volume for this session
4. Price is above the VWAP... at the close of the first 5m bar price exceeds 2SD with good ASK volume
5. The open @ 3012 was 2 point BELOW the pivot @ 3014
6. The fast stochastic is rising and appears about to cross the slow stochastic
7. The POC from the Globex open is 3007
8. At the close of this bar I'll have the first POC from a VH that begins calculating at 2 am

Everything here is suggesting a long trade, but my experience tells me when price is around a whole number WAIT ... But if price makes a new high above 3019 ..... waiting will be difficult. A short or long (mean reversion) trade at or above the VWAP +/- 2SD is a high probability trade MOST of the time at the 2 am open, but in this tight range with LOW volatility the risk is greater, and the profit potential is LOW. If this holds true I'll enter long at the "rising" VWAP. An important note here; the gravitational pull of the VWAP is especially strong in a prolonged range bound market, also the POC. At the open of the 2:05 bar the POC of the VH that began calculating at 2 am is 3014, That number (POC) will remain a contender throughout this session (every session). Also at the close of the 2am bar BOTH the slow AND fast stochastic indicators turned UP.

The 2:05 bar closed UP at the high of the bar with increased volume, increased Ask volume, increased momentum, increased volatility while remaining ABOVE the VWAP +2 SD. Patience, will reward a trader more than anything else. The (third bar) opened 2 points off the high (close) of the preceding bar and never tested the high, Ask volume fell off, momentum waned and the bar closed near its low. Hope is rekindled for the enrty at the VWAP. I put an order in at 3014 (pivot and 1 point below the "new" POC) and one at 3009 the VWAP. The 3009 order was never filled prices traded at 11 and 10 but never 09. I entered another at 3014 and the market died. ALL volume fell off, the range tightened to 5 points, the BBs contracted and momentum stopped.


Now that I'm in the trade, where do I get out? My targets are defined on the first chart. The POC shifts of yesterday. The first target that price will come into contact with is 3044. The other 4 targets for a long trade are POC shifts at 3051, 53,56 and the Trend Reaction Sell Number at 3063. ALL the numbers with the exception of 3044 have one thing in common. Price has to trade through 3050, plus 13 points to touch the TR SN. Whole numbers are usually "tough nuts to crack." The Oil Can will be my decision maker (see my previous post, "The Oil Cans").


When price jumped above the BBs I felt pretty confident about this trade, but when price hit 3043 and wouldn't touch 44 I started to think 3063 wasn't going to happen I moved Both targets to 3050 and I'm glad I did. That FAT oil can says 3050 on top but it only touched it a few times very late in the bar. I moved my targets to 49 after what appeared to be an eternity, 2 or 3 minutes for sure. I've been a "Dick for a tick" many times but with the low volatility at the open on this session, I wasn't going to push my luck.

Thanks

I really wanted to get this particular post posted before the Holiday.

I've committed to this thread throughout the month of December and want to thank everyone who has taken the time to view it, Thank you. Once again I want to thank Big Mike for the opportunity he has given to all of us. IMO, if I would have attempted this project on the other forums I've visited, it would have been disastrous. Thanks, BM

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 Big Mike 
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 Cashish 
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There's no School like the Old School


Comments on Time, Price and Volume

A few weeks ago my Grand Daughter called me at 10:30pm from somewhere in West Virginia. She was visiting her other Grandparents and although I'm always happy to get a report on how she's doing, a call at 10:30 pm raised my concern. Quickly my concerns were diminished when I heard the excitement in her voice. She was standing in line at a Walmart store waiting for an opportunity to buy a laptop computer for $189.00. "I only have six and a half hours to go!" she told me. One of her concerns was the fact there was a limited supply of these laptops and although she was very near the front of the line the total number available was unknown, and she wanted two of them! Her perseverance was rewarded and she bought her two laptops shortly after 5:00am. If you think about it she was dealing with, time, price and volume.

In the 6E anyone can initiate a position at anytime so in theory the supply (volume) is unlimited. But, for every buyer there is a seller, and for every seller there is a buyer in the futures market. So, although there is an unlimited supply of contracts that are available for trading in theory, the amount of traders willing to take the other side of the trade is limited. When the sellers refuse to sell (at the current price), there are only buyers left in the market, conversely, when the buyers refuse to buy (at the current price), there are only sellers left in the market. When this deadlock (equilibrium) occurs price has to move to a different level. This movement to another price level doesn't have to happen on any particular time frame but it will happen. When the move does happen the market often tries to conceal the distance required to stimulate new enthusiasm from the buyers and sellers already in the market and more importantly from the new traders looking for opportunities to initiate new positions. This may be why many times we'll see the pivot and either the BN or SN traded during a session more often than both the BN and SN traded during a single session. Similar to the example with my Grand Daughter, when price is low enough buyers (volume) show up, when price is high enough sellers (volume) show up. This idea of traders moving in and out of the market at different price levels and different times of the day (different trading sessions) is the basis for why I use different VHs commencing calculations at differing intervals throughout the day.

Nonsense

Once again.
My intention with this thread is to help traders find their way through a lot of the nonsense and develop "Their Own" method/strategy for trading the (6E) market using Old School studies. Later, I'll add the "Twist."

A lot of the nonsense and confusion I've seen on different forums and threads has to do with the indicators I've included in "The Twist" portion of this thread, namely the VWAP and VH studies. A few posts up thread I suggested traders may find it beneficial to manually calculate the indicators they use to generate trading signals to get a total understanding of their assets and liabilities. After the charting program completes the calculations there may be many options for customizing the visual display with your charting program. IMO, a total understanding of this display is also very important. This is a complicated subject and I do not intend to pursue the depths of the math behind the common misrepresentation of these studies, but I do hope to offer guidance and direction to those individuals who may seek a deeper understanding of these indicators.

If traders pursue the truth about these indicators chances are these terms will emerge, normal distribution, skewness, kurtosis, peakedness, variance, deviation and a few more. But for my simple cautionary post I believe most of the misrepresentation is based on the term, normal distribution. Rarely (if ever), do we see a normal distribution of either price or volume in the market and IMO, a lot of the methods presented that use these indicators to generate trading signals assume a normal distribution of price and/or volume. These assumptions will leave traders "chasing their tails" trying to make sense out of these indicators. The problem is often compounded when traders try to merge the two studies (VWAP and VH) and generate "hard and fast" trading rules based on them. I'll refer to a quote by Jim Dalton about Market Profile, "It (MP) doesn't tell you to buy or sell or anything else. It is just a way to organize data. It gives you depth." A similar argument about normal distribution can be made regarding the VWAP, it is the benchmark value of an instrument at the last calculation, nothing more. If traders manually calculate a few bars of volume on price data and truly understand the results, many of the misrepresentations of the VWAP study will be quickly realized.

The PH, VH and VWAP are great indicators if calculated and used properly, they certainly are not the end all or "Holy Grail" of trading. "A way to organize data" is the best definition I could use to define how I incorporate them in my personal trading style. Combined with the Old School indicators, I believe they offer me a wide angle view of the overall market and a "high definition" view of intraday moves.

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 Cashish 
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There's no School like the Old School

VH "A way to organize data"

In this post my intention is to show in more detail how I use the VH studies calculated during different time periods to expand my view of the market and alert me of potential high probability areas in the market that price may be drawn to or targeting. First some basics. Since we fully understand the calculations of the VH study and the liabilities of those calculations, I suggest using the same time frame for calculating the "look back" period as you do for your trading chart. This example is based on intraday trading positions and I'll use 5 minutes for all the VH calculations. With that being said, I also suggest looking at these charts as a road map. When we open a Rand McNally Atlas (old school I know) we see the "big picture" of the State we're traveling in. Later as we approach our destination, Rand McNally often provides an enlarged view of the city's surface streets to assure our shortest route. Another thought. Like the road map we use to find our way to a destination we're unfamiliar with, if we find ourselves traveling the same route again and again we often depend less and less on the map and find ourselves driving on memory. I believe the same is true in the market, but with all the pertinent market information rattling around in my head the VH is a great way "to organize data."

I'm using data for the March 2012 6E contract, for a cleaner view I may omit the price bars, however the highs and lows are charted by the VH.

This first chart is a VH of the 12-22-11 session which opened for trade @ 6pm est on 12-21-11. This chart shows the POC and all subsequent shifts plotted in red just prior to 2am est.



This chart begins its calculations at 2am and after a strong move thru the 3100 level (attracting volume) causes a POC shift to 3119. As the market continues to consolidate ultimately a POC shift is triggered at 3111.



Now we return to the previous chart and see that during the 2am session the volume of trades traded on the 3111 price level exceeded the amount of volume traded on the 3058 level. This is a KEY shift of the POC. At this time my focus is shifted back to the Globex chart since it is NOW in agreement with the 2am chart. The "trial by fire" will be the area on the 2am chart around 3080. If this level fails to hold (support) price in a down move, the next high volume level at 3058 / 3053 will be in play.



This is the Globex chart. Price traded down and around the 3080 level but soon fell, down and thru the 3053 level (by one point) and bounced up to the 3080 area then down again to 3059, just shy of the 3058 line.



The day continues to trade lower, since the 2am session traded higher at the open the volume on the lower levels wasn't charted, but the Globex chart had the levels and when price and volume returned, the chart once again began to chart them on the graph. This is why the 2am chart did not shift the POC to the 3058 level as did the Globex chart.





So why did price stop where it did, You decide for yourself, I'm not selling anything here and many may consider my efforts on this thread total nonsense and a waste of time. But so far we've been looking at the surface streets, the next few charts IMO, are how we got here on the Interstate.

Two days


Three days


Since the Sunday night (Monday session) open






This Santa needs to get busy in his workshop, I'm putting the finishing coats of paint on a three story doll house.

Merry Christmas Everyone

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 lolu 
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Cashish View Post
@lolu

Your supposition is correct, I use Ensign Charting Software. All the indicators on all the charts I've posted are standard studies within the software, I simply put a check in a box and the histogram appears. Since my programming IQ is well below room temperature I'm happy with the program. I'm sure this visual could be programmed and displayed on NT and probably has been by someone. Good luck in your search and thanks for visiting the thread.

@Cashish,

With help from @ Fat Tails and @ Cory, I got my BB spread as histogram on my chart (see attached screenshot).



Going through your thoughts in this thread, I seem to have come up with the annotations on my chart. Am I in sync with your thoughts on BB, BB spread and Volatility ?

