Trading with the High Performance Intraday Analysis Indicator Suite

Transcription

1 Trading with the High Performance Intraday Analysis Indicator Suite PowerZone Trading indicators can provide detailed information about the conditions of the intraday market that may be used to spot unique trading opportunities. While it is unrealistic that one indicator can provide all of the information that a trader needs to make consistent buy and sell decisions, the right combination of indicators can really stack the odds in your favor. That is the goal of the PowerZone Trading Indicator Suites; to provide a collection of fast reacting indicators that help traders spot powerful intraday price moves. The intent of this document is to help traders get started using this set of high performance intraday indicators. I would like to emphasize that the following guidelines are only suggestions on how these indicators may be used to enhance your trading. There are many other innovative and powerful applications for these indicators. I would also mention that traders should verify the research presented in this document before spending money trading this (or any) system. Please refer to the disclaimer at the end of this document. THIS DOCUMENT IS NOT MEANT TO SERVE AS TRADING ADVICE. 1

2 Trade Entries Step 1 The Setup Figure 1 A HPIA workspace with a 144-tick chart of the Emini Russell One of the challenges of an intraday market is determining the phase of a short-term trend. For day traders, it does not matter if a price swing is the start of a new trend or just a pullback from an existing trend as long as we can profit from it! That is the goal of the HPIA indicators, to quickly determine the phase of short-term trends and make high probability trading assessments. Finding a setup using the HPIA indicators is a relatively easy task, as we will look for indicator consistency in three conditions: 1. The PZT ADAPTIVE MA forming a strong slope (green or red) as can be seen in Figures 2 and 4. This tool allows us to quickly assess the short-term direction of price and allows us a reference for where price has been. In our example, the consistent green readings are the first indication of a bullish price move. 2. The VSTOPS indicator should turn in the direction of the PZT ADAPTIVE MA as seen in the green or red stop levels in Figures 2 and 4. While this is primarily a binary indicator (with the exception of the blue bars that represent a change of direction) it will immediately register a long (green) or short (red) market bias, based on volatility. 3. The PZT THERMOMETER indicator should agree with the other two indicators as in Figures 3 and 5. This represents the immediate intraday strength or weakness of the trading instrument and can help traders stay on the right side of a strong intraday trend. As the temperature bars of this indicator become stronger and move outside of the dotted threshold levels, it signals a significant amount of outside buying or selling entering the market and confirms that a strong intraday trend has occurred. 2

3 LONG TRADE SETUP Green slope on PZT ADAPTIVE MA Green VSTOPS level Green PZT THERMOMETER Figure 2 A green PZT ADAPTIVE MA and the VSTOPS indicate potential for a long position. Figure 3 A green temperature bar on the PZT THERMOMETER completes the setup for a long trade. SHORT TRADE SETUP Red VSTOPS level Red slope on PZT ADAPTIVE MA Red PZT THERMOMETER Figure 4 A red PZT ADAPTIVE MA and the VSTOPS indicate potential for a short position. Figure 5 A red temperature bar on the PZT THERMOMETER completes the setup for a short trade. Step 2 The Trigger Once the setup conditions are met, we now look for short-term support or resistance to initiate the trade in the direction of the setup. At this point, we will look for a key level and set a stop order and enter into a position one or two ticks away from this level. There are two methods of spotting key resistance and support levels: 1. POWER PIVOT Trigger. PZT POWER PIVOTS provides a series of horizontal support and resistance levels that may be used in determining a price breakout level. These PZT POWER PIVOTS become even more significant if price has found prior support or resistance along one of these lines. As price approaches these levels, as in Figure 6, a stop order may be placed in the direction of the setup. This resistance level becomes even more important when two or more PZT POWER PIVOTS are very close together. 2. AUTOTREND Trigger. Using the PZT AUTOTREND indicator, as seen in Figure 7, support and resistance levels can be easily seen. This tool draws two mechanical trendlines that determine support and resistance based on the actual conditions of the market. The strength of key price swings are analyzed, and establish the points to draw the PZT AUTOTREND line and project it forward (to the right). The current projection of the PZT AUTOTREND establishes the level of support or resistance that, when broken, may lead to a significant price move. It should be noted that when both of these triggers (PZT AUTOTREND and PZT POWER PIVOTS) form at the same point (or within two ticks of each other), it illustrates an area of significant support or resistance that often leads to higher probability moves. 3

4 LONG ENTRY TRIGGER (POWER PIVOT Trigger) Closest PZT POWER PIVOTS Resistance level (767.8) Stop Order to Buy at Figure 6 A 144-tick Emini Russell 2000 chart showing the yellow EminiMid line as the trigger to buy. Once price exceeds this level, a long position could be entered. The following figure shows the two-point continuation from this move. SHORT ENTRY TRIGGER (AUTOTREND Trigger & POWER PIVOT Trigger) Closest PZT POWER PIVOTS Support level (767.2) PZT AUTOTREND forming support at (767.2) Stop Order to Sell Short at Figure 7 This chart shows both the POWER PIVOT and the AUTOTREND triggers converging on one area of support. This often leads to powerful price moves as price breaks this strong support to the short side. 4

