Thinking Man s Trader Advanced Trader s Package Trading is a three dimensional world and the Advanced Trader s Package covers all three. Dimension three: Market Dynamics, conditions and change of conditions %C (Original) and the current %C %CADX TMT-Tip-of Show me study %BB-VIX, famous for picking the 2007 peak in Dow Jones. {needs CBOE data} TMT Historical Volatility. One workspace is provided that includes separate windows for every indicator listed above. Each window is a primary example of the trade plans at work. You should use the copy-window/ paste-window into your own workspaces and formatted to suit your needs. Any examples of the trade plan giving signals as a plug in strategy is for demonstration, the strategy file itself is not included in any of the packages. Strategy Traders are encouraged to contact TMT directly. The two other dimensions recommend to use with TMT s Market Dynamics are: Dimension one: Day Trader S&R zones and Short Term / Intermediate Term S&R fixed zones. (S&R) Day Trader (intra-day) fixed for day S&R zones. Same formula used by my well known S&P Day Breaker strategy Day Trader Scalper price targets and risk management prices. Daily, Weekly and Monthly S&R zones Dimension two: Market Direction and Momentum %BB-Oscillator dynamic support and resistance %BB-Oscillator for data2 dynamic support and resistance for top/down analysis. %BB-Reflex 1
Market Dynamics and change: The %C Solution a market condition indicator. Until now one of the longest lived and most popular trend indicators around has always been ADX which stands for Average Directional Index, but as I will outline here this index has it's shortcomings. One of it's major shortcomings is that it is slow to reflect the momentum of a trend. This indicator needs to get above thirty or thirty five before a trader can have confidence in the dynamics of the trend. Furthermore, if this indicator turns lower it doesn't imply that the trend has reversed. The %C Indicator which stands for % contraction is much faster than ADX and has some absolute boundaries, it is rare for this indicator to get below thirty and rare for it to get above seventy. Besides having relative boundaries it also cycles faster than ADX for trading purposes. The development of a profitable trading system is based on how you understand the markets. The essence of that understanding is the notion of the Holy Grail or the perfect trading system. Obviously, we know perfection is an idea, not a reality, but it is the concept and goal that are important. By definition, to be profitable all systems must catch a trend in the direction of the position, and all systems must enter on a breakout or a reaction. That is simple enough. Furthermore, empirical study reveals that breakouts - of some proportion - lead to more trends in the direction of the breakout most of the time. A good part of the remainder of the time, the breakouts are faded, and should be viewed as reactions. Such a condition can be called a trading range. However, it is important to remember that ranges are not limited to a horizontal direction. They can be up or down as well. In addition to trading range and breakout markets, there is a third major market condition that can exist and should be avoided for a system to be profitable: flat or dead markets. Pull up any chart of any bar size and place the price channel indicator, which is standard with TradeStation around the bar chart. Your empirical study should reveal that there are only three market conditions: 1) Flat or dead markets, a condition for floor traders in which prices rarely get to either side of the channel band and in which the pattern from open to close is seldom repeated in the next bar; 2) A tradable range, in which each side of the channel is a touch off for a reversal of an inside and trend, and suitable for desk traders. Direction from open to close and from bar to bar is consistent from one side of the channel to the other; 3) Dynamic conditions, in which breakouts outside the range get carryover in the direction of the breakout. This condition is suitable for desk traders to take advantage of. Being able to predict what condition the market is in and when it is about to change allows you to know whether you should stand aside the market when it is dead, or fade the breaks (enter on reactions) when the market is locked in a range or go in the direction of the breakouts when conditions have turned dynamic. That, in large part, is the essence of the Holy Grail: having the ability, the indicator, to call market conditions. Direction, therefore, becomes a secondary consideration. The Market Dynamics background seen in the right hand window reflects one of four rules we use in Market Dynamics, when %C-Original is spiked above 4.5 and TMT s Historical Volatility is very low, below 35, it is a leading sign for a down turn. 2
The Dow & Co. set up as such today. {April 30, 2015} The set up mid-september of last year was similar compared to today: %C spiking and TMT s historical volatility below 35. Please note the lead time and the head fake before the decline. Rule: To find a leading indication, look to the leaders. Below is the TS workspace on the leading stock indices, which are off shore the USA. The DAX two weeks ago failed to hold above its IT resistance. You can insert your %BB-Osc on the DAX to see it has broken down below its lowest threshold, which is called a momentum surge, a negative calling for more decline. The higher steps of IT fixed S&R define the IT trend as up, leading to a potential set up for entry, if prices get into fixed support, early this first week of May. The market dynamics indicators %C and Hist.-Volt., both support more decline, near term. The Nikkei waited to break lower until this past week with the move below 19,826, this is a signal of an IT failure. It is a standalone short entry for the IT trader, on the move below price at inside resistance based only on IF fixed S&R. ST %BB-Osc. is set up for entry long or short and the clear IT trend is up. %C market dynamics call for increased volatility, which favours a lower market. Keep in mind that for these two relatively strong markets the COT (change of trend) is like a big ship turning in the ocean, it may take some time to pick up momentum, if a multi-month change is being put in place. The cross currents are easy to see daily with each major index taking the lead on any single day, they are rarely in step, this year. 3
