Identifying patterns and divergences then combining them with trend lines that have been drawn across price tops (in a down trend) can help with visualization of potential reversals and/or trend line breakouts...The ability to visualize these Price Action events allows a trader to develop favorable trade entry points, proper stop-loss points and more realistic price targets...
My hope is that the techniques described on this blog will contribute to one's ability to create an acute 'feel' of price action events....events which can be taken advantage of through trading.
As you look through the trade picture examples and explanations on this blog you should notice that there are times that conflicting rationals are given for entering positions. For example, one trade may be showing an example where just a single signal was used for entry, where-as in the next example there are several signals.This is the nature of discretionary trading.
The signals I use are not automatic "green lights" for taking positions every time I happen to spot one on a chart. Although there are times I might wait for multiple, confirming signals before taking trades, I have no hard and fast rules in this regard. A deliberative choice is made each time a trade is taken.
Over time, as you become more adept at reading price action events, at drawing market 'mood' conclusions (as well as recognizing your own current mood) etc., your feel for good entry timing becomes enhanced...Feel increases your abilities - it adds to the small edge that good chart reading skills can provide.
RATIONALIZATION vs. REASON
Throughout this blog I have tried to convey the rationals I use to enter trades. They may indeed sound reasonable.
There exists a subtle difference between these two terms that I think is important to understand
...especially as a trader...
The inherent dichotomy between these two terms when combining them in a trading method does create conflicts.
Everything is based on an individual's personal experience, observations and bias
...which can only begin to provide a measure of reasonableness...
Rationalizations may or may not be reasonably objective. Although rationalizations can be based on reason
or can sound reasonable, any discretionary trader must understand:
...markets do not always behave in a reasonable fashion...
Successful discretionary trading embraces these things and also includes an element of intuition or FEEL...
NOTES on INDICATORS
Almost all indicators are based on price and they are designed using prices that have already occurred. Thus they are all inherently lagging indicators...that is, they follow what has already happened to price.
Normally you'd expect a Moving Average as drawn on a price chart to eventually change to match the general direction that price has moved in, thus showing us trending attributes. The MACD is a trend indicator and was designed using differing MAs but it is drawn as a separate study. An oscillator like Stochastic is more of a 'trigger' indicator, moving up and down within bounds for interpreting Over-bought and Over-sold conditions.
These things can be derived at by looking at Price Action alone but the separate study panes make the visual evaluations much easier to discern.
The indicators I use are readily available on most charting software packages - they include "Trend Followers" (MACD and TRIX) and Oscillators (Stochastic, RSI and Stochastic/RSI)....I consider the MACD and TRIX to be combination indicators. That is, their histograms are oscillators and their EMA lines are the "Trend Followers".
Mainly I use the MACD EMAs and Stochastic %D for entry signal generation.
Every software package will display "standard" indicators differently so the settings that I use may not draw on your software's charts in the same manor as they do on those shown on this blog. Also note that I've found that most other oscillators can be just as effective as the ones I use. You may prefer Williams %R, Commodity Channel Index (Woodies CCI), Momentum etc. They can be set up to work just as effectively as my choices.
Here's a link to a chart page comparing divergences between the MACD histogram (displayed in the price pane) and other oscillators (displayed as histograms in the study pane).
- - -An example of indicators used as TREND reversal SIGNAL generators- - -
I've included my settings as a place to start when setting up your charts:
These are out of the box or standard settings for most software packages. I've tried many different parameters over the years but have found I couldn't improve upon the std settings...this is the case for both software packages I use.
With that said:
ApexTrader software allows me to apply different moving averages to the MACD EMAs. I use either a 3 period EMA or a 4-period Weighted Moving Average which are applied to the Main EMA line (to smooth it out)...I use the standard setting for the MACD Signal line. If I have dual, overlaying MACD histos on a chart, one will be based on the open while the other one will be based on the close.
After perusing the chart pictures on the blog you may have noticed that I rarely show a volume study. I do think volume can be important to monitor on longer term charts such as 15+ minute and especially, Daily and Weekly charts...BUT I think it is often misleading on short term charts since there is generally an 'abnormal' volume increase following the major markets' open and when they are about to close.