Lolu

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 vvhg 
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Hope I'm not intruding....
Shouldn't it be rising and falling instead of high, low volatility. As I understood it the graph should basically be a direct display of volatility.


vvhg

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 Cashish 
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@lolu "Am I in sync with your thoughts on BB, BB spread and Volatility ?"


Yes I believe you're in sync. Those are some great visual displays of the BB spread, the color change on the lower one is a great touch, very nice. Bollinger claims two indicators can be derived from BBs, %b and bandwidth. %b tells you where price is in relation to the bands, and bandwidth can alert the beginning or end of a trend.



Not to push the issue but, can you adjust your upper and lower bands to change color to signal whether they are individually "rising or falling" I reposted a chart showing this. This is a good exit signal. Often during the end of a trend when a (single) band turns, price will give you "a second chance" to exit, during a quick retest of the last high or low. This chart shows 2 of these, I'll caution you, don't expect a total retrace to the high or low tick, but many times price will go deep into the "exit signal bar." Of course this is trading and sometimes price NEVER comes back. But knowing what significant prices are nearby is helpful. Remember, the BBs are just a piece of the total package, but I consider them an excellent volatility indicator.

Bollinger has a great website, https://www.bollingerbands.com/


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 Cashish 
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vvhg View Post
Hope I'm not intruding....
Shouldn't it be rising and falling instead of high, low volatility. As I understood it the graph should basically be a direct display of volatility.


vvhg


You say tomato, I say tomato. You say potato, I say potato. You say pajamas, I say pajamas.

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 rainbowchaser 
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Thanks Cashish for all the effort and time displayed on the thread. Hopefully you will extend it beyond december...
Happy New Year to you and to all futures.io (formerly BMT) traders.

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 ValutaTrader 
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You can also plot a simple MA (20 period or so) of the volatility histogram, and use the "bar crossing the MA" as trigger. For some instruments, the direction of the initial move may be a fake. However, for hourly AUDUSD this has given good results during the latest months of turmoil


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 bluemele 
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lolu View Post
@Cashish,

With help from @ Fat Tails and @ Cory, I got my BB spread as histogram on my chart (see attached screenshot).



Going through your thoughts in this thread, I seem to have come up with the annotations on my chart. Am I in sync with your thoughts on BB, BB spread and Volatility ?

Lolu

Lolu,

Can you share the Oscillator?

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 lolu 
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bluemele View Post
Lolu,

Can you share the Oscillator?

It is not an indicator, it is really not an Oscillator indicator. It is a BBHistogram derived from the SMA and StdDev of the BB indicator. I just did what @ Fat Tails guided me to do here. The additional thing I did is just on color tweak (using the ColorInputSeriesSlopeChanges indicator - which is available on futures.io (formerly BMT)) and which reliability or otherwise I'm just studying and testing.

Meanwhile, @ Cory has his BBHistogram indicator posted here, and which has the color coding in-built.

Lolu

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 rainbowchaser 
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Big Mike View Post
Merry Christmas and Happy New Year!

Mike

Mike.. love the pics of your labs and retrievers. Would you mind doing a posting showing all of them by name..? Should we open a thread for the doggies of the traders.. ?
Regards

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 Big Mike 
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rainbowchaser View Post
Mike.. love the pics of your labs and retrievers. Would you mind doing a posting showing all of them by name..? Should we open a thread for the doggies of the traders.. ?
Regards

Briefly, I have two dogs - a 7 year old black lab, and a 5 year old yellow lab. I show pictures of them as well as pictures of other lab friends. I try to keep the picture relevant to what is going on in my life.

The current avatar is a picture of fruits and vegetables in a basket, representing the new diet I am on

Picture taken just now of them sleeping in my office next to me.



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 Cashish 
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This thread is going to the dogs






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 Cashish 
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There's no School like the Old School

More about the VWAP


Most of today's markets never sleep, the 6E is no exception. The information, price and order flow from around the globe is seamless and instantaneous. At anytime from anywhere in the world when traders bring up a 6E chart we all see the exact same last traded price within a fraction of a second. Knowing this is true, I also believe the last calculation of the Volume Weighted Average Price is considered the benchmark value of the 6E worldwide. I'm not alone in this belief. Algorithmic trading in the FX market is becoming more and more popular, many of the old standby algos are based on the VWAP and it's standard deviations. Although this first graph obviously encompasses stock trading the sheer number of traders still using the VWAP is, IMO, worth noting.





EBS, Electronic Broking Systems



So what does all this mean, if anything? I believe it signals to those who are looking, watching, studying or measuring that the 6E stays in a continuous state of evolution and market dynamics are constantly changing. This evolution of the currency's characteristics are IMO the forces wreaking havoc on many sound trading methods. I have studied the VWAP and its bands for many years, I know these levels can often stimulate volume and are significant levels to be aware of intraday. I've used the VWAP and the bands as a reference point for many of my studies and I've had limited success compiling a few tradable intraday signals based on them alone. However, when the VWAP and its standard deviation bands are used in conjunction with other studies, like those described in previous posts successful trades can be increased greatly.

The VWAP is probably one of the most common tools retail traders have that allows them to peek inside and witness algo-trading order-flow. I have no intention of competing for ticks with HFTs. But knowing these algo trading systems are not designed to be directional, and knowing they inadvertently move price up and down while working the bid/ask spread. This movement (price rotation) often allows traders to align themselves with the algo traders rather than fight them.

The VWAP builds continually throughout the entire session, with price weighted by the volume traded at that price. An uptrending market that is attracting volume from buyers will show a smooth rising VWAP, price will remain above VWAP and will build distance above it. Conversely, in a downtrend that is attracting volume from sellers, we will see a steadily falling VWAP. Price will remain below VWAP and will build distance below it. When we see price crossover the VWAP several times this is an indication we are not trending on the day. On range days, fading the oscillations above and below the VWAP often proves to be a successful trade.

I've found the VWAP a difficult study to write about. I don't consider the VWAP an indicator per se, I (usually) don't buy or sell positions based solely on the VWAP. I do however filter all decisions to buy or sell through a reference of where the last traded price is in relation to the VWAP and the SD Bands. For clarification of this statement think of this similar to the %b indicator reading derived from the Bollinger Bands, it tells me where the last traded price is in relation to the VWAP and the SD bands. This information regarding the location of the last trade can then be used to influence decisions based on other criteria, e.g. volatility, momentum bid/ask volume.

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 Cashish 
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There's no School like the Old School



Chutes and Ladders

I often think of price movements in the 6E as chutes and ladders. Have you ever been just about to close out a long position that seems to have stalled out or just died and all of a sudden the price jumps 3, 6, or 8 points in your favor or slides against you and takes away half the profit? That's what I'm referring to as chutes and ladders. I believe the price levels between these moves can be identified before taking the position and by knowing these levels exist traders can anticipate sudden moves in and out of these areas. These sudden moves can be used to enter positions or take profits. I believe a real value lies in the awareness of these chutes and ladders, the knowledge of their existence may help reduce the fear of getting shaken out of positions shortly after entering. I've also found I can add to positions with very little risk by trailing the price movement with limit orders further behind the last traded price, and if filled on a sudden pull back (chute or ladder) they generally show a nice profit very quickly if the original move stays intact.

More Entries and Exits

These charts are representative of my analysis of the 6E on January 12, 2012 at 2am EST. The market was anticipating interest rate decisions from the BoE and the ECB at 7:00 and 7:45am respectively. Also US retail sales numbers and jobless claims will be reported at 8:30am. Given the fact few traders expected an interest rate change the most significant numbers on the economic report agenda would be the US Retail Sales numbers that were to be announced in 6 1/2 hrs. While remaining mindful of an unexpected change in rates my bias for the day prior to 8:30 am EST would be a thinly traded range bound market with the potential for sudden reversals on higher volume.

Prior to the Thursday 2am open prices had been consolidating in a 27 point range for 8 hours. All 5 POCs from the last 5 days of trading were within 88 points of themselves. The next POC to the up side is sitting at 1.2954 more than 150 points away. I identified three price levels (Intraday POC shifts during trade date 1-5-12) I thought would be resistance if the market staged a short squeeze, 1.2848, 1.2879 and 1.2900. Also prior to the 2am open I identified the trend reaction numbers, BN 1.2644, pivot 1.2719 and SN 1.2774.



To elaborate on the concept of Chutes and Ladders I intentionally placed this post after my post about algo trading systems and the VWAP Study. I firmly believe the correlation between volume on price and the standard deviations of the VWAP are more than coincidental. Both the VH study and the VWAP study will for the most part generate the same indications of significant price levels regardless of the intraday time frame. I consider this an important positive aspect of these studies, this allows traders to basically trade any time frame while charting the VH and VWAP on another time frame. When attempting to implement the use of the chutes and ladders for entries and exits the time frame is somewhat irrelevant, this is more a matter of speed of fills and speed of moves in and out of price levels. IMO, many of these moves are caused by algo trading systems and as I hope to show in this post having limit orders resting in the market on these levels, which are commonly at or near the extremes of ranges in anticipation of that level being touched, traded on or thru then quickly revert back seeking equilibrium is a very productive method of positioning yourself deep within a trading range in anticipation of catching a greater portion of a bigger move later in the session.

This chart shows the VWAP study. The black line is the average price, red line +/- 1 SD and blue line +/- 2 SD. The bold red line is the POC shifts of the VH during this session and the dotted red lines are POCs from Friday and Wednesday. As this market is about to open there's a lot going on here around the last traded price.

Jan 6 POC .................................... 1.2727
Highest POC shift of this session .....1.2724
VWAP +1 SD .................................1.2724
Latest POC shift ........................... 1.2722
Last traded price ............................1.2720
Today's TR pivot ............................ 1.2719
Current POC ...................................1.2718
VWAP -1 SD .................................. 1.2715
Wednesday's close ..........................1.2712

But wait there's more, VWAP -2 SD, Jan 6 POC, the session low and of course the whole number 1.2700. These are all significant price levels this market will eventually have to sort out.



I hope we can agree prior to the green line at 2am this market is non-trending. I've mentioned before a mean reversion trade at 2 am from the VWAP +/- 2SD is a high probability trade in a consolidating market. The problem I have with this trade is the profit potential back to the average is usually small (< 10 points). However, if price trades thru the average a touch or test of the other 2nd SD will make this trade more attractive. A simple rule for a stop on this trade is any close above or below the 2SD you're trading, but being aware of other significant prices "nearby" can offer a better indication of being right or wrong on the trade. The chart below shows price action continues to range around between the SD lines and the average. Now testing the session highs.