%C-Market Dynamics rule: The Percent C-Tip Off show me study is a leading indicator. When you see the WHITE dot, the trend has been forceful or dynamic for some time but it is now time to expect a V shaped bottom or an inverted V shape top. A helpful little tool for taking profits, a unique way not based on price targets and not based on money targets. Rather it is based on objective market conditions. With the same tool, when you see red dots, draw a box around the nearby adjacent bars to see the trading range and expect the sideways congestions area to change into a trend. I mentioned above one of four rules TMTs use with the set of %C Market Dynamic Tools. Similar to the stock market example, you can see in mid-2014 when %C-Original spikes above 4.5 and TMT Historical Volatility is below 35, it is calling for a change to a forceful downtrend. Another one of the hard and fast rule is when %C-Original is high above 4.5 and TMT Historical Volatility is high above 70 expect a change to an uptrend. In the above chart you can see how the IT fixed S&R zones have been the trading range for Crude Oil after it ended its dynamic downtrend; plus you can see how %BB-OSC moved out of support zone trending higher to lead the way. The reversal two weeks ago by Crude was an IT buy signal. When prices enter into IT resistance, profits should be taken. Ditto on the Euro. 4
Day Trader can use the same patterns and rules. You may recall the same chart from a previous TASC newsletter. This chart of the day session mini S&P shows set ups TMT s hard and fast rules based on these key indicators. One of the setups is %BB-VIX above its upper threshold (.60) the previous day where on the open of the current day, a higher gap open generates a breakout based on %BB-Osc its big move above.80. So the day preceding %BB-VIX sees a peaking in volatility and the next day the higher gap open leads to a breakout by %BB-Oscillator calling for higher prices for the day. Entry is on the open and exit is on the close. On the 19 th and 20t two fine examples. The set up on the 16 th of April is the flip side of it, with %BB-VIX oversold and %CC itself in breaking below outside support on the %BB-Oscillator, calling for a momentum surge. Selling short on the open and exiting MOC, is the trade plan. You can also see the previous day set up when %BB-VIX is overbought and %BB-Oscillator is oversold, therefore on the following day reversal by %BB-Oscillator out of its support zone is a buy for the day. {I inserted arrows to pin point what the text is describing} 5
Here is one easy to see and understand setup, for day traders. Trade Plan: When %C is above 4.5 and TMT s Historical Volatility is below at the end of the day session, look for a rallies to be revrsed, use TMT s intraday S&R to signal short at inside support. Trade Plan: for the long entry, when %C-Original is below 3 and TMT s Historical Volatility is above 70, look for a reversal to up the next day and enter on the break above inside support. 6
Last chart shows the current market environment according to %C-Original and TMT Historical Volatility. TMT's %C is added edge of market dynamics, one of the key filters used to smooth out what is wrong in the equity curve. The set up in this chart is like the conditions of last October going into a sustained period of higher trending prices. The break by %C-Original below the lower threshold is a call for follow through. Another first principle of trading is that bull markets behave very differently than bear markets in terms of character just not direction. Bull markets are sustaining and stubborn with decreasing volatility. The picture above supports that scenario. TMT Trading Tools from the TradingApp Store, Issue No. Five How to combine indicators for higher strike rate and greater confidence. No one indicator used in a vacuum, stand-alone, can be as effective when compared to the use of complementary indicators. Trading is not one-dimensional. The market has price levels, it has rate of change (momentum), it has direction and it has conditions (dynamics). Many of newer traders have already progressed to the point where they are asking some very key questions like: do I trade the breakout or do I fade the breakout? 7
The same question can be asked regarding any type of strategy, from trend following to range trading. To demonstrate how market dynamics are used to set up entry here are two real life trading strategies. Here is a day trading pattern with TMT s Market Dynamics tools %BB-VIX, used with %BB-Oscillator. When BB-VIX is oversold below it lower threshold -, the market is near a high and when BB-VIX is overbought above its upper threshold -, the market is near a low. This chart of the day session mini S&P shows five set ups with four of the five winners. The setup is %BB-VIX above its upper threshold (.60) the previous day and on the open of the current day, the higher gap open generates a breakout based on %BB-Osc its big move above.80. So the day preceding %BB-VIX sees a low in the market, the next day the higher gap open leads to a breakout by %BB-Oscillator calling for higher prices for the day. This would have allowed a long entry on the open and simple exit on the close, else the individual trader s money risk / reward targets can be used. If you have any questions on the difference between money and price, just send me an email. This chart is the set up going into trading today April 1, 2015. Without any reference to trend, fixed S&R or dynamic S&R, here are six set ups for s-t (1 to 5 days) and i-t (6 days to two weeks). 8
Spikes above the upper threshold of %CADX call for a dynamic directional move. TMT s Historical Volatility tips off directions, if it is going up, expect the break to be lower, if it is going down, expect the trend move to be higher. For TMT traders, all we need to know is that there is a real opportunity today just not flat trading. The set up today calls for a dynamic market or range day, if not today Thursday. It favours the bullish side, but we will let the market take us into the trade; and here is how. Great and Many Thanks, Jack F. Cahn, CMT Since 1989, TraderAssist Thinking Man s Trader. Copyright 1989-2015 --Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. 9