Volume Clues Direction II

BarroMetrics Views: Volume Clues Direction

Let’s take yesterday’s info and apply it to the trade I made on the S&P.

Figure 1 shows the classic Market Delta footprint. On Feb 22, the E-mini made a new high. Note the buying volume (9687) which is below normal and raises a red flag that the upmove may be stalling. When this volume configuration occurs, I want to see strong upside continuation, and I take steps to protect my long position. As a result, I raised my initial stop to 1924.

On Feb 23, my longs are stopped out

The 2/23 Footprint shows strong selling volume, but the range is below normal (this suggests there is buying support). After considering the Profile and intraday charts, I took the view that the ES would most likely break. But, the strong selling volume and below normal range caused me to stand aside.

On 2/24,  the ES breaks to 1886 and then rallies to close on its highs. Buying volume is normal as is the range suggesting continuation. However, for me, the ES has to clear 1946 before I’d be willing to buy.  The issue is whether demand is being absorbed by supply (if so, move down to follow), or whether supply is being absorbed by demand (if so, up move to follow).

What’s important here, is the Footprint allowed me to exit my longs for a small profit. Had I not raised my stop, I would have been stopped out, only to see the ES reverse.

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FIGURE 1 ES MarketDelta Classic Footprint

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FIGURE 2 ES 18-day Swing

Volume Clues Direction

BarroMetrics Views: Volume Clues Direction

I received a request to explain how I use Market Delta charts.

OK. First some context.

My strategy is mainly based on the ideas of Richard Wyckoff and Pete Steidlmayer (Market Profile) with support from the Ray Wave (my version of the Elliott Wave – I like to call RW and objective EW).

One of the ideas propounded by Wyckoff and Steidlmayer is the relationship between volume and range provide reliable guides to the future direction of the markets.

Here’s a summary:

  1. Normal Range and volume accompanied by the appropriate bar, suggest continuation. For example, normal range and volume where a bar opens at or below the bottom 25% of its range and closes at or above the top 25% of the day’s range suggests continuation. Or
  2. Below Normal Range with above normal volume suggests a reversal in the making especially if the bar shows a directional bias. For example, a bar that exhibits the open and close characteristics suggest a reversal rather than a continuation of the upmove. 

Market Delta adds a dimension to the range-volume analysis.

Market Delta provides a DNA of a bar. Let me explain. Wyckoff and Steidlmayer, if they saw a directional bar, that the total volume can be attributed according to the direction of the bar. The Market Delta footprint indicates whether the volume was bullish or bearish; and the amount of volume that was bullish or bearish.

My rules for interpreting Delta bars to signal change of direction:

  1. If the bar shows bullish conviction, especially if it moves to new highs, and the volume for the period is bearish, expect a reversal.  
  2. If the bar shows bullish conviction, especially if it moves to new highs, and the volume for the period shows below average buying volume, watch for a reversal signal in the next three periods.
  3. A conviction bar that shows excessive range and excessive supporting volume may signal a buying climax – a Buying climax suggests the start of a congestion range. So, if the trader has been using trending strategies, he knows to change them. 

More tomorrow.

Change in Trend Patterns

BarroMetrics Views: Change in Trend Patterns

An email asked:

“What do you mean by a change in trend pattern?”

(I said in yesterday’s video blog, that there was no 18-day swing change in trend pattern evident).

I use the Wyckoff change in trend patterns and have added one of my own; so, I have four in my trading arsenal.  There can be no trend change without at least one of the patterns being present.

Figure 1 is the NZDUSD. The first pattern is the ‘Spring’, changing the trend from down to up; the second is a ‘Normal’ changing the trend from up to down.

Usually there is a re-test, especially if it is a ‘Normal’. The test usually takes place within the Primary Zone of the congestion, but can go as high as the 27.6% retracement zone – as it did in Figure 2. There was no retest in Figure 1. A ‘no retest’ would have been rare if the pattern has been a ‘Normal’. In a ‘Spring’, a lack of a retest is more common.

Figure 2 is the current price action of the 18-day. As you can see, no change in trend pattern in sight for the 18-day.

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FIGURE 1 18-day CIT Patterns

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FIGURE 2 18-day Current

Rule of 4

BarroMetrics Views: Rule of 4

I’ll was gong to have a look at Gold today, but, I’ll leave it till tomorrow.

Today, I want to address a response  to some emails.

On Feb 4, I did a presentation for MacQuarie Securities, Singapore. In it, I made reference to the Rule of 4. I have received a number of emails asking me to give another example.

What is the Rule of 4? It’s an idea I first read in one of Gann’s books. The fourth attempt at a support or resistance should result in a breakout; failure to do so, means the opposite support or resistance will be tested and will give way. 