After testing the session highs, a quick retrace back to the rising VWAP and POC (magenta circle) proves to be a great entry point for a nice up move. As defined in the More about VWAP post, "An uptrending market that is attracting volume from buyers will show a smooth rising VWAP, price will remain above VWAP and will build distance above it." This also reflects my thoughts of, a simple rule for a stop on the 2 SD trade is "any close above or below the 2SD you're trading." Remember we're trading into news releases here and the whole idea of this post is to highlight the significance of the volume levels generated by the VH (POCs) and the SD levels of the VWAP study. Moreover, the ability to use these levels for entries and exits. I find it fascinating how predictable these levels can become support or resistance.



This chart shows a retrace of the entire European Session from the time of the final Interest Rate announcement right up to the minute of the US Retail Sales numbers. After a pause at the VWAP the market continued to sell off finding support at the previous POC level (1.2722) the TR Pivot (1.2719) and the VWAP -2 SD line (1.2718).



In this early post, on this thread, @rainbowchaser made the following statement.

rainbowchaser View Post
Of course these days news about the Euro have been pretty intense.

Anyone familiar with currency trading knows how true this statement is and this day was an excellent example. Minutes after the US numbers were public, they were forgotten. Because the President of the European Central Bank was giving a speech and a mention of more stimulus by Mr. Draghi was enough to trigger a 131 point short squeeze. You gotta' love this stuff




Reversion to mean trading can be a profitable option if market condition warrant it and risk levels align with individual traders money management criteria. Trying to show trade entries and exits on a thread like this is more difficult than you may imagine. My goal was to show the relevance of the SD levels generated from the VWAP. I look at many bits of information while making trading decisions this post highlighted how I incorporate the VWAP and VH into reversion to mean trades. I also took the opportunity to comment on the surprise breaking news event and show how these price levels once again came into play. These price levels are real, I believe they hold tremendous power in the market, they can bend like reeds in the wind or stand firm as iron. Identifying these levels is only one step of the process, developing a method or system to fit your trading style or personality may be another.

In this post I made no mention of the Bollinger Bands or "Oil Cans" but you may well imagine they play an important role in my decision making process for reversion trades.

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 dakine 
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Hello Cashish,

Thanks for this thread it has been very insightful. I use VWAP in my own trading so it is interesting to read about how you use it in yours. What are your thoughts on stop placements if you are initiating trades in the direction of the trend say at the VWAP or +/- SD1?

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 TempletonPeck 
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First of all thanks for this great thread and your detailed posts.

Could you describe which type of POC you use. I´m new to this subject and found out there are different methods of calculation (TPO, VOC, VWTPO). In NT 7 I tried various indicators with different settings but I didn´t get the same results for the POC shown in your screenshots.

Thanks in advance.

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 rainbowchaser 
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Cashish View Post
This thread is going to the dogs





That was really funny, I LMAO....NOW BACK TO STUDY VOLUME... STILL A PUZZLE FOR MY "PEABRAIN"..

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 Cashish 
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dakine View Post
Hello Cashish,

Thanks for this thread it has been very insightful. I use VWAP in my own trading so it is interesting to read about how you use it in yours. What are your thoughts on stop placements if you are initiating trades in the direction of the trend say at the VWAP or +/- SD1?

Thank you @dakine I'm glad you're finding this thread insightful, I assure you writing this stuff is a lot harder than it appears. With that being said this comment/post and my next comment/post may be proof of how easily pertinent information can be lost in translation

I think most traders would find it easier to describe the flavor of artichoke hearts, than try to offer thoughts on stop placement. But I will offer some fuel for thought.

The notion of chutes and ladders, like many aspects of trading seem to provide a contradictory purpose. For example, if a SD level is used as a profit target to the up side and profit is taken and my positions are flat, if price continues to go up, that same level can often be used as support. A limit order a tick or two above or below the SD level will often get filled and get you back into the trend. I've said time and again, "being aware of other significant prices "nearby" can offer a better indication of being right or wrong on the trade." The example on my last post of several significant price levels clustered together at the open, was meant to alert traders that these situations do exist and are not that uncommon, if you're aware and take the time to identify these levels.

For me, stop placement is a "per trade" decision process. When I enter my order I have a entry, target and stop. The stop is always (N) points behind the entry when the entry is filled, the target is always (N) points ahead. When filled I might move my stop up to a level 10 points under the entry or 5 points under. Same is true with the target, as soon as the entry is filled I get to work managing the trade, both the target and the stop. I hope this helps, and thanks for following the thread.

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 Cashish 
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TempletonPeck View Post
First of all thanks for this great thread and your detailed posts.

Could you describe which type of POC you use. I´m new to this subject and found out there are different methods of calculation (TPO, VOC, VWTPO). In NT 7 I tried various indicators with different settings but I didn´t get the same results for the POC shown in your screenshots.

Thanks in advance.

Thank you, @TempletonPeck

I covered a lot of this starting with this post, but I'm happy to review and do my best to answer you directly.

I use Volume on Price, the above post describes the calculations. In this post, I mention I use different starting times for my Volume Histograms (VH). One chart starts at Globex open 18:00pm EST another starts at 02:00 am EST, this may be where you are a little off in comparison to my charts. And yes, when calculating the VH on a 1, 5, 15, 30 or 60 minute chart you will get different readings, I described the reason for this in the first link posted above. Remember traders, I'm posting examples here. Our software and data may influence our individual displays, to some extent.

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 rainbowchaser 
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Cashish View Post
Who would have figured ?



Quick one, is your time zone ET? Thanks.

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 Cashish 
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There's no School like the Old School

Learning How to Lose

When I started trading, a friend gave me a simple system for trading the Deutsche Mark. It was based on a series of 20 day moving averages and generated profit targets of 200 and 500 points. This system worked and I started making money right from the start. My friend told me I was lucky with my first entry but assured me, if I could stick with the system I would continue to make money, I did.

All the entry and exit signals of this system were based on the close (RTH), with one exception. If the position showed a 500 point profit intraday I was to liquidate the position and take profits. The next rule of this system was, if I closed out the position for a 500 point profit, I was to sit out the next four (4) signals.

I knew the friend who gave me this system was a successful trader, he always reminded me to stick with the plan and trade the rules as outlined. I know many traders search high and low of a system with hard code-able entry and exit rules, I guess I was lucky. As I continued to trade, I learned holding trades for weeks or months just wasn't my style and didn't fit my personality. Changes in the currency markets along with the changes toward electronic markets caused my trading to evolve and I became more short term oriented.

Holding an open position for a couple of weeks is a lot different than holding a trade for a couple of minutes. But it may surprise some traders to know the psychology of these two styles of trading are very similar. At the most basic level, all my trades have but two possible outcomes, they're either winning trades and my equity increases or they're losing trades and my equity decreases. It is that simple. My intent with this post is to share my experience with the psychology of trading, but to add a twist I'm going to share my experience with the psychology of losing, you may be surprised.

The Fear Factor

I have friends that know I trade, everyone of them at one time or another have asked me the same basic question, "Aren't you afraid of losing your money when you enter a trade?" My answer is always the same, "You're damn right I am!" The difference between their fear of losing money and my fear of losing money on a trade is their total lack of trading experience. To put it bluntly, they have no idea what they're talking about, they've never traded. The initial thought many of my friends have is they would lose all the money in their trading account, their savings, their homes, the family farm and their first born child! To compare, losing money on a trade to me generates about as much fear as buying a half a gallon of ice cream on a hot day and hoping it doesn't all melt before I get home. There's no way around it, who among us wants to lose, not me. That's why, I always know exactly where I'll exit the position when I feel my analysis is flawed or the market sentiment has changed. The fear aspect of trading is real, the effects that fear has on my body is also real. I can gauge the effect this fear has on my body by using a pulse monitor or blood pressure cuff. I don't advocate "discipline" or trying to "control your emotions." I suggest traders become absolutely comfortable with the amount of capital they need to place at risk before they enter the trade, feel the feeling and become comfortable with it, it is a major part of trading. Fear is an emotion as old as man, it alerts me that something is threatening me and may cause me pain. Don't get me wrong, I can easily find my threshold for fear in the market by increasing my position size. I call this a healthy fear but one that needs to be pursued with strict money management rules. In my own trading, I found if I focused my efforts on controlling my actions instead of controlling my emotions, the intensity of the emotions dropped dramatically. IMO, to be a successful trader, "A man's got to know his limitations."

Fear, Fear and more Fear

When I began to get serious about my trading I took a detailed inventory of my trading behavior. I found greater or lesser degrees of fear to be the dominate underlying cause of my trading issues. Other than stupid trading errors (e.g. miscalculations, buy instead of sell, unaware of news) all my demoralizing actions could easily be traced back to fear, I found fears on both sides of the trade. I found myself entering trades to early due to a fear of missing out on a move that may or may not materialize. When those trades didn't materialize and continued to go against me I found myself holding losers to long due to a fear of missing out on the positive move that never came. When the trades did go my way I found myself taking profits to early due to a fear of giving back what profit I had on the winning trades.

Learning How to Lose isn't some clever play on words. I had to learn how to lose, and be comfortable within my own skin. I found that when I closed out losing trades I began overtrading due to a fear of ending the day with my account in a drawdown. I also noticed if I did experience some limited success and made a little profit during the session I found myself overtrading again due to a fear of not making an (X) dollar amount per session that I had unrealistically set for myself. In both instances the trading session was usually very stressful whether the outcome was positive or not. Learning How to Lose a predefined amount of risk capital, and closing down my trading station for the day was probably the hardest and most profitable (over the long term) trading skill I've learned.

Winning trades can also generate fear. Huh? What? If any one reading this post takes any thing away, let it be this. Winning trades can generate fear. Closing a well analysed and executed trade with a healthy profit is a very satisfying experience. After closing out a picture perfect successful trade, it wasn't uncommon that a fear of giving back some of those profits kept me from entering again as price continued on in the favorable direction. This fear of giving back some of the earlier profits is then intensified with another blast of emotion, due to regretting the decision to stay out of the market.

Winning trades are not as emotionally charged as losing trades. After I'm in a position my job consists of simply executing a simple order based on three parameters buy, hold or sell. While a winning trade is moving in my direction and begins to approach my predefined target any adverse movement has the ability to trigger that fear of giving back my unrealized profit. Since the market is always in motion and basically never stops fluctuating the simple decision based on the three parameters (buy, hold or sell) becomes a continuous process of deciding how much is enough from both a profit and loss perspective. I've found for me, a losing trade will generate "an emotional factor" many times greater than a winning trade of the same ($) dollar value. I've learned (the hard way) I'm never truly satisfied with the profit of any trade. This last sentence may sound absurd but I assure you, when I came to accept it as a fact, perceptible changes in my trading followed.