Commonly used chart set ups
These two chart templates are representative of my most commonly used indicators on short term TICK trade charts.
My preference is to use OHLC bars to trade off of.
These next two are representative of my most commonly used indicators on Daily and TIME based charts.
I like candlesticks for longer term charts.
Some variations using the "Coloring" and "Show Case" tools
Choose Indicators that are right for you
There are hundreds of indicators to choose from... It's just a matter of selecting which indicators "talk" best to you.
The following charts show how you can manipulate indicator parameters to show you what you want to see...
The picture below shows the price action on the left...On the right are several different oscillators (drawn as histograms) for that price action. In this example most of indicators did not print divergence when the MACD histogram did. They look as if they are more similar to the MACD's EMA pattern than the MACD's histo pattern.
If you spend enough time fiddling around with their periods, you can make them match the MACD's histo...The diagonal yellow lines show the Acceleration/Deceleration oscillator printing divergence that was similar to the MACD indicator -- but -- this was after I spent some time trying different settings...
These next two sets compare the MACD (in the study) to some others (in the price pane)...
Notice how similar the indicators are to the MACD as far as printing divergences...
TRIX on the left hand chart and Tangent of Linear Regression on the right
NOTES on TIME FRAMES
Whether you exclusively use minute based charts or tick based charts (or a combination of the two) is a matter of personal, discretionary style - to be decided by each individual trader, combining their unique experiences, chart reading abilities and other preferences...This is another area where developing a workable and dependable "feel" comes into play.
TICK BASED vs TIME BASED charts
If you trade many different stocks, i .e. a different one every day for example, you may find that time based charts are more practical.
Tick charts are harder to use than time based charts if you are constantly changing symbols...
Tick charts need to be adjusted to the market you are trading, to find the right tick size in order to show you what you need to see. With very active stocks like IBM, Apple or Google you may find that you need to use a 500 tick-per-bar chart whereas with a 'slower' or less active stock like Alcoa, you may only need to use 200 ticks-per-bar.
Also - you must be aware that there are times during every market session that will be more active than others. This may be due to breaking news (event driven) or there may not be any 'reason' that you can put your finger on to explain the increased action. If you are using time based charts, this increase may manifest itself in longer bars or candles relative to previous bars...This phenomenon also happens on tick based charts to some extent but the change in the bar length will most likely be less drastic...What you will notice is how quickly new bars are printing...
There are other subtleties between the two type of charts that take some getting used to...
Comparing a two minute-per-bar Time based chart to a 60 tick-per-bar Tick chart
PACE OR MARKET MOMENTUM
I use both minute and tick based charts of varying time frames or duration. I will use a different chart duration depending on the market I'm trading. I'll also change chart duration depending on how active any particular market is on any particular day (relative to previous days). I'll adjust chart duration depending on how actively it may currently be trading (relative to how it was trading an hour ago) AND/OR how a market trades in general (relative to the time of day, day of the week, pre/post holiday, pre/post news events, etc.)
Why Pace is important for short term discretionary trading
Developing a feel for differences in market activity levels can be a difficult task. Each trading day's overall pace is different as is every hour of each day. With very fast paced market action, price more often overshoots prefered entry levels. For example, a limit order placed in anticipation of a TLB ReTest may see price dip 5,6 or more ticks below the breakout level before reversing, requiring better precision or wider stops...
I am not, but some traders may be comfortable making adjustments to their trade orders throughout the day; i.e. widening stops and target levels when taking part in more active markets, rationalizing :
1) that the runs may start by dipping a few more ticks than 'normal'
2) that the runs may also drive higher than 'normal' once the trend begins
I find it more difficult to trade during very active times - it requires a higher level of concentration that I can not maintain for very long. The price swings are wider, causing the individual bars on my very short term tick charts to have a wider range which in turn causes the tight protective stops I use to more frequently trigger.