Figure 1 is the S&P example I gave at the presentation. (The S&P example is the 5-D sideways congestion I mentioned in yesterday’s blog). In Figure 1, I have marked in the three lows and possible third high.

What I said in the presentation was: 

Given the low at ‘3’, I expected an attempt at the high at ‘2’ to be challenged and to give way; BUT if the high at ‘2’ held, then we could expect the low at ‘3’ to give way because of the Rule of Four. (BTW, for those who have done the Barros Swing course, did you recognise the Negative Development buy signal at 3)?

 Figure 2 is another example of the rule in action. 

In Figure 2, I have marked in the zones: 

  1. Primary Buy and Sell Zone (PBZ, PSZ)
  2.         Maximum Extensions (ME)
  3.        Value Area High (VAH) and Value Area Low (VAL)  
  4.        The minimum price (Min) needed to complete the move from PBZ to PSZ and vice versa.

Let’s walk through how the highs and lows were formed as it is instructive.

  • A swing high and swing low are formed at 1.
  • The low at 1 is breached by the low at 2. Note that the low at 2 gives the same Negative Development Buy signal as the one in the S&P.  The buy signal suggests that high at 2 will give way. 
  • The high at 3 generates a Negative Development sell signal that fails. I’d have expected the low at 2 to be breached. Instead, prices turn up at the ‘minimum price level’ , without even touching the PBZ. Normally I’d see this a sign of strength that would suggest a breach of 3 and the probably start of a 5-D uptrend. 
  • This analysis would be supported by the fact that a test of the swing high at 3 would invoke the Rule of Four – this would give weight to the upside breakout possibility.
  • The failure of to reach even the PSZ suggests weakness and the Rule of Four suggests a downside breakout that has not been negated by Feb 11’s price action. This happens if prices touch the MIN at .7831.

Hope this clears any confusion.

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FIGURE 1 S&P

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FIGURE 2 AUDUSD

A Worthwhile Habit II

BarroMetrics Views: A Worthwhile Habit II

Today I am going to show my thought processes on the SNB decision. The best way to do this is to reproduce some of the Evernote entries:

2014-12-05: Saw Mario’s interview. Seems clear that he is hell bent on a European QE. Question is whether the EC rules and Germany will acquiesce. Keep eye on this.

2014-31: assessment of Europe.

  • Germany seems OK but rest of Europe especially France and Italy are heading South. Given nature of economic thought, QE is on the cards.
  • What will this mean? Euro down. Greece force to toe the line? What about rise of left? Impact on CHF? Will the cap be too expensive? Not enough info but need to keep these questions in mind for 2015.
  • When will the case initiated on Oct 14 against QE be heard? Cannot find date for decision.

2015-01-17: It seems clear that Europe is in the grips of a major recession and that Draghi, politically, will be able to overcome the Germans objections. The only barrier will be the Euro Court decision. If he receives its approval then all systems go. What effect will this have?

Foreseeable – expected event: the EURUSD will fall.

Less foreseeable – unexpected event? If QE starts, this will place an enormous burden on the Swiss cap. I think it unlikely they will keep it in place. I would expect the CHF to rally against the USD and other currencies if the cap is removed.

Action: should I short the USDCHF? Too much of a risk for me. If the Courts rule against Draghi, the EUR will rally and may take the the CHF with it. If it rules in favour, the CHF will rally. Too much of a lottery for me. And since my AUDUSD is signaling the possible end of the R2 move, time to exit.

For new positions, will wait till after ECB’s meeting on Thurs  Jan 22.

—————-

I thought I’d end this blog with the headwinds  I see on the horizon:

  1. ECB’s plans for QE.
  2. China’s growth
  3. FACTA
  4. US Congress vs the President
  5. Islamic Terrorism, in particular Iran’s nuclear program.
  6. European Court of Justice decision on whether to ratify the decision by Pedro Cruz Villalón, a European Court of Justice (ECJ) advocate general. Note that the review is due in April to June 2015. And note that the advocate general provided an avenue for the Court to reverse his decision without appearing to do so. He said in his decision:

“The ECB must give a proper account of the reasons for adopting … the OMT programme, identifying clearly and precisely the extraordinary circumstances that justify the measure”.

The ECJ could merely say that the ECB had failed to discharge this duty and reverse Villalon.

I am not saying it will do this; in fact, the ECJ is expected to rubber stamp. But, in this exercise we are considering what is possible and its effects if it happens.

    A Worthwhile Habit

    BarroMetrics Views: A Worthwhile Habit

    For those of whose who were not short the CHF, say a prayer of gratitude…we were lucky…we did not join so many others in financial devastation: ‘there but  for the grace of God, go I’. For those who were long the CHF, congrats on the result.

    Today, I am going to talk about a habit that has placed luck on my side…so far it has allowed me to escape the ravages of failed brokers – in some cases withdrawing my funds before the crash; in others, making a conscious decision to avoid the broker.