"A man's got to know his limitations."

I stated earlier I don't advocate "discipline" or trying to "control your emotions." I want to clarify that statement. To do so I also want to add this statement, "In my own trading, I found if I focused my efforts on controlling my actions instead of controlling my emotions, the intensity of the emotions dropped dramatically."

I never found a way to directly subdue my trading fears (emotions) by using meditation, visualization or self talk. IMO, my attempts to do this was an honest effort to "control your emotions." Further, although I "disciplined" myself to follow these practices the outcome proved uneventful for me.

I believe if an aspiring trader has developed a proven method of trading which consists of realistic entries, exits and risk management and is still struggling with maintaining consistent profitability, focusing on his/her psychology will propel them to where they want to be.

Trading is all about risk, as a trader I had to be absolutely comfortable with the amount of capital I was willing to lose on each trade. More importantly I had to have a realistic understanding of the absolute maximum amount of drawdown I was willing to accept before I stopped trading and reassess my method. Personally, I chose a drawdown 3 times the size of my systems backtested results. I think of my trading and available capital like flying an airplane under a set of power lines. I start off under the wires and my goal of course is to fly above and continue to go higher, but if I struggle and begin to lose altitude I can land safely, refit, reassess my method and continue trading. Holding a clear understanding of my realistic risk capital and expanding my evaluation horizon from a single session to one week and later one month alleviated "the intensity" of the amount of capital I was putting at risk on individual trades and allowed me to focus on execution of trades and execution of my stops in a "disciplined" way. Part of Learning How to Lose is knowing when you are losing on each individual trade, admitting it without hesitation and closing the trade. This trade may need to go against me 10 points before I call it a loser. This trade may need to go against me 30 points before I admit my analysis is wrong and I must close the trade for a loss. I'm speaking of discretionary trading here, automating stops is a topic for another thread. Trading is an arena where seconds count, and doing nothing can cost you $$$. While learning how to lose I found having something to do immediately after a loss can be very helpful. I found if I had a couple projects setup each day and if I suffered a loss I could walk away from my screens and go change my lawnmower blade or change out the flapper valve in my toilet tank, you might think this is funny but believe me it clears your mind and that's what you want to do.

Overtrading is usually a direct result of trying to hurry up and make back a loss. Until I found a way to clear my head from a loss and treat each trade on it's own merit I did all sorts of reckless trading. The idea here is to stop emotional driven trading, and if closing out a losing trade generates an emotional shit storm, even if it is within your predefined risk level, the safest place to be is away from your mouse. So go fix that cabinet hinge or frame that picture that's sitting against the TV.

If my first trade goes profitable fast and pauses at the support or resistance levels I identified prior to entering the trade this may be an indication I'm in tune with the market. However if that pause is prolonged and price creeps anywhere near my target or if an economic report is approaching and I planned on being flat when the release comes out I'll close the trade and go put a coat of paint on a flowerpot, and come back later during the economic report release. If I feel gripped by the emotional fear of giving back my realized profit when I return I'll shut down my trading station and call it a day.

Trading is a serious business to me, I've had traders come and trade with me but mostly I trade totally focused and totally secluded. When I'm trading I don't pay bills online, balance my checkbook or surf the web, I trade, I focus on price movements of a few markets and keep an eye on breaking news (no TV). I trade the 6E from 2-6am est most every day, if I'm not in a trade at 6am I shutdown my trading station and go on with my life, if I am in a trade I'll stay focused and manage the trade to its fruition. Since the market is continuously moving, this offered a tendency for me to see the movements during the times I wasn't at my trading station as missed opportunities, i.e. regret of missing out. If time allowed I often found myself lured into the market during a time of day I wasn't accustom to trading. I'd put on a few emotionally driven trades, "wanting some of that action" usually closing them out for losses then trying some other reckless entry trying to make back my losses, we all know the story. I strongly suggest to aspiring traders to allocate a "time to trade" and stick with it day after day, especially in the beginning. There are reasons for this recommendation, markets have personalities and characteristics derived directly from the participants involved. Using the 6E as an example, the Asian session trades differently than the European session and the European session trades differently than the U.S. session. I firmly believe if "a little guy" wishes success in trading it would behoove him/her to focus intently on one market and develop a thorough understanding of it's quirks and nuances.

When it comes to trading it pays to be a good loser. I hope this post is taken with the seriousness it deserves. I can't stress enough the value of Learning How to Lose. Wanting to be right, risk VS reward, the market is always right, control issues, my beliefs about greed and my fears of failure. The old cliches hold powerful truths when we begin to understand them on a psychological level and feel them on a physical level. Embrace the uncertainty of the market during every trading session, feel the feelings generated when taking positions. Focus on controlling your actions and discipline yourself to do what needs to be done. Embrace the uncertainty and get yourself comfortable accepting the risk. Embrace the uncertainty and trust your analysis, enter trades without hesitation. Embrace the uncertainty and trust your analysis, exit losing trades without hesitation. Embrace the uncertainty Embrace the uncertainty Embrace the uncertainty

Thanks guys for your continued interest in this thread

And yes @rainbowchaser all times are Eastern Time ....... the right coast

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 Cashish 
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There's no School like the Old School

Paralysis from Over Analysis

When I was a kid growing up in the Midwest I started working at age 13 for my uncle who owned a service station. Those were the days when someone (me) pumped your gasoline for you, checked your engine oil and washed your windshield. I worked for him all through high school and into my early twenties. This was long before computerized fuel injected engines were mainstream, if fact many of the engines I worked on had manual chokes and no power steering. You didn't have to have a degree in engineering to be considered a mechanic.

My uncle instilled in me a work ethic which as hard as I tried in later years to free myself from I could never make the separation. One of his famous sayings (to me anyway) was, "Do something, right or wrong!" As an example, I might be working on getting an engine to start and tell him, it's either the ignition points or the ignition coil. He would often respond by saying, "Instead of standing around here doing nothing, Do something, right or wrong!" In his not so subtle way he taught me to take a risk. Of course he being a Midwest Conservative, he always suggested the "cheap" option first, in this example, it would be the ignition points. It was his way of limiting risk, since even back then returning electrical automotive parts was a "no no."

The purpose of this post is to caution traders as to the quantity of indicators they feel they may need to make a trading decision. I refuse to get into a pissing match over price action trading VS technical trading so don't go there, thanks. Although I consider myself a discretionary trader, I use the previously outlined indicators to support my decision making.



How Many is to Many

I've seen charts posted here on BM's forum and other sites that cover almost every candle/bar on the chart. Of course since I'm ignorant of most of the indicators on the chart and don't know what I'm looking at anyway, I have no opinion of their purpose or validity, I'm just commenting on the quantity of indicators they use. To each their own of course, but the amount of data points the human brain can effectively process is proven to be limited. I'm not here to judge what other traders do, as far as I know they may plug all the visible data points on the chart and many many more into their CPU and let "it" make the decision. Again, that's another topic for another thread.

I like to keep things simple. When I prepare for a day's trading session, I look at the overnight news events, read a couple fundamental commentaries, analyze my charts and price movement all to make one of three decisions, buy, sell or wait. In the past I often found myself complicating trading as a whole by thinking there was more to it than there really is. All I can do is buy, sell or wait. The "trick" or struggle for many traders is making the decision, and that is what most traders use indicators for. When I began using indicators I considered them as "votes" assuring me my opinion of market direction was correct and fell victim to the notion the more the merrier.

The 6E like most of today's markets is in a state of perpetual motion, it never stops, only pauses. Simply put, price is either going up or going down. The distance or the enthusiasm of the last move may not alert my concern but I'm certain price is either going up or going down in the future. After taking my seat at my trading station I visualize price movement scenarios in both directions. If the market moves down, where would I consider entering a short position and where would I place my stop? How far would I expect a down move to travel, what would be a likely target area right now if price broke to the downside? I do the same for an up move, I consider an entry,a stop and a target with the information the market is showing me right now. Think of it as if you're a shortstop on a baseball field. You know who's on base, what base their on, who's at bat, how many outs and the the current count on the batter. If the ball is hit to you you need to know where to throw the ball to make the best defensive play or series of defensive plays, long before the ball is pitched. I find this true in the market as well, making the decision to wait, doesn't mean standing in the outfield with your ballglove over your face, like a 5 year old "T" ball player! In my case waiting means evaluating the congestion area, analyzing the formation of the volume histogram and keeping an eye on the bids and asks.

We've all seen the perfect setups, price touches this line or that line and pulls back or rockets off and touches this line or that line, after the fact. Then I take that indicator and throw it on a few months of old data and try and try to figure out how to trade it. Then I want to add another indicator to confirm the first one, and on and on and on. When in fact if I had the balls to pull the trigger or have a resting order sitting above/below "that line" in the first place everything would have worked out fine. I'm all for back/forward testing setups and indicators but there comes a time when a trader needs to place the order. If I'm trading off a VWAP's standard deviation line or a POC from a few days ago I might have only one chance for an entry, and price may never get within 10 points of that level again. Waiting for a moving ave to turn or the close of a 5 minute bar to confirm my decision may be the difference between getting in the position or not. It may also mean "missing out" on a nice piece of the move, the piece that's deep in the move, the piece that's not retested, the piece that allows me to add to my position with no added risk.

How many indicators are enough? As many as you feel you need, but I'm not alone when I say the human brain begins to "short circuit" with more than 5 or 6 data points. Computers can utilize an unlimited amount of data points and it's not uncommon to see small traders try to program/code themselves out of the decision making process entirely. My suggestion is this, if you're using a lot of indicators and still find yourself missing trades while waiting on confirmation or fine yourself saying "I knew I should have taken that trade" ask yourself why you didn't take the trade. If the answer is because this line wasn't red/green or this line wasn't above/below that line consider this a wake up call. A wake up of your sub conscience/intuitive mind. How many times have you repressed an inner urge to enter a trade before your indicators were in alignment with your analytical mind only to miss the trade and sit by and watch it unfold as you saw it in your mind's eye. Why didn't I take that trade? If I limited my risk and placed a stop in the market that I was comfortable with, what harm could come? Trading is about risk, and limiting risk. Do I feel better emotionally, or am I limiting my risk more effectively if I wait for confirmation?