5 Trade Exits Step 3 Initial Stop Loss and Profit Target Once a position has been entered, there are many methods of managing the trade. It is highly recommended to place a protective stop loss order in the market immediately in case the trade goes against you. Determining this level depends entirely on personal risk tolerance, margin requirements and overall trading methodology. In the short trade example in Figure 8, a level that may be useful is the prior PZT POWER PIVOTS support level of 767.8, or the EminiMid in our case. Setting a stop order for one or two ticks above this level at will allow a bit of price fluctuation. Consequently, an initial profit target for all or part of the position could be set for the next lowest PZT POWER PIVOTS level. As we can see from Figure 8, the next lowest PZT POWER PIVOTS level can be found at the EminiLow where price reaches A limit order for one or two ticks above this level at can be entered. Please note, when using both a protective stop and limit order simultaneously, a bracket or OCO (one cancels other) order should be used since one of these will need to be canceled once the other gets filled. Otherwise, an active order will remain in the market and could open an unwanted position. Initial Stop Loss Stop Order to Buy (Cover) at Trade Entry (Short) Limit Order to Buy (Cover) at Initial Profit Target Figure 8 PZT POWER PIVOT levels may be used to set initial stop loss and profit targets once a position has been opened. Since not all of the PZT POWER PIVOTS levels may display on the price chart, the Analysis Commentary feature may be used to display all of the current PZT POWER PIVOTS levels, as seen in Figure 9. Figure 9 An Analysis Commentary window shows all of the PZT POWER PIVOTS levels for the day. 5

6 Step 5 Applying Dynamic Trade Exits Dynamic trade exits allow traders to close a trade if there is strong market momentum in the opposite direction. There are two methods that adapt to the conditions of the market and allow traders to determine a reasonable point to close out a position (when to cut and run). In many cases, this can help traders determine when to take profits early or when to take a small loss before it turns into a larger one. The first method involves the PZT TEXT ALERTS indicator to identify a strong change in the direction of the short-term indices. While this tool will alert traders to a variety of conditions, a HIGH-TICK ALERT in a direction opposite to a trade can provide a strong reason to close the position, especially for traders that use smaller timeframes as their primary trading chart. High tick alerts are generated when the NYSE TICK index gets above 600 or below 600, and the Nasdaq Tick index moves above 300 or below 300, in the same direction. Using the previous trade example, if we are in a short position and see a BULLISH HIGH-TICK ALERT such as in Figure 10, a trader may want to put in an order to immediately sell at market. Keep in mind that this does not guarantee that the symbol will change direction, and traders using larger timeframes may choose not to use this form of dynamic exit. --- Bullish High-Tick Alert --- Figure 10 This PZT TEXT ALERT screen with a green Bullish High-Tick Alert may signal traders to immediately close their short positions. The next method of dynamic trade exits utilizes the VSTOPS indicator on the main chart to provide a definitive stop level based on market volatility. The dotted VSTOPS levels serve as a reference point for possible stop placement, and steps up throughout the course of a positive trade. When the trade moves back and penetrates a stop level, a blue dot (or bar) is generated signaling the crossing point. Since these stops are determined one bar in advance, traders could enter these into the market as stop orders well before price reaches the predetermined stop point. Dotted VSTOPS levels step down to protect profits Blue VSTOPS dot shows where price breaks a stop level Figure 11 VSTOPS provides a dynamic method of stop placement and once price pushes above this level, the trade should be closed. 6

7 Advanced Tactics Multiple Position Trade Management As traders become more comfortable trading with these indicators, more advanced tactics may be employed. One such method involves opening a position and then dividing the position into thirds. This will allow a gradual scaling out of the position while protecting profits along the way. Using the same entry example as shown in Figures 7 and 8, we will again set the initial stop loss level just above the PZT POWER PIVOTS level of the EminiMid line (768.0). The next steps in using this trade management system are shown in Figure 12 and are detailed below. Trade Entry (Short) Stop Order to Sell Short 3 units at Initial Stop Loss Stop Order to Buy (Cover) 3 units at Stop Level #2 (Break even) after first profit target Stop Order to Buy (Cover) 2 units at Stop Level #3 follows VSTOPS and closes final position at this point Profit Target #1 Limit Order to Buy (Cover) 1 unit at Stop Order to Sell (Cover) 1 unit at Profit Target #2 Limit Order to Buy (Cover) 1 unit at Figure 12 This 144-Tick chart of the Emini Russell 2000 illustrates the possibilities of advanced trade management using three separate exits. The initial trade management for each third is as follows: 1. The profit target for the first third will be set one tick from the next lowest PZT POWER PIVOTS level (EminiLow). 2. The profit target for the second third will be set one tick from the second lowest PZT POWER PIVOTS level (S1). 3. The remaining third will use the VSTOPS level to follow the move and will close out as price falls back and penetrates the current VSTOPS level (forming a blue dot). Once the initial orders have been placed, there are three possible outcomes: 1. We reach our initial stop loss and close the trade for a loss. 2. We reach a dynamic stop level (using PZT TEXT ALERTS or VSTOPS) and close out the position. 3. We reach our first profit target at the EminiLow, in which case we have some work to do 7