    The story starts long before I started trading; it starts, in fact, when I was in my teens. In those days, I was an avid fan of JFK. I read that he had taken the Evelyn Woods Reading Dynamics Course and that he read a number papers to start the day. So, I took the course, (still one of the best reading courses I have ever taken), and started reading the daily papers to start my day.

    Shortly after that became a habit, I read that cutting out articles of interest, and creating a scrapbook, was an ideal source of creativity. So, I added that to the habit.

    Fast forward twenty years later to a course on Market Profile taught by Pete Steidlmayer. Peter taught that there were three types of fundamentals:

    1. Expected events: events that are events known and correctly anticipated by market participants. As a result, the underlying structure (which he called value) and price moved in the same direction. This results in a congestion market.
    2. Surprise events: events that happen out of the blue, ‘acts of God’ if you will e.g. Chernobyl  Here price move away from value only to return to value once the crisis is over.
    3. Unexpected events: events that are available to market participants; but these events are either ignored or incorrectly interpreted. Value moves away from price. When the events are recognised for their true impact, price moves to value, usually in a dramatic manner.

    I added the lesson to my morning regime. So, the habit now is:

    • to read news events (this includes certain sites and email updates),
    • enter or snag a summary into Evernote (rather than cut and paste into a scrapbook), and
    • for each item of interest:
      1. rate the event as either expected, surprise or unexpected;
      2. ask what is the probable impact on currencies, gold, stock indices and interest rates; and
      3. assess the probability of the event’s occurrence.

        The process may sound like a lot of work, but so far, at least, it has kept me out of trouble. Tomorrow, I’ll show the process in action with the Swiss National Bank announcement.

        A USDCAD Analysis

        BarroMetricsViews: A USDCAD Analysis

        Sorin raised a question (see his question in USD Topping?) whose answer may be of benefit to all.

        My answer:

        Here’s how my mind works. When I look at your chart (Figure 1), the first question that pops up is: what timeframe are you trading? 

        If the 13w, I’d look at the 12-m to place the price action into context.

        But, let’s say that the chart is all the info I have.

        Then, I’d still like to set the context; so, the next question: B has taken out the highs of the prior downtrend. So, what is the current structure?

        I’d label:

        1. A as a selling climax,
        2. B as the automatic reaction and
        3.  C as a test. 

        This analysis helps me identify the boundaries of congestion, (AB) which in turn helps me identify:

        • the Primary Buy and Primary Sell,
        • the maximum extensions,
        • the likely top and bottom of value and
        • the minimum targets 78.6% and 21.4% retracement zones. </p>

        Let’s now look at the smaller picture: I’d see the price action within the blue rectangle as showing the last shot at selling, and it fails. 

        So:

        • At (1 in Figure 1), we have a breakout and retest in the 18-d or 5d. The breakout is clue we are about to see a move to the PSZ; 
        • at (2) we have a 13-w breakout and retest, a confirmation we are probably seeing a move to the PSZ.

        Your chart does not show the possible value area. My black lines represent the two possible levels. Acceptance above the upper line, will suggest a minimum move to at least the 78.6% of AB and probably the PSZ.

        So, to answer your question:

        1. The current 13-w trend is probably SW (with the swing up at C). I would therefore be looking for a turn down at ‘D’ (still to be formed). 
        2. We are currently seeing an upmove to form ‘D’. 

        The tools not in Nature of Trend (NOT) that are critical to the analysis:

        • The development formula that provides clue on the duration of the SW move. 

        1. If the formula indicates that the SW move is ‘long in the tooth’, then I’d be less confident of a turn down at a potential ‘D’ – raising the prospect of an upside breakout. 
        2. If the formula suggests development is incomplete, then I’d be more confident that we’ll form ‘D’ and see a turn down from that level i.e. we’ll see a move to the PBZ.
        • Geometric Fann Angles: The current 13-w swing is in a R2 or R3 move. The GFA will provide the tools to warn if the directional move is losing its momentum, maintaining it or accelerating. 

        The info above helps in determining if we’ll see confirmation of the SW structure with a turn down at D; or we will see an upside breakout.

        • if we do see breakout then we need to determine whether the breakout will successful or not  – with a breakout, we are now in a different stage of the Wyckoff model.

        Hope this helps.

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        FIGURE 1

        Left Brain Thinking Conclusion

        BarroMetrics Views: Left Brain Thinking Conclusion

        As a rule-based discretionary trader, I use my position sizing to reflect my risk assessment of the current structure. In turn the position sizing is also determined by whether I am seeking to manage the first, second or last third. Each has its own considerations and objectives.

        Take the AUDUSD as an example.

        I have only last thirds left.

        With the last third, my general strategy is to bring the stop to breakeven and exit via a trailing stop; or exit the position on a change in trend pattern in my trader’s time frame. Sometimes the market does not make its intention clear. So, to the extent I am unsure, I reduce my position size.