I took this from Wikipedia, A decision can be treated as over-complicated, with too many detailed options, so that a choice is never made, rather than try something and change if a major problem arises. Can you see how this portion of the Analysis Paralysis definition aligns with the wisdom of my Uncle, Do something, right or wrong." My uncle assured me what ever the outcome, we would follow through and solve the problem. Keep in mind the fact any thing can happen in the market, is any trade really less risky than any other? I'm not advocating jumping in and out of the market haphazardly, far from it. I'm suggesting listen to your inner voice, control your risk and take a few trades based on your intuition. The key is to control your risk, and learn to differentiate between your intuition (inner voice) and emotional trading. My experience with intuitive trading is, it's in my head ,,,,,, emotional trading is in my gut! I call it sending in a soldier, I give him full ground and air support, limit my risk and enter the trade.

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 Cashish 
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There's no School like the Old School

Sending in a Soldier

In my last post I cautioned the use of using to many indicators in the decision making process and how it is possible to become over stimulated and end up not being able to make a decision at all (Analysis Paralysis). The idea for that post came from the following trading session. I had planned to post these charts within the last post but time became an issue, so now you'll have to suffer through another long winded play by play of one of my daily trading sessions.

Feb 14 2012 2am Eastern

When I sat down at my trading station the market was making a new low for the session after trading thru the 1.3150 level that had acted as support throughout the night. According to my analysis each previous test of this level held and price traded higher. I've mentioned before in this thread it is wise (for newbies) to focus on a single market and a single session and learn that market's "personality and characteristics," the 6E has many. When I find, several of these "quirks and nuances" playing themselves out during a trading session indicators can become less important to my trading decisions. I'm going to back up here and restate that sentence. It's not necessarily that I find these it's more like they are identified by my minds eye, intuition. If I look deeper at all the "quirks and nuances," and attempt to analysis each one individuality the market often moves on without me, and I'm caught, as my Uncle would say, "standing around doing nothing (over analyzing)." So when this intuition of price movement becomes apparent the time to act is now. If you snooze, you loose. This brings up the ability to differentiate between intuitive trading and emotional trading based solely on the fear of missing out on a move, this is a personal judgement, like many aspects of trading.

When I sat down to trade this session this is what I saw on the chart below.
1. There was a rare gap at the open of the Globex session that wasn't filled
2. Price was below the VWAP'S 2nd standard deviation band
(a) I've said before, a mean reversion trade is usually a good trade at the 2am open, but the profit potential is usually small. This particular trade however could yield 20 points with a target at the VWAP, I'm interested.
3. Price is below the Pivot, in fact it's below the Buy Number, (another potential target)
4. I've also mentioned in previous posts I give the 6E a lot of berth to maneuver around whole numbers, in this case the whole number is 1.3150 which served as support throughout the night.



{A Note} The chart above shows a volume histogram beginning it's calculation at the open of the Globex Session for trade date 2-14-2012. This volume histogram is set to show (2) two days of volume data. This setting allows for a clear visualization of the 9 point gap separating the two day volume profile.


The 2am bar opened at 1.3149 and began to sell off. As price traded below the VWAP'S 2nd standard deviation band I made the decision to enter long at "my sweet spot" 16 points below 1.3150 or 1.3134 (I've mentioned this area before in this thread) and target the VWAP. I felt comfortable with one half of my stop one tick below the low at 1.3127 and the other half at 1.3120. As the market moved down my momentum indicator showed a sharp drop and potential for a reversal. The drop from 3150 to the low 3130's caused an expansion on my volatility indicator (to the down side). These indicators are not on this chart but I was "glued to them" just as well. As every indicator I have was telling me I might be making a big mistake, I felt confident with my decision to enter the trade and the amount of capital at risk. While being filled on the 2:05 bar and not making a lower low, some nice volume came into the market and left me with a "BIG FAT OIL CAN" with 50/50 bid vs ask volume. I felt more confident.



I closed out half the position as price hit the VWAP. The enthusiasm to lift price off 1.3150 was still in the market and support at the VWAP seemed obvious. As price approached the "gap" volume, volatility and momentum came into the market and supported my decision, now the market was trading above the Buy Number, further supporting my decision. Also the second chart shows a volume profile for this session that begins charting at 2am. As price traded at the bottom of the gap the POC on this chart shifted above the VWAP. As the gap was filling in on good (not great) 'up' volume I decided to set a target at 1.3200.

Price is now trading above the Buy Number, above the VWAP, above the 2am POC and above "my sweet spot" 16 points above a whole number (1.3150). As price filled the gap and closed at the low of the bar all my indicators were in agreement to go long. As Price sold off, retraced and touched the VWAP I loaded the boat for a run to 1.3200.





When Price touched the 90's momentum increased and pushed price thru 1.3200. When price traveled thru 1.3200 to 1.3207 ..... 9 or 10 ticks from the prior day's POC it (the POC) acted like a magnet and pulled price right to it. You got'a love this stuff.






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 Cashish 
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There's no School like the Old School



Trading can be an extremely rewarding experience, it can also be very frustrating. I've tried my best to keep all my posts in this thread (and on the forum) in the first person. Mainly I've written about my trading journey and my personal experiences. My intention with this thread is to help traders find their way through a lot of the nonsense and develop "Their Own" method/strategy for trading the (6E) market using Old School studies. To continue that endeavor I wanted to post some detailed guidelines that new traders might find useful as they prepare to begin interacting with the markets. This is not how I started my trading journey, mainly because the tools available to beginning traders today weren't around when I began trading. In my opinion, if these guidelines are considered and hopefully followed to some extent they may save traders from a few common mistakes and relieve some early frustrations. In this post I ask up front for your forgiveness for using a "third person objective" and probably many generalizations, thanks.

I've been approached many times and asked if I would help a trader with an issue, mentor a trader or just critique a series of trades they've recently made. I've found if I ask one question I can almost instantly ascertain the level of seriousness the trader places on his/her trading and if I can honestly be of any help or not. The question I ask is, What have you been studying?

What have you been studying?

I've found most new traders and some more experienced traders can't answer that question directly and start down a laundry list of crap they think I might want to hear, if I hear more than three topics I prepare myself for a bumpy ride. I'm listening for a single sentence like, "I'm studying channel breakouts," or "I'm studying moving average crossovers." A focused and precise answer to my question will often emerge from a focused and serious trader. The first thing anyone wishing to participate in the markets needs is a belief or theory of how or why the market moves from one level to another. This is what I'm fishing for when I ask the question, what have you been studying? Knowing the belief a trader holds about the market will often answer the question whether I'm able to help or not. For example, if someone asks me to help them with geometrical trading patterns or candlestick pattern recognition I'm quick to decline. I simply don't believe in it, and have no desire to invest my time or effort into proving to myself the theory is valid or not. There are plenty of theories about market action, finding the one that fits your personality is in my opinion a prerequisite for successful trading. The theory that fits you best may not be the first or last theory you pursue but focusing on one theory at a time and applying an honest effort toward studying it will get you much further than jumping from theory to theory and never giving any approach the time and effort it needs to bear fruit.

Once a trader settles on a theory and has made a decision on a basic concept to exploit that theory he/she can then begin to develop and test a trading system. I'm going to outline an example of what I consider the steps to developing a consistently profitable trading system, crude of course and very basic but the concept may be new to many who read my thread.

Getting Started

In my opening posts on this thread I covered the importance of identifying a time of day when the market is active and the trader is available to devote his focused attention to his trading. To refrain myself from reinventing the wheel I'm going to stick with the 2-6am et trading time frame. With a "time to trade" chosen my next task is to form a belief or identify a reoccurring movement that I feel I can exploit for a profit.

Assume I've noticed a retracement to the VWAP time and again as I study my charts over the weekend. With further study on past data I notice this retracement occurs consistently each morning while I begin my trading session. I develop a theory this movement from one level to another is tradable. I decide to design a system/method of trading this movement and test the idea. I'll call it the 2am reversion to the VWAP trade.

Simply stated I want to see if I can:
1. Limit my risk on each trade in relation to my account equity
2. Extract a consistent weekly profit

This chart shows the first trade. At 1:55 am the blue line of the -2 SD (standard deviation) was 1.3059 and price was trading above that price. At the open we place an order to buy one contract at 1.3059. At the close of the 2:00 bar our order isn't filled and the -2 SD moved down to 1.3058 so we move our order down to the -2 SD line at 1.3058 and we are soon filled. Price moves up as the analysis of our historical data indicated and we exit our trade at 2:45 @ 1.3088 for a 30 point profit.



Tuesday we return for the 2am trade and take a short position at 1.3130. This trade acts like it's going to go our way when the second bar fails to make a new high but the third bar moves against us and the market stops us out at 1.3150 Triggering our maximum stop for a 20 point loss.



Wednesday we're back for more. Today the range is a bit tight and the entry happens later in the session, on the opening bar of the London session. We take a short position at 1.3279 this trade tests our commitment to our short trade and we take 11 points of heat on the trade. Price eventually drops and we're filled at our target for 10 points of profit.



We're hard core traders and this trade proves it! Thursday's 2 am bar opened 2 ticks above the 1:55 +2 SD line and filled our short entry at 1.3305. Almost 3 hours later at 4:50 am price trades thru our target (a rising VWAP) and we're filled @ 1.3279 with a 26 point profit.



Friday's trade was filled long at 1.3252 @ 2:25 am after an hour of this trade showing us mostly a losing trade with 12 points of adverse excursion price made a move up and within one hour to the minute, price traded back to the VWAP and filled our resting order which closed our position at 1.3263 for a 11 point profit to end our week. TGIF



This series of 5 trades in 5 days rewarded us with 57 points of profit worth $712.50. Not a bad week for a newbie, trading a 1 lot! I've written about this trade previously in this thread and I've stated before I consider this is a high probability trade. If someone is looking for a simple trading system complete with mechanical entry and exits, here it is, good luck. But my real intention of this post is what follows.

Loose While You Learn

I'm sure someone will attempt to trade the 6E with this system. Maybe they'll stick with it and reap unprecedented rewards, that's great, I hope it works out that way. But I'm here to offer guidance to struggling traders and offer them insight to devise their own unique method of identifying trading opportunities. I believe the hard work of trading is finding a method that fits your personality. IMO, the best tool for this job is the trading simulator, if used properly. There's no reason to Loose While You Learn any more, those days are gone. The lure of money makes people do things they normally don't do, and the market will prove that to you again and again. How many readers of this post could take one trade per day win lose or draw, shutdown their trading station and walk away for the day? How many readers would or could take the five trades posted and sit tight until the stop is triggered or the target is triggered? If I altered any of the rules pertaining to these five trades the outcome would be negatively reflected in the weekly P&L, it's that simple. When using a trading simulator the level of benefit is proportional to the level of seriousness you assign to the simulated equity account. The more you treat the money in the simulated account as "real money" the more benefit you'll receive. The simulator allows you to learn how to trade with 0% of the cost. Trading is a business, and learning how to trade doesn't come cheap but many traders play around with their simulators and have no idea if their strategy works or not! They play around with position sizes they only dream of trading, they enter stop orders far beyond their acceptable risk tolerance. They hold trades for hours just to prove to themselves "they were right" regardless of the drawdown. A trading simulator is a powerful tool and should be respected.