Personally, I do not like changing my regular stop-loss levels by more than a tick in order to accommodate faster paced markets - I will more often refrain from trading during such times or use other order types and techniques, such as incorporating buy-stops above the current price when I see good signals:
DETERMINING MARKET PACE LEVELS
I find that certain times of the day can be much more difficult to trade than at others. This is especially true during 9:30 AM
to 10:00 AM when the major markets open. I avoid trading at this time because I cannot compete effectively with large
block traders that are establishing and/or eliminating their major positions for the session. The Pace is just too frantic.
I suggest utilizing your software's features to gain an enhanced 'feel' for activity levels throughout the trading day.
I find that Depth of Market and Time & Sales windows are valuable as 'tells' for determining market pace.
My preference is to keep one of each open and situated next to my main trade entry chart at all times.
On the DOM I pay attention to the spread and watch the order sizes that print around the Bid/Ask/last.
I use my peripheral vision for getting a sense of how quickly trades are going off on the Time & Sales;
the actual T&S numbers are not that important to me.
Other ways to determine Pace levels
This next chart example shows how you can discern activity levels using tick charts. ApexTrader software allows me to set up my charts so that vertical lines will automatically be drawn in the price pane for selected times...both the tick chart on the left and it's approximate equivalent minute based chart on the right have them.
The chart below combines examples of pace, patterns, activity levels and momentum over the course of an entire RUT e-mini session.
Time vs Tick chart examples
These next two chart sets compare displayed price action between 15 seconds-per-bar and 30 ticks-per-bar.
They were snapped during a VERY fast paced market - compare the ranges between individual bars on each example.
IMO, tick charts give more detail and a better view of what is currently happening...
Additional time vs tick chart examples
Here's two YM charts, each spanning more than a week of 24 hour sessions.
The first one is an hourly with 1 hour-per-candle, the second has 6500 ticks-per-candle...the 1 hour chart's lines show the same exact distances between sessions where-as the tick chart shows you the different activity levels via the distances between the vertical red session lines.
Note that the hourly chart shows fewer candles during the day session, which is much more active than the over night session.
The TICK chart shows more bars during the very active day session.
Take note of the tick-per-bar required to show the approximate equivalent duration for each market on the pairs of charts below...The red ES chart required using 1800 ticks per bar to have 9:30 AM thru 2:00 PM show on the chart while the Green NQ chart required only 600 ticks per bar to show the same period of time. This suggests that the ES market is 3x more active than the NQ.
The shorter distances between the yellow arrows show you how slow the activity level (pace) becomes during the lunch time period.
Other than the reversal zones at 10:00AM and 3:30PM (EST) and a general lack of pace through lunchtime, I don't see many other regularly recurring time patterns.
In general, there are increases at the Major Market open at 9:30AM, a slowdown thru lunchtime (12-1:00PM) and then a pick-up in trading action in the late afternoon thru the major market close at 4:00PM...
One of the many things I like about trading the e-mini futuress on a very short term basis
is that you need not be correct about the effects macro events will have on the markets nor have a correct overall opinion on the
market's day-to-day or week-to-week direction in order to profit from the never ending oscillations that occur in price action.
That is, you don't have to form an assessment about "if X news hits, price will do Y" etc...
There's no need to be correct in your judgement of where the world is headed nor do you need to think about
how other investors/traders will perceive a future that can't be known...
(unless you have inside info or the money to move markets of course).
You can do it as many times per day as you like - or not do it at all on any particular day...
to any market's gyrations for minutes at a time.
IMO, very short term trading is simply about the numbers... I use a 2 1/2 to 1 gain/loss ratio on my bracket stops so that I need to win only one trade out of three to break even...Over time, this works out to needing just a 33% winning-trade/losing-trade ratio to avoid losing account equity (not including commissions)...
All that's needed is SOME Price Action feel or some other trigger/timing method...Over time you're probably going to achieve a 50% to 60% win ratio at least - or far better if you or your stuff is really good...
My own 'rules' include using pre-defined bracket stops on every trade - one above and one below entry while still being able to quickly increase either stop once in a trade...raise the protective stop when you can and raise the target stop if the price action says to do so (never lower the protective stop)...
Although you need to be in to win , you also need to limit the size when you lose.