8 Once the trade has moved in our direction and we have taken our first profit target, we take the following actions: 1. Cancel the initial stop loss order at the EminiMid and put a new stop order for the remaining two thirds at a breakeven level (the price at which the trade was initiated or the Pivot). At this point, the trade is a winner, even with two thirds of the position remaining. 2. If the VSTOPS level is greater than breakeven (closer to the current price, meaning more profitable), change the stop level of the remaining two thirds to the VSTOPS level. The PZT TEXT ALERTS should still be monitored for a dynamic exit. 3. Once the second profit target has been reached, the remaining third can be managed using the VSTOPS level and closely monitoring the PZT TEXT ALERTS for signs of weakness. This final position is known as the runner and allows traders to remain in a trade to capture a large trend if it occurs. Multiple Chart Intervals Employing multiple chart intervals allows for an additional level of trade confirmation and adds another element to the setup phase of trade analysis. Viewing multiple chart intervals allows traders to maintain a larger perspective of the markets and attempt to differentiate the formation of a new trend from a pullback of an existing one. This may assist traders in determining the probability of larger moves, which can be used in determining risk levels and position sizing. For instance, traders may elect to trade more contracts when a potential price move is confirmed on a lager interval. To develop a bigger picture of the market, traders should use a larger charting interval than their primary chart. In our example, a 610-tick interval will be used in conjunction with a 144-tick chart, as in Figure 13. Similar to our initial analysis, we will look for the same setup criteria that we established during Step 1, and apply it to the 610-tick chart. While the PZT THERMOMETER will register the same value regardless of the interval, we will look for both the PZT ADAPTIVE MA and VSTOPS to confirm the price move before entering into positions. Once we have this confirmation on both intervals, we will then look to the PZT POWER PIVOTS or PZT AUTOTREND to provide a support or resistance level that will allow us to enter a trade (resistance, in our case). 8

9 Figure 13 These multiple interval charts include a 144- and 610 -tick chart of the Emini Russell A bullish setup on both of these charts may lead to a more reliable upward move once a POWER PIVOT or AUTOTREND trigger is reached. Entry Price Improvements Once a trade setup and trigger level has been reached, traders can use alternate methods of entering the trade. While using a stop (market) order to enter a position one or two ticks away from the PZT POWER PIVOT or PZT AUTOTREND trigger level offers the safest method of trade entry, some traders may elect to try for a better entry price. As price crosses the trigger level it often retraces back a few ticks before continuing in its intended direction. This phenomenon can be used to a trader s advantage by placing a limit order for three to five ticks below the trigger price, as seen in Figure 14. Traders may use a special type of stop-limit order that will automatically enter the limit order (for 3-ticks below the trigger level) once the trigger level has been violated. It should be noted that the risk of this type of trade entry is that if price does not fall back, the order will not get filled. If this is the case, traders may be left on the sidelines as the trade takes off in their direction. Trade Entry (Long) Place Limit Order to Buy at (Once price reaches 769.2) Order gets filled at (5 ticks below the PZT POWER PIVOTS level of 769.2) Figure 14 Once a long setup occurs and price reaches the PZT POWER PIVOT trigger, a limit order is placed below the market to attempt to get a better price. Scalping Scalping the market is an extremely short-term form of trading that attempts to profit from small, frequent intraday price fluctuations. Many scalpers only look to gain two to four ticks per trade and rely on precision and a high percentage of winning trades for their success. While scalping the market takes quite a bit of practice and is not recommended for new or less experienced traders, PowerZone Trading indicators can be very useful for this style of trading. A typical scalping setup involves the use of a short interval chart such as the 55-tick chart in Figure 15. For this application, we will use the PZT PROOF indicator instead of the PZT THERMOMETER. PZT PROOF forms a very fast oscillator that can help spot changes in shortterm momentum. The combination of PZT PROOF, PZT ADAPTIVE MA and VSTOPS forms the setup combination that we will look for to enter a scalp trade. The triggers remain the same for this type of trade, with the PZT AUTOTREND trigger becoming the most common. 9