If you have identified a trading setup write down the rules on paper. It was suggested to me to keep the required parameters under 6. For example, 1. the 5min chart must show an up trend 2. this MA needs to be above that MA 3. enter long when price pulls back .618% of the last 5m bar 4. enter stop loss order 1 tick below the signal bar and 5. always take profit on whole numbers

Always know your risk level. Have a maximum loss per trade. A maximum loss per day when you will stop trading for the day. And a maximum system loss. Example, if the system draws down your account 15% stop trading and reassess the system.

Set weekly goals for yourself and develop the discipline to follow thru on weekly intervals. Example, I'm going to follow my written rules to the letter each day and evaluate my progress each Sunday. I'm not going to make any changes to my system between Monday and Friday. Make notes of changes, analyze the changes as the week progresses and slowly (one change per week) perfect the system.

When you can consistently extract profit from the market on a weekly basis allow yourself to trade live. Expect your live trading to be 50% of your simulated profit.

If you can focus your efforts and maintain the discipline needed to achieve these goals your "final frontier" will be managing the emotions involved with trading real money. The benefits of the simulator are many. I've found the comfort of knowing how the system preformed in forward test after forward test over several series of trades helps curb emotions tremendously when taking a system live in the cash market for the first time.

A final word, prepare for "what if's." Locate the phone number to your brokers help desk and tape it to your computer. What if, your computer crashes, data server or internet goes down. You want to be able to stay calm call the help desk and flatten your positions.

Thanks and good night

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 Cashish 
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There's no School like the Old School

The Trend is Your Friend

How many times have I heard that, how many times have I told myself that, thousands. This chart is today's 6E the green line is 2am Eastern Time.


This is from my previous post, More about VWAP

The VWAP builds continually throughout the entire session, with price weighted by the volume traded at that price. An uptrending market that is attracting volume from buyers will show a smooth rising VWAP, price will remain above VWAP and will build distance above it.Conversely, in a downtrend that is attracting volume from sellers, we will see a steadily falling VWAP. Price will remain below VWAP and will build distance below it. When we see price crossover the VWAP several times this is an indication we are not trending on the day. On range days, fading the oscillations above and below the VWAP often proves to be a successful trade.

The Perfect Trend ?

I don't know if it is or not but "in my book" this chart was to perfect to pass up and not post, (sorry, "other" Euro thread ). Identifying a trend can be done many ways, trendlines and moving averages are probably the most common. I use the VWAP and remain mindful of the paragraph above. I stripped out the volume histogram, pivot line and buy number line from this chart to make it as clean as possible. If you trade with a VWAP you may notice it is not uncommon for breakouts to occur at or near the +/- 2 standard deviation line. Conversely, pullbacks and reversals also originate at or near the +/- 2 standard deviation line quite often. That's the uncertainty of using the SD line as a trigger (on it's own). But, as the paragraph above states, "Price will remain below VWAP and will build distance below it." I'm looking for this "distance" to be below (down trend) /above (up trend) the 2SD line, this chart shows that. What makes this "the perfect trend" (IMO)? The pull backs. These are 5m bars that plot the range and the close. The black dot is the close, the open is not charted. Look closely at the chart beginning at 2am until price touched 1.3200. Count how many times the 5m bar closed above the -1 standard deviation line, (red line) never, IMO, "the perfect trend." I use this (-1 standard deviation line) as a "built in" entry trigger, or a place to add to the position on these slow, boring, long drawn-out trends. I use the VWAP (black line) as a stop (gives me something to do ) I just keep trailing the position down to the target. Same with adding to a position just trail along on the 1 SD line, usually the position goes profitable quickly. This is not a "no brain'r" trade, they're rare. They're hard to identify, hard to enter, and hard to stay in, but if I sit back and let the trade work, on it's own timeframe, (I fixed a lamp on my desk during this trade) it can be very rewarding. That's why I wanted to post this chart of the (IMO), perfect trend.


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 Cashish 
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There's no School like the Old School

A Trading Error

When it comes to stupid mistakes I've committed them all, and still do on occasion. Journal after journal speak of the same common mistakes all traders are predisposed to making. I believe the situations that cause me to make trading errors are a constant and will never "go away," they're embedded in the uncertainty of the market. If my back/forward testing suggests a particular setup has a win rate of 80% for example (this is an example) and price begins to approach my stop I can commit a trading error in one of two ways. I can move my stop toward price with the notion of taking a smaller loss than my predefined risk amount. This may seem like a good idea at the time but often before the bar closes (and I'm out of the trade with a loss) price turns and continues in the favorable direction without me. Or, I can move my stop away from price with the intention of giving the trade a little more breathing room this time, then maybe a little more, I'm sure we all know how this turns out. Both of these actions of moving the stop are common trading errors. IMO, the events that cause me to react in either of these two situations is firmly based in my false belief that I can somehow predict future price movement, I can't.

Consider this; When I preform my due diligence and identify what I believe is a tradable edge, it's most often based on reviewing past data on several charts. As I continue to evaluate the edge and ascertain if the amount of risk necessary to trade the edge fits my personality or more importantly my account size, I'm still basing my findings on past historical data. Basically I'm finding a hidden diamond, a totally mechanical edge. Like the 2am reversion to the VWAP trade I outlined up thread, both the stop and the target are fixed and known before the trade is entered. Stringent adherence to following the set parameters is necessary to trade a mechanical system, any deviation of any parameter can cause the edge to fail over the course of time.

I'm not an automaton, and my human brain starts to believe things that aren't there, I begin to imagine price movements in the other direction, or beyond my set/fixed target and I find myself meddling with the extensively back/forward tested edge during the trade. Sure, sometimes I don't get my fill on entry and sometimes I don't get my target, this is why I only expect my "live fire" trades to generate 50% of back/forward tested results, when trading a mechanical system as a discretionary system. This post could go on forever if I wrote of automating the strategy or other common errors like chasing the market to get a fill on entry or exit. My intent in this post was to scratch the surface and reveal the inherent complexity of simply moving a stop.

I believe finding and trading a mechanical system is a valid step when learning to trade. I also believe as a trader becomes more comfortable with a markets unique price rotation and learns his/her market's "personality and nuances" they will become more proficient as a discretionary trader. This obviously takes time (10,000 hr ??) for me the change was subtle and non eventful.

A More Complex Example

Anyone following my thread should know the indicators I use and the price levels I consider when making trades. Prior to 2am the 6E traded in a continuation of the Wednesday-Thursday down move. Since the Globex open it traded down within +/- 10 points of Thursday's low. When the 2am "oil can" opened at +/- even with above average volume making a new low and sentiment skewed to the downside, signified by 75% of those trades traded on the bid, the reversion to mean trade was definitely out of the question. Price traded down through Thursday's low and rotated around the Buy Number. The Bollinger Bands were signaling increased volatility as price traded just "inside" the BBs and the -2SD line. All the indicators on the chart were signaling a short trade, the only question was were and how to enter, where's the stop and where's the target.

After price penetrated the buy number with 71% bid volume I began trailing a sell order on the -1SD line. This order would be near the top of the bar if price attempted to test that level again, my stop was on the VWAP 11 points above and my target is sitting on 1.3250.



After another move down, making another new low on 78% bid volume, the London session was open and price rose to the -1SD and filled my sell order resting at 1.3286. However, several things of note happened in those few bars from the low at 1.3266 to the high 1.3288. The upper BB turned down, at the close of the 2nd bar after the recent low. This signals a possible consolidation or reversal, when this band turns down very often I'll see a test of the most recent low. The high of the down bar was tested to the tick, and the next bar exceeded that high, this is where my order was filled. At the close of the last bar on the chart the spread between the BBs was contracting, this is signaled by the red fill color within the bands. When this last bar closed, it closed below the 1st SD line. Also the red dots above the bars is the 20MA of the BBs, price never touched this area. Lastly, the new low is 1.3266, this is IMO a sweet spot in the 6E. It's 16 points above the whole number 1.4250, I've stated before on this thread I give the 6E 16 points on each side of whole numbers 00 and 50s for normal price rotation. Seeing this level tested again and taken out will surely drive price to 1.3250.



Price approached and tested the 1.3266 low with increasing bid volume and continued to close below the -2SD line and out side the BBs. The BBs once again began to expand signaling an increase in volatility. With these factors in mind and no sign of exhaustion I moved my target lower to 1.3234, 16 points below 1.3250.



Price traded through 1.3250 to 1.3247 failing to trade on 1.3234. At this point I wait and let normal price rotation work the trade.



Price rotated around 1.3250 for over an hour making another new low at 1.3241, then began to move higher, price crossed above the -2SD line and touched the 20MA of the contracting BBs. Price moved up sharply on high ask volume penetrating the -1SD line but closing below it. The high of the last bar on this chart is 1.3266, exactly the 16 points I consider normal price rotation around whole numbers. Since this level held and price closed below the -1SD line I decide to add to my position, I enter an order to sell at 1.3260 the -1SD level.



This chart shows another hour of price rotation after adding to my position. The market has been consolidating here around 1.3250 for 2 hours the BBs have contracted to the tightest point since the session began. The 1.3266 level held and the 5m bars continued to close below the -1SD line and didn't make much of an attempt to trade outside the upper BBs. Price moved down and tested the previous low but didn't penetrate it. Using the rule of three (three attempts to break support or resistance) I decide to exit half my position at 1.3234 and lock in some profit and move my target for the remainder of the position lower to 1.3200. I'll close out the whole position if price closes above the -1SD line.



Price traded at a low of 1.3235 on two 5m bars and closed both times below the -2SD line. When price did trade on 1.3234 the flood gates opened with heavy volume creating a new low at 1.3213 outside the BBs and below the -2SD line.



My normal trading session has long pasted and another 2 hours after making the low at 1.3213 price trades above the -1SD level again. I add to my position and get quick results, price falls straight down on increasing bid volume and my target is filled.



But wait there's more. This trend showed absolutely no sign of turning around all night. The news weighed heavy on the Euro all week and this was the bottom (as of then) of a 300 point drop in three days. It was like throwing spaghetti on a wall, every down move stuck only to be followed by another. As I was closing down my workspace price began to climb and as it traded above the -1SD line I thought what the hell and sold more at my sweet spot of 16 points above a whole number 1.3216 an hour later I was covered at even.


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 TempletonPeck 
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Thanks for your detailed analysis of fridays´ price action!

I´m a little bit confused about your VWAP-bands or rather because mine look different.

Do you use standard VWAPs for the ETH session which starts at 6pm EST?

Here is a chart where you can see for example no close below the -2SD at 4am EST.

(My timezone is CET which is EST+6h)

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 Cashish 
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TempletonPeck View Post
Thanks for your detailed analysis of fridays´ price action!

I´m a little bit confused about your VWAP-bands or rather because mine look different.

Do you use standard VWAPs for the ETH session which starts at 6pm EST?

Here is a chart where you can see for example no close below the -2SD at 4am EST.

(My timezone is CET which is EST+6h)


Thanks for your question. Yes I begin my VWAP at the Globex open. The problem may be with the data point used for the calculation, my setting is O+H+L+C / 4, not the close. I've found the VWAP similar to a compass reading, if I'm off a degree or two at the origin of my journey I'm off a lot at my destination.

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 josh 
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Cashish, looking at your post #65 above, I have a question:

You said in the first chart that the market went below your "buy number" with 71% bid volume. Your equivolume candle shows 71% shaded blue -- by "bid volume" I assume you mean volume transacted at the bid, which are market sell orders. Typically one would think of this as "red" and is usually color coded as such in the time and sales, for example. The only thing I can think is that you don't mind blue volume indicating market selling. Am I right?

Also a question on this:



Cashish View Post
Thanks for your question. Yes I begin my VWAP at the Globex open. The problem may be with the data point used for the calculation, my setting is O+H+L+C / 4, not the close. I've found the VWAP similar to a compass reading, if I'm off a degree or two at the origin of my journey I'm off a lot at my destination.

The VWAP should be calculated based on tick data only, and I would assume it is on all modern platforms. Maybe I'm misunderstanding what you're saying? But the VWAP has nothing to do with bar OHLC. Did you mean something else?

Thanks for your thread by the way, I have enjoyed reading it!

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 Cashish 
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josh View Post
Cashish, looking at your post #65 above, I have a question:

A: You said in the first chart that the market went below your "buy number" with 71% bid volume. Your equivolume candle shows 71% shaded blue -- by "bid volume" I assume you mean volume transacted at the bid, which are market sell orders. Typically one would think of this as "red" and is usually color coded as such in the time and sales, for example. The only thing I can think is that you don't mind blue volume indicating market selling. Am I right?

Also a question on this:

B: The VWAP should be calculated based on tick data only, and I would assume it is on all modern platforms. Maybe I'm misunderstanding what you're saying? But the VWAP has nothing to do with bar OHLC. Did you mean something else?

Thanks for your thread by the way, I have enjoyed reading it!

Thanks for reading the thread, I've tried to make it informative and yet somewhat entertaining. As a side note to anyone reading this post, (especially you @josh) I consider josh's posts and his opinions worthy of considerable contemplation, I find his experiential knowledge of the markets and indicators of great value. I believe he enhances the quality of the forums he frequents.

I edited your post with A & B to assist my replies.

A The short answer is yes I don't mind the color. When setting up the parameters I "thought" blue = bid, and never changed them. It's not really a red light green light study but your idea may be helpful for anyone building such a Bid/Ask volume display. Good eye.

B This is where we disagree, kind-of. You are correct, "The VWAP should be calculated based on tick data only, ........." The key words are "should be." In theory the VWAP is the summation of every single tick on every single price, but I've found this is not the case on most "modern platforms" available to us retail traders. The problem lies in the fact that a tick by tick calculation of the VWAP is extremely resource intensive and hence the tick by tick calculation is seldom (if ever) used. I believe the most common VWAP calculations are derived by first identifying the typical price of the time period (e.g., 5m, 15m or 60m). Many common calculations of the typical price are the close, H+L/2, H+L+C/3 or H+L+C+O/4 not every tick traded on every price within the bar (time period). Again, you are correct that the true/absolute calculation "should be" (and is) calculated on every tick on every price. But like I said above I find this calculation to CPU (resource) intensive for our (retail traders) computer power. Now while you chew on that! Some platforms allow users to change the calculation of the typical price from the close to H+L/2, H+L+C/3 or H+L+C+O/4 or something more out-of-the-box. This is the calculation parameter I'm referencing in my response to @TempletonPeck

For those wishing further clarification and evidence of my findings, consider these sources.

Flame > Knowledge Center > vwap

Calculating VWAP: From the above link
VWAP is calculated using five steps. Firstly, the typical price for the intraday period needs to be computed. This is the average of the high, low and closing prices of a stock.
Secondly, this computed price has to be multiplied by the trading period's volume. Then, one needs to create a running or cumulative total of these values. Similarly, a cumulative total of volume has to be created next. Finally, the running total of price-volume has to be divided by the running total of volume.


Trading With VWAP And MVWAP

Calculating VWAP: From the above link

Choose your time frame (tick chart, 1 min, 5 min, etc.)
Calculate the typical price for the first period (and all periods in the day following). Typical price is attained by taking adding the high, low and close, and dividing by three: (H+L+C)/3
Multiply this typical price by the volume for that period. This will give us a value called TP*V.
Keep a running total of the TP*V values, called cumulative TPV. This is attained by continually adding the most recent TPV to the prior values (except for the first period, since there will be no prior value). This figure should always be getting larger as the day progresses.
Keep a running total of cumulative volume. Do this by continually adding the most recent volume to the prior volume. This number should only get larger as the day progresses.
Calculate VWAP with your information: cumulative TPV/cumulative volume. This will provide a volume weighted average price for each period and will provide the data to create the flowing line which overlays the price data on the chart.


Volume Weighted Average Price (VWAP) - ChartSchool - StockCharts.com

VWAP Calculation: From the above link

There are five steps involved in the VWAP calculation. First, compute the typical price for the intraday period. This is the average of the high, low and close {(H+L+C)/3)}. Second, multiply the typical price by the period's volume. Third, create a running total of these values. This is also known as a cumulative total. Fourth, create a running total of volume (cumulative volume). Fifth, divide the running total of price-volume by the running total of volume.

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 josh 
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Cashish, thank you for your kind words and for your helpful information.

I think that the calculation of the VWAP may not be quite so CPU-intensive. As it's simply an average, it should be as simple as:

store A, which equals the cumulative sum of all price * volume so far
on each tick, multiply price * volume, and add to A
VWAP then = A / totalvol

So for each tick, there are only maybe four or so operations. In today's billion-cycles per second, multi-core world of computers, it's probably truly so small that a human cannot perceive it. In fact, my program reports that it takes less than 1ms to calculate the VWAP. The key is that there is no recalculation of past ticks when a new tick comes in--it's simply an addition to a running total. In algorithmic terms, I would venture a guess that for each tick the calculation time is O(3). Whatever the case, it's definitely constant and importantly, not dependent on the size of the whole data set--only on the initial load of the VWAP does the data set matter, and even for a large data set of billions of ticks, it should take less than a second or two to compute.

Now, for historical data where tick data is not available, then we must estimate. But I'm surprised that some programs do not use tick data to calculate if it's available.

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 Big Mike 
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Congratulations on your journal!



In the spirit of our March Trading Journal contest, I am asking everyone to spend a few minutes and share their journaling experience.

A) What are the top five benefits you have seen as a result of regularly posting in this journal?

B) What are the top five problem areas you have identified as a result of regularly posting in this journal?

C) Were you initially reluctant to start this trading journal? If yes, why?

D) How do you feel, overall, about your journaling experience?

E) Would you recommend to others that they should also start a trading journal?

Thank you for taking the time to answer my questions. I appreciate your posts, and I hope you have benefited from your journal. I also know that others will benefit as well, just by reading about your own experiences.

Enjoy your weekend,
Mike

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 anituchka 
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Thank you for a great journal and very thorough analysis. I have just started trading 6E so this journal helped me a lot.

Please continue, it has been very useful to many of us, I am sure.

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

A Few Great Trades

I've been thinking about breathing a little life back into this thread and just couldn't come up with a topic, I still can't, so I thought I'd share today's trades. For me, this was one of those days where everything went as planned. The first chart shows two attempts I made last week at taking out that POC sitting at 1.2791. I got caught in that big spike down on Wed, 5-16. Thursday I caught some of the Asian up move but the push into the Frankfurt open fell flat. I was out of the market Friday doing lawn work when the POC was taken out.




The next chart is Friday's volume profile. With the huge amount of shorts in the market I figured this low volume area between 1.2757 and 1.2740 would be tested soon after the open on Sunday night.



The area was tested down to 1.2750 but not 1.2740 which is the upper value area of Friday's profile. I took a buy signal during the Asia session and took profit at even 1.2800. When price traded on my sell number 1.2808 I sold, when my buy signal failed to take out the high at 1.2814, I sold more. My target to cover was 1.2784. Just prior to the European open I took profits on half my shorts. The market dropped and triggered my 2am return to mean trade, I covered the rest of my position. The market went range bound and struggled above the falling VWAP so I sold again, with an intention to test 1.2740. When price dropped to 1.2760 and started "walking" the B Bands and continued to trade below the -2SD band I moved my target to my pivot 1.2726. Price bounced off 1.2733/32/33 a couple of times minutes before the US open, it felt like forever. I shoved my target to 1.2730 and covered. This was a long night, I called it a day. I think this market is still searching for balance (as always) in a totally out of balance world!





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 Big Mike 
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  #75 (permalink)
 Cashish 
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There's no School like the Old School

Some days make it all worthwhile, I had just that experience this morning. If it wasn't for my children (and Grand children) I probably wouldn't be as patient as I am today. In fact that's why I started trading leveraged futures in the first place, to make a lot of money in a hurry. Maybe that's not the best reason, but it's mine. On a day like today what patience I do have still struggles with my desire to take profits and my trust/commitment in the readings of my indicators. Today wasn't as pretty as it could have been, but my trust in my analysis and my commitment to my indicators won out, and the trade slowly continued to unfold as planned.

When it all Comes Together, it's a Beautiful Thing

This chart shows what I was looking at prior to 2am. With only the GFK Survey on the economic release docket, I felt this session could be traded without interruption, barring any breaking news. My plan at the open was to buy or sell the first tag of either the +2 or -2 SD level, the target would be a retrace of the value area a potential profit of 20 ticks. I felt buying the -2 SD level held the most risk since this level was only 6 ticks off the session low and 9 ticks off yesterday's low. If the -2 SD triggered the buy I'd put in a tight 10 tick stop, 1 tick below Yesterday's low at 1.2515.
I found a typo and ain't gonna' change the chart, Yesterday's VWAP is 1.2569 not 1.2576



The GFK report was released at 2am as the session opened, the number was good for the Euro but the market fell triggering my buy @ 1.2525. The market paused and traded in a tight range for several minutes, never testing the low again, then slowly moved higher. Price rose to the VWAP and rotated there for several more minutes but again never moved lower. About 20 minutes after I put the trade on my target was hit as price moved above the +2 SD level, I took profits as planned.



After the +2 SD level was penetrated the market pulled back to and thru the POC but failed to trade on the VWAP. I usually try to get flat before the 3am open, guarding myself from a common pull back that sometimes can go quite deep, and often reverses an existing minor trend. But given the price action on the pull back to the VWAP I thought if could get into this move I could catch a continuation to my Pivot, exit and still be flat at 3am. I was filled 1 tick above the +1 SD level @ 1.2543 and again took profits at my target, the Pivot @ 1.2555 just prior to 3am. The market moved higher and I began to consider the possibility of the 3am traders joining in on this move and continuing this trend. It does happen, not very often, but it does happen.



For this market to get to 1.2555 it had to enter into the previous day's Lower Value Area, that level was 1.2550. After taking out the pivot, price rose to 1.2561, this represents 42% of the LVA and this move is showing no signs of slowing. I decide to enter again and target Yesterday's POC. When I look at this chart I can see volatility expanding, price action above the B Bands and price action building distance above the +2 SD level. I start trailing a buy order under the market one tick above the +2 SD level and trail a stop along the +1 SD level. On the 3am bar my buy order is filled and I'm back in this thing!



This time I didn't take profits on Yesterday's POC. Volatility was still rising, price was trading above the B Bands and price remained above the +2 SD level. I held the trade and targeted the Sell Number @ 1.2594. On the close of the bar on the hard right edge of the next chart the lower B Band began to turn up (turns red). In my previous posts on B Bands I've detailed this signal as an exit signal. I've also mentioned a final test of the latest high of the trend is also often attempted when this signal appears (second chart).





Volatility is contracting, the recent high was tested and exceeded, but I stay with this trend, why? Several reasons, first, the market is close enough (in the 80's) to begin rotating for an attempt at even (1.2600). With this price rotation in mind I'll move my stop to 16 ticks under the most recent high, if price rotates beyond that level I'll be stopped out. Secondly, it isn't that uncommon to see the lower B Band turn up, volatility contract and price continue to inch higher as the market hits a significant resistance level. Third, since the recent high was tested and exceeded is a major distinction over a high that was tested and failed, yes 6 ticks ain't that much higher, but price is now in the upper 80's, that is significant. Lastly, and most importantly (in my experience) is the fact price has maintained it's ability to remain above the +2 SD level since this trend got it's legs. If at any point the +2 SD level is breached it's time to head for the exits.





I said it wasn't pretty, and I know nothing works all the time, every time, but this morning everything worked out fine.

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


Early Friday Close, Sunday Night Globex Open, Asian Trade, European Whit Monday and U.S. Memorial Day

I usually watch the Sunday night open and often place trades during the Asian session. This Sunday is a bit different, but the FX market is trading and for lack of subject matter I thought I'd post a few charts and explain what I look at on the 6E Sunday open. Basically, I treat Sundays like any other day after spending a few extra hours during the weekend analyzing price moves of the prior week. Since Monday (5-28-2012) is a Holiday on both sides of the Atlantic I start with Friday's Globex early close. I consider the 6E the tail and the FX Cash market (FX) the dog, so the first thing I look at is the last printed price of the Globex 6E on my chart in comparison to the last printed price on my FX Cash market (FX) chart. Sometimes when the Globex closes early like it did on Friday I'll notice a greater difference between the two prices (usually depending on the time of the Globex early close). Same is true with the Globex open compared to the FX open, since the FX market opens at 3pm est on Sunday and the Globex opens at 6pm est the difference in the opening price can be significant if the fundamentals of the market have changed or a breaking news event is influencing price movement. Using this weekend as an example, the early close Friday on the Globex left 1.2516 as the last (posted) price on my 6E chart and 1.2514 an hour later the last (posted) price on my FX chart. OK, OK, OK the settlement price of the 6E was 1.2518 I'm not concerned with that, I'm just comparing the last printed prices on the two charts to get an idea if FX prices moved away from the 6E when the Globex was closed and the FX continued to trade (in this example, for an additional hour). Friday's FX price movement remained relatively flat after the 6E early close on Friday.

I look at several volume profile charts of the price movements of the prior week and look for overlapping value areas (consolidation) or value areas separated by thinly traded low volume zones (trending). Here are two charts of last weeks 23 hour Globex sessions.





I also use daily Trend Reaction Numbers and review those charts prior to the new week. This chart shows last weeks TR Numbers and how the market traded in reference to those levels, this chart also has the TR Numbers calculated for the Monday session.



This chart is a "rainbow" histogram, same data as above just a different visual effect. The highest volume (hot) areas are highlighted in red and the lower volume (cool) areas are charted in blue/black, this chart also has the TR Numbers for Monday.



On Sunday's the Globex 6E session opens 3 hours after the FX cash market so I watch the price movement at the FX open and compare the first few bars ranges in reference to the TR Numbers calculated for the upcomimg day. Todays FX open on my chart was 1.2555, it made a low of 1.2549 and a high of 1.2578 creating a 29 tick range prior to the Globex 6E open at 1.2570. This gap up begs the question why, why did price gap up, political comments, civil unrest, a change of trader's sentiment or lack of liquidity could all be possible "reasons." IMO, what is most important is the fact price did gap up, not the reason why. Before I begin any trading session I check the news and read a couple trusted market commentaries. After a quick review of current news, I found nothing Earth shattering to suggest an all out panic in the markets. If I examine the chart above, the 6E open at 1.2570 was at the lower edge of a high volume area which encased the 1.2582 TR Sell Number. Below is a chart showing the Sunday night price movement of the 6E within the high volume area below and above the 1.2570 open. Trend Reaction Numbers often seem to provide a contradictory purpose. The Buy Number can serve as support in a rangebound market and also serve as a breakout sell number in a trending market. Vice versa for the SN, the Sell Number can serve as resistence in a rangebound market and also serve as a breakout buy number in a trending market. Knowing the market I'm trading can be most beneficial in determining whether to buy or sell these levels. Looking at the volume profiles of the last three days I conclude this is a consolidating market, bound within a rage from 1.2580 to 1.2520 with occasional attempts at each extreme over the last two days.

The Sunday open in the high volume area offered an opportunity to either buy or sell the the projected TR Sell Number. As price rotated around this level I concluded another test of the low volume area between 1.2605 to 1.2623 might be tested. My studies have shown if I use the Sell Number as an entry for a long position in anticipation of a breakout or continuation of a trend a likely target is a distance equal to in points the distance from the Pivot to the Sell Number. In this example the Pivot is 1.2539 and the SN is 1.2582 a distance of 43 ticks. With this information, my projected target for a long trade with an entry on or below the SN would be the SN plus 43 ticks or 1.2582 plus 43 ticks placing my target for the trade at 1.2625.

The decision to enter this trade long is based on the notion that price must not return to or trade in the proceeding day's Upper Value Area at 1.2555. The "hot spot" on the above histogram or the high volume area is where I expect the market to continue to trade. If the market trades lower and into Friday's Value Area, a test of the Pivot would be expected, and a short trade off the SN would be in play.

This chart shows price rotation after the Sunday session open and into the Asian open, the market traded lower and found support, traded lower again and failed to make a new low, I entered long on the POC at 1.2570 (the open).

os128


This was as I expected, a long slow boring trade with very light volume. I trailed my stops on the VWAP locking in profit once price traded above the +2SD band. I put target orders in the area between 1.2620 and 1.2625, all were filled.



Below is a chart showing the Sunday/Monday session at the Monday early close 12:00pm central time.


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  #77 (permalink)
 Cashish 
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This is an EDIT of my previous post. It appears, I didn't post a few charts properly, silly me.
Anyway, here they are, for what it's worth.

If anyone does look at these charts, they may notice these levels came back into play on Yesterday's (Sunday's 6-8-12) open.

This is an EDIT, These charts are from the May 20, 2012 open thru the May 25, 2012 close.


Cashish View Post

I usually watch the Sunday night open and often place trades during the Asian session. This Sunday is a bit different, but the FX market is trading and for lack of subject matter I thought I'd post a few charts and explain what I look at on the 6E Sunday open. Basically, I treat Sundays like any other day after spending a few extra hours during the weekend analyzing price moves of the prior week. Since Monday (5-28-2012) is a Holiday on both sides of the Atlantic I start with Friday's Globex early close. I consider the 6E the tail and the FX Cash market (FX) the dog, so the first thing I look at is the last printed price of the Globex 6E on my chart in comparison to the last printed price on my FX Cash market (FX) chart. Sometimes when the Globex closes early like it did on Friday I'll notice a greater difference between the two prices (usually depending on the time of the Globex early close). Same is true with the Globex open compared to the FX open, since the FX market opens at 3pm est on Sunday and the Globex opens at 6pm est the difference in the opening price can be significant if the fundamentals of the market have changed or a breaking news event is influencing price movement. Using this weekend as an example, the early close Friday on the Globex left 1.2516 as the last (posted) price on my 6E chart and 1.2514 an hour later the last (posted) price on my FX chart. OK, OK, OK the settlement price of the 6E was 1.2518 I'm not concerned with that, I'm just comparing the last printed prices on the two charts to get an idea if FX prices moved away from the 6E when the Globex was closed and the FX continued to trade (in this example, for an additional hour). Friday's FX price movement remained relatively flat after the 6E early close on Friday.

I look at several volume profile charts of the price movements of the prior week and look for overlapping value areas (consolidation) or value areas separated by thinly traded low volume zones (trending). Here are two charts of last weeks 23 hour Globex sessions.





I also use daily Trend Reaction Numbers and review those charts prior to the new week. This chart shows last weeks TR Numbers and how the market traded in reference to those levels, this chart also has the TR Numbers calculated for the Monday session.



This chart is a "rainbow" histogram, same data as above just a different visual effect. The highest volume (hot) areas are highlighted in red and the lower volume (cool) areas are charted in blue/black, this chart also has the TR Numbers for Monday.




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