Tuesday, December 4, 2012

INTRODUCTION - Repeating Signals and Patterns, Trend Lines and Divergence

Throughout the pages on this blog I present ideas, definitions and explanations of the Price/Action events I have successfully used over the years. These events continually repeat and can be seen on any time frame or market. I offer very simple techniques to take advantage of these recurring patterns.

...Latest update November 2014...

The information presented here comes with no strings attached. There are no 

sign-up pages, no ads, no hidden agenda and I do not track visitor's addresses.


...Blog navigation notes...

Links are in orange text and should open in a new tab or window.  Comments, charts and topics are 

usually dated  when content is added. Clicking on any chart will open a larger view in slideshow mode.

 If a chart is still too small to see the details, right click on it then select "Open in a new window"

 or "New tab" and use your browser's zoom control.


REVERSALS RULE !

My basic premise : In the markets, what goes down must go up.

 I have observed that price seems to do more oscillating ↓→↑→↓→↑ (link) than trending, even when it can be seen to be moving in one over-all direction for an extended period of time. I have developed methods to take advantage of these very short term price oscillations:

These methods work whether the longer term trend is down or up...

Note that I see reversals as a matter of course...my T/A bias is always bullish.

Granted, I'm more successful when the overall markets are in bullish mode. Being aware of my bias

helps me restrain my trading when things are not going my way. 


( click on any picture to view it's details - i.e. a larger view )

This is a relatively long term 3 minute per candle chart spanning several hours.

It shows the development of a typical REVERSAL pattern...one of many that occur every day.

Below is a short term 75 ticks per bar trade entry chart showing a time lapse set

 of the same P/A, Divergences, Trend Lines and REVERSAL as seen on the 3 minute chart above


Another reversal


Another reversal


What goes down must go up...In up trends or down

Here are links to more examples supporting these statements:

1) Long trades in a down trend   2) H&S suggests a  down trend beginning   3) Heavy session selling but LONG trades were still presented 


My methodologies are applicable for trading long 

Applying them (or an inverse of them) for taking short trades does not seem to work as consistently, although there can be exceptions to this rule. See my Comparative Trade Scalping Method page for a way to get around this limitation using Bull/Bear ETFs.

 Most of the examples on this blog are showing tick based e-mini Futures charts...The methods, patterns and signals work just as well when using time based charts of stocks and ETFs.

Don't be put off by the 'busy-ness' of the charts included on this blog...most of the annotations

 were added after the snapshots were taken.  I draw a lot of trend lines on my trading charts

throughout the day but I do not add the notations shown when trading.


 You may as well stop reading at this point if you are not interested in counter trend reversal trading. Conventional wisdom suggests that "picking bottoms is a fool's game" and that "trading with the established trend" is the only way to be consistently successful...For most traders, listening to conventional wisdom may seem to be the most logical and surest way to approach the markets. 

...BUT...

Since most traders are not very successful at this vocation...

How valuable can the conventional wisdom be?

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You have to continually ask yourself the question:
"Do you trade for excitement or to take money from the market?"
Well, do you?

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The following charts present an overview of some of the recurring events that are mentioned throughout this blog... i.e. repeating patterns. My intention is to explain how to take advantage of them via trading, day in day out...

 Explanations of the terms and abbreviations used on the charts are posted here:  
PRICE ACTION & DEFINITIONS 

Example 1
Example 2
Example 3
Example 4
Example 5
Example 6

 The examples above are my bread-and-butter trade patterns. In its simplest form, my method uses Price Action and Trend Lines to identify price reversals : 

...direction changes from down to up... 


 The price patterns on the charts may all look the same but note that they are showing different markets with different time frames and were all 'snapped' on different days at different times of the day.


These types of patterns happen many, many times every day... AND they have been happening ever since price charts were invented. Thus my premise as stated above:

...In the markets, what goes down must go up...


If you are excited about the possibilities that easily recognisable, repeating patterns may present for you that's good...but don't let your initial excitement go too far...

It's not always as easy as it looks

There will be days when you see no signals, poor signals or good signals that fail resulting in nothing but stop-outs on the trades you take.


 What I do is simple and repetitive :
 It gets very boring watching squiggly lines on a chart all day !

I suggest you find a way to temper your initial excitement and direct your trading with the above caveats in mind. If you are able to get through this "Home page" and are interested in learning more about all the stuff posted here, I recommend studying the pages that are listed on the right hand side - they are numbered by what I consider to be their level of importance to the learning curve.