10 Possible scalp trade entry location Figure 15 A 55-tick Emini Russell 2000 chart using a PowerZone Trading scalp setup. The combination of green PZT PROOF, PZT ADAPTIVE MA, and VSTOPS form the setup for this fast style of trading. The entry setup for a scalp trade: 1. PZT PROOF crossing the zero-line and with a strong directional slope (bright red or bright green). Dark red or dark green indicates a slowing of short-term directional momentum. 2. PZT ADAPTIVE MA moving in the same direction as PZT PROOF, with a strong up or downward turn. 3. VSTOPS confirming the direction of the other two indicators. In many cases, VSTOPS will form the directional bias that may help traders get in the right direction. The entry trigger for a scalp trade: 1. The PZT AUTOTREND trigger forms the most reliable method of entering into a scalp trade. The entry into this type of trade will often involve placing a market order to enter the trade as soon as price spikes above the PZT AUTOTREND line. Having a quick reaction to enter a scalp position is critical and may mean the difference in a winning or losing trade. 2. The PZT POWER PIVOT trigger level is another means of entering into a scalp. Traders should use caution with this method, however, as price will often retrace several ticks back from these strong areas of support and resistance if there is not sufficient initial short-term momentum. Scalpers may elect to look at the PZT TICK COUNTDOWN indicator to judge the immediate trading volume. This can be achieved by noting how fast the numbers of the PZT TICK COUNTDOWN scroll by. As these numbers pass faster (suggesting greater momentum) the probability of a successful PZT POWER PIVOT trigger scalp entry increase. 10

11 Tips for using HPIA Indicators Use the included workspaces as a starting point for developing individual preferences. Double right click on any chart to enlarge it to full screen. Double right click a second time to return to the original workspace formatting. Single right click while the cursor is over an indicator and select format to quickly change the inputs on that indicator. Set pointer tracking to workspace [Drawing Menu Pointer Tracking Workspace] to allow the cursor to automatically go to the same spot on all charts within in a workspace. In each intraday workspace, charts may be linked to the quote screen by left clicking on the colored tab on the top right edge of the window and choosing a symbol link color. This allows all charts to change to the highlighted instrument in the quote window. Recommended articles on using intraday indicators: Jean Folger and Lee Leibfarth [November 2010]. Volatility Indicators: Techniques for Profiting from the Market s Moves. Marketplace Books. Jean Folger and Lee Leibfarth [October 2007]. "Make Money Trading: How to Build a Winning Trading Business," Marketplace Books. Lee Leibfarth [January 2006]. Charting for Day Traders, Futures Magazine. Lee Leibfarth [January 2006]. Developing Your Own Indicators, Technical Analysis of Stocks & Commodities. Lee Leibfarth [March 2006]. "The Automated Daytrader," Technical Analysis of Stocks & Commodities. Lee Leibfarth [August 2006]. Intraday Market Forecasting, Technical Analysis of Stocks & Commodities. Lee Leibfarth [August 2006]. Day Trading with Support and Resistance, Trader s Journal. Jean Folger [September 2006]. Trading as a Business, Futures Magazine. Lee Leibfarth [September 2006]. Trading with and Adaptive Price Zone, Technical Analysis of Stocks & Commodities. Lee Leibfarth [October 2006]. Forecasting Techniques, Active Trader. Lee Leibfarth [November 2006]. Measuring Risk, Technical Analysis of Stocks & Commodities. Jean Folger [December 2006]. Day Trading Then and Now, Futures Magazine. Lee Leibfarth [February 2007]. Tuning Intraday Strategies, Technical Analysis of Stocks & Commodities. Lee Leibfarth [July 2007]. Intraday Hybrid Strategy, Active Trader. Lee Leibfarth [September 2007]. Sharpening a Countertrend Strategy, Active Trader. Lee Leibfarth [February 2008]. Fibonacci Pivot Points, Futures & Options Trader. Lee Leibfarth [August 2008]. Premier Stochastic Oscillator, Technical Analysis of Stocks & Commodities. Lee Leibfarth [August 2008]. "Improving the Three-bar Pullback Pattern," Futures & Options Trader. Lee Leibfarth [March 2009]. "Using Probability as a Guide," Futures & Options Trader. 11

12 Disclaimers All information contained in the PowerZone Trading website, indicators, instructional sessions and literature is for educational purposes only. PowerZone Trading makes no guarantee that you will become a successful trader, even with the best education, tools and guidance. PowerZone Trading does not make any trading recommendations, and nothing should be construed as such. You are responsible for any and all trading activities in which you engage, including any resulting losses. You should consult your broker or financial advisor before placing any trade. PowerZone Trading assumes no responsibility for your trading and investment activities or results. Required USA Government Disclaimers: Futures and Options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site or during instructional sessions. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN ACTUALLY EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN PowerZone Trading, LLC. All Rights Reserved 12