        In the AUDUSD, I assess we are at 12-month swing and 13-swing support. In addition, Figure 1 shows the Ray Wave count with a structure that says we may see a correction from the high at {c} (0.9350) to the current lows at 0.8032. A normal retracement would take me to the zone 0.8850 to 0.8550. There is no way I would ride my last thirds from 0.8032 to .8550, let alone .8850. I’d expect to have a Change in Trend pattern somewhere along the way.

        The Ray Wave provides an early warning signal.

        Yesterday’s move to 0.8254 (better would have been a move above 0.8300) suggests the possibility that the current down move is over. Normally we’d see a sideways period, that is followed by a change in trend. But, sometimes we see a V-bottom type pattern.

        Given that the down move has been thrown into doubt, I lightened my short position at an average price of around 0.8257. I will exit the balance on a change in trend pattern or on any daily close above 0.8356.

        I like managing a trade in this way. it suits my personality and attains my trading objectives.

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        FIGURE 1 AUDUSD

        Left Brain Thinking IV

        BarroMetrics Views: Left Brain Thinking IV

        Shame on me. For Left Brain III, I got lazy, did a minimum blog, and assumed all would be able to follow my line of thought. Thank goodness for readers like Sorin and Paul – they keep me focused.

        For context to this piece, I’ll leave it to you to read Left Brain Thinking and Left Brain  Thinking II. Here, I’ll provide a detailed outline to my thinking.

        To understand the approach, you need to bear in mind the functions of  my Rule of 3:

        1. The first third exit covers the loss on the remaining two-thirds. It’s function is purely defensive. If your approach is similar to mine, after entry, the trade tends to move in my favour even if subsequently stopped out. The first third seeks to make use of this pattern.
        2. The second third exit is the core profit. If I am to make money, it will be on the exit of this third.
        3. The last third, a friend once called, the ‘Blue Sky’ contract. It seeks to capture those moves that are greater than I expect. Often these moves fail to provide a location for safe entry; so, holding the last third removes much of the pressure.

        OK, lets’ turn to the series…..

        The point I was seeking to make was to illustrate the flaw so prevalent the plans of retail traders  (at least among those whom I have coached): they treat their profit target on an all or nothing basis i.e stop out or profit with nothing in between.

        This is a fatal flaw – whether you are a discretionary rule-based trader or mechanical trader. If the latter, the omission is a trailing stop rule once the instrument moves into the Expectancy Ratio Profit Zone.

        Here I am addressing the discussion Paul and I had. I agree that rule-based traders need to follow their rules; but that does not mean they cannot amend their rules should they see a weakness that needs correction – failing to have a trailing stop in this context would be such a weakness.

        I use the Expectancy Ratio profit zone  to answer the question: when is there enough profit in a trade to say that we need to protect it: if we take too early, we are failing to let our profits run; if we take too late, we are guilty of allowing a profit turn to a loss or too small a profit.

        In Left Brain  Thinking II, I referred you to an explanation on the calculation and use of the The Expectancy Ratio. I’ll leave it to you to read the piece before turning to the track records of Traders A &B (Figure 1).

        Starting from C1:

        • Col C is the current low of the move.
        • Col D is the entry
        • Col E is the initial stop
        • Col F is the stop range (entry – stop)
        • Col G is the 2x stop range for the 1st third (not needed in this example).
        • Col H is the 1st third exit price  (not needed in this example).
        • Col I is the trader defined 2nd third profit target exit price.
        • Col J is the profit range.
        • Col L is the R:R (profit range/stop range)
        • Col M is the R:R required by the ExpRatio. We’ll be using this in our assessment of the ‘moat’ for the second third.
        • Col N is the ‘moat’ i.e. the number of points from the low that trader has before having to take profits  i.e. Trader B has a ‘moat 69’ points from 0.8034, i.e. at .8103, Trader B must take profits or risk losing money long-term even if he exits at a profitable price BUT above .8103.
        • Col O is the calculation of the price, in this case, .8103.
        • Col R win rate
        • Col S loss rate
        • Col T Avg $ win and
        • Col U Avg $ loss.
        • Col ExpReturn  (not needed in this example)
        • Col X ExpRatio: Notice that both Trader A & B have the same ratio by adjusting the R:R to allow for Trader’s A better win rate.

        What Figure 1 tells us is allowing for the win rate and avg $win and avg $loss, both Traders have a 20% edge. Note that for the example, the winrate:lossrate is taken from the Traders’ own statistics.

        With that in mind, let’s apply the ExpRatio.

        We know that:

        • the trade’s R:R is 2.15:1.
        • we know that Trader B’s MUST have Reward:Risk is 2:1.
        • Subtracting (trade’s R:