At this point, I want to stress the absolute necessity of keeping accurate trading records & statistics AND  understanding their implications to your trading bottom line. I realise that this part of "trading for a living" can be the most tedious part of the entire business. But neglecting this aspect will prevent you from excelling at this vocation. Some of the reasons "why they are important" are listed on the page linked below:

---Ignoring your statistics will lead you to ruin---


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This blog is primarily for my benefit.

I created it to keep myself  focused on what I love doing, trading for a living. It is my Trader's Log, my Blog-Log if you will. Everything I do in the markets is documented on this home page and the others listed on the right hand side...

If the reader can get something to add to his bag of trading tricks, that's OK too. If you have comments, constructive criticisms or questions feel free to contact me by e-mail (see my profile)

Sharpshorts is a day trader; primarily using technical analysis and taking multiple trades every day. Each trade is of very short duration, usually less than 5 minutes of market exposure per trade.  But the information on this blog can be applied by longer term traders, swing-traders and investors as well. 

Although I am aware of market news and fundamentals, I endeavor to keep from being overly influenced by the constant barrage of "financial news" stories published by market news organizations. Most financial news writers cater to a need that people seem to have for "understanding WHY" the markets did what they did...As entertaining as the presented rationalizations may be, they can not be relied upon as trading tools. I especially avoid listening to market pundits who present their expert opinion about what "WILL happen" in the markets going forward...IMO, it is somebody's expert opinion that gets us into any and every mess in the first place...

 I trade primarily using the relatively simple technical methods that are described here. These methods are combined with my"feel" for market actions.

 Feel is the more difficult of the two to quantify.

I suggest you acquire the knowledge and own the tools I present on this blog before throwing your hard earned money into the fray...When combined with chart-time experience, these tools will produce a reliable "feel" for the trade that will serve you well.



Charting Preferences

Most of the earlier charts on this blog are one minute intervals showing stocks and ETFs.  As I migrate toward concentrating on the e-mini futures I find TICK charts present a clearer price action picture and are especially useful for trade entry charts:

(15 second Time based vs 30 Ticks-per bar)

 Tick charts often display patterns that may not be quite as apparent on time based charts: 

(Head & Shoulders) and (Cup & Handle).

  Tick charts are also particularly good for studying the 24 hour price action of the e-minis...for a single session or for multiple sessions.


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Recurring Price Action, Patterns and Signals

It should be obvious that most of the charts on this blog were hand picked by me for illustration purposes. Of course they were. They usually show a plethora of patterns and trade signals on each example. Although multiple, confirming signals do occur quite often everyday, you must understand that these things don't always occur simultaneously. Also be aware that the types of signals I'm pointing out do not occur before each and every price reversal... 



Good trade opportunities do not require waiting for 'perfect' sets of signals to happen...


4/01/2014  "Perfect" Signals for entering long positions

Sometimes multiple signals happen to print simultaneously...on some days, good trading signals print more frequently than they do on other days...Rarely will good signals fail to print for an entire day...There will be days that good signals print but fail to precede good reversal runs - that's what STOPs are for...




8/9/2013    Signals and Patterns that continually repeat
The following is my description of what the chart below is telling me...
it is how I read charts : 
P/A (price action) was in a down trend with LL's & LH's  (lower lows and lower highs) ... 2xD (two indicator divergence) then developed, alerting me of the potential for an imminent change in direction*... price then broke the TL (Trend Line)** and made a new HH before retracing back toward the level where it broke out***... P/A then printed a HL MOF (money on the floor) with the MACD EMAs trending up at this point...P/A began to print HH's & HL's, describing a new up trend... 

How I take positions based on the Signals and Patterns that are described above :
*1st long entry order signal - Market order - try to enter just below the TL level
**2nd long entry - Buy Stop -  placed just above where price would break the TL
***3rd long entry - Limit @ the TL break level, for a TL break re-test entry.

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3/08/2012
 3xD Buy STOP+TTO at the Trend Line trade
TTO = Threshold Trade Order a.k.a bracket order 


Below is an example where I spotted the three indicator divergence (3xD) just a little too late to place a Market+TTO order under the trend line (the dotted vertical line points out when the divergences in the study pane can first be spotted). But I was able to place an anticipatory Buy-Stop+TTO order at the trend line before price broke out, which got a fill....For the NQ ($5.00 per tick) I had my TTO offset order preferences set for a 6 tick protective sell stop (1.50 points, or $30) and a 12 tick target stop (3 points or $60)...

Note that after getting my fill, there was plenty of time to change the order type to a Limit+TTO if I had wanted to try to add additional contracts using a TLB-RT (Trend Line Break Re-Test) order...I like to add contracts at the TLB-RT area, especially after a first entry that had a very good fill -- like one that was filled immediately after the divergence was spotted, well under the trend line.
This is a 60 tick chart



3/14/2012    2xD Divergence can be powerful too...
A Limit+TTO order relies on a retest of a break-out point and is sort of a late-to-the-party trade relative to using a Market+TTO order immediately after divergences below the trend line are identified. But on most days they will provide good fills with reasonable stops. It is not always easy to to place 'perfect' 
under-the-trend-line-early-entry orders, especially on very active days.

Below is a 120 tick chart which draws price bars much slower than the 90T, 60T and/or 45T charts I usually use when trading the YM...but so far on this day, trade activity had been at a far greater pace than on average.

This chart shows where to place "late" limit orders...The solid lime line crossing the teal down trend line (circled area) is the trend-line-break level. In this example, both 2xD plays would have been filled on retests, without price coming near a tight 6 tick stop...you might even have gotten a better fill by a tick or two, if the order was entered while price was dipping...




5/3/2013  2xD followed by 2xRD  

The Lower  Highs and Lower Lows price/action of the previous down trend on the lower left hand side of the price pane (yellow diagonal line) is reversed after the divergences developed. A new up trend is then  defined by the series of Higher Highs and Higher Lows that printed after price broke above the down trend line.
Regular divergences (2xD) suggested an imminent trend change.
           (LL on price while the MACDh and STO  made HL's).
Reverse divergences (2xRD) suggests  continuation of the 'new' trend .
           (HL on price while the MACDh and STO made LL's)
Also on the chart above - price printed a HH after making the Trend Line Break...it then retraced back
 to test the level where it broke out (TLB Re-Test) and printed a HL. This particular HL is also known as
 a Money-on-the-Floor pattern...Note that a Slingshot pattern is developing on the
 stochastic indicator at the same time.
These two patterns help to identify and to confirm the reversal, from down to a new up trend...
They are both described in detail on my Money on the Floor page.


4/25/2013     2xD followed by 2xRD
2xD indicates the start of a new bullish trend... 
2xRD then indicates an 'overdone' short term pull back has occurred...
 I use this signal as confirmation that the new bullish trend should continue.
I include this 120 minute-per-bar chart to demonstrate that price action works very similarly, regardless  of the time frame you may choose to view.
In this example, over a month's worth of the DJIA e-mini sessions are included. 

3/13/2012
Viewing multiple 'time frames' can be helpful in confirming 3xD trade signals and more. Here I'm using both 90 & 120 tick charts for the NQ e-mini futures. Divergence is apparent on both charts, suggesting an imminent trend reversal. The yellow, gray and red diagonal lines in both studies clearly show the divergences on each indicator. The aqua vertical line marks the point where the divergences can first be identified - that's when to place your orders.

The 90T allows you to optimize your entry and suggests where a reasonably tight stop-loss order can be placed...The 120T chart gives a better perspective for determining how much of a reversal you might expect from the divergence in order to set a reasonable target...


Comparing Histogram Divergences 

 Notice that the 90T on the right has a MACD histo and a TRIX histo in the study panes...Both are trend indicators and work very similarly - its just a matter of preference as to which to use (see the next chart for further comparisons)...The 180T chart also shows Stochastic divergence.
 Its not unusual to have divergence on one time frame but not on the others. 

The following chart is for comparing the TRIX histogram with its EMAs to the MACD histogram and EMAs.

It also highlights relationships with the yellow Stochastic slow %D line and with price action.

You can see the similarities as well as differences easily...


Another comparison of differing histograms


Other combinations of trending and oscillating indicators can work just as well as the ones shown above.
Most will show very similar shapes & patterns ...
In the charts above, the scales for the TRIXh, the Awesome  Oscillator and the MACD (with it's EMAs) are on the left while the Stochastic is on the right. The actual scaling numbers are not that important to me. I'm more interested in seeing the relationships between the indicators with price. If my software would allow it, I would turn off all the left hand scales.
(I discovered a way to turn off the price pane's LH scale in later snapshots)
In my view, the stochastic and each of the histograms are oscillators...BUT the TRIX EMA lines and MACD EMA lines indicate trending attributes of price.
I do look at over-bought and over-sold positions of the stochastic line within the study pane...and although I use MACD EMA crosses, I do not concern myself so much about whether they occur above or below the center line.



12/11/2012
This set up gave three ways to make an entry...

1)  Market+TTO entry below the  trend line
(for immediate entry)
2)  Stop+TTO at the trend line, directly above the developing bar
(entry order would be activated if or when price broke-out)
3)  Limit+TTO  at the trend  line after the break-out
 (requiring a re-test of the break-out level for entry)
(The links above take you to MBT's NavPro documentation - See chapter 13 - Order Type)

All three types of orders could have been deployed.  After the 3 indicator divergence set up was spotted there was at least a minute to place the orders.
I didn't see it until after the trend line was penetrated but was able to participate on the move because shares happened to retrace to .01 below my limit  @111.97 as price re-tested the breakout point.
 The indicators in the study panes on these charts use a Stochastic ( 9,2,3 yellow line), a standard MACD without a histogram (aqua and red lines) and a TRIX histogram (light blue bars). The other Stochastic (12,3,3) listed in the pane is used to create the black background for the study. It covers some background lines but is otherwise hidden. The last number (1) listed within the parenthesis next to some of the legends for the indicators is the chart interval...


12/10/2012

Three Indicator Divergence does not happen all the time but it usually allows for a very good scalp trade when it does. Note on the chart below that it occurred once at 11:30 but it was a bit more difficult to rationalize an entry being that it was harder to see where the trend line of the recent price action was...


12/06/2012

Another example of a three indicator divergence scalp trade allowing an entry before price action makes the breakout of the trend line.


12/07/2012

Entry signals - Divergence vs. Trend Line break retest

The chart below illustrates the power of 3 indicator divergence and the relative safety of this trade entry vs. playing a trend line break and waiting for a re-test of that point for entry.
 Normally I would have cancelled order # 2 after three to five minutes since there was no immediate retest after the TL break, rather than leaving it live for the 15+ minutes as shown on the chart.





There is always another trade

Avoid second guessing your trade decisions - Learn from losing trades and yes, analyze stop-outs to determine if your entry reasons were valid...
But DO NOT second guess yourself or engage in coulda-woulda-shoulda thinking. These things will cloud your abilities and interfere with successful trading.

What happened later, you might be asking?
Talk about what second guessing and coulda-woulda-shouldas can do to you...
'I coulda used a 7 tick stop instead of 6,  woulda won this trade...wonder if I shoulda increase it...'

Don't sweat the coulda-woulda-shouldas...
There is always another trade

Little can be gained by focusing on bad trades...unless you recognize them when they happen...

AND

3/19/2014  Good signals don't always guarantee a gain...

Using a Buy-Stop above price can keep you out of a trade that does not move in the direction you were anticipating...
Here's an example when good signals fail to reverse P/A...The signals firing on the LH chart suggested that a reversal, from down to up was potentially imminent.
Spotting the signals, I placed an order...because I was "trailing-down" my buy-stop order (placed above the TL and above the current bar), I was not filled  before price continued to fall (see RH chart)...thus saving me from having to rely on my stop-loss to limit the damage from a losing trade...
The green Buy-Stop order line and white auto offsets are shown on the charts.
You can drag & drop the order line to trail a buy-stop down - this will also move the offsets correspondingly.  


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Sunday, January 8, 2012

TL break+volume+divergence

Note:  This post is one of the earliest remaining examples that was added when I began to develop this blog.
It shows a trade in Valero Energy using a 3 minute per bar chart...Although the market, the time frame and the chart color is different from most of those in my later posts, notice that I am still using the method described...

A scalper's dream set up...multiple rational for entry. 
The stock chosen must have the liquidity to handle market entry and exit of a few thousand shares so that you avoid getting scalped...
I'll take even .15 or .18 for exposure of 15 to 25 minutes.




 Once you see the divergence setting up, there is time enough to enter an 'anticipatory'  Limit+TTO or a Market+TTO below the trend line in an attempt to get a better fill... i.e. getting an early fill in anticipation of a divergent bounce through the trend line.

But very often, its better to enter a buy Stop+TTO order at the point where price would break the trend line, above the current bar, to be sure of getting a fill  IF price does indeed make the expected divergent bounce up.  If the stop order is not filled by the completion of that bar, you can move the stop price down along the trend line while the next bar is developing.

This entry method avoids the potential problem of getting your 'anticipatory'  Limit+TTO or Market+TTO order filled, only to watch as price first spikes down to your automatic TTO sell-stop, which could take  you out  just before the move goes in the anticipated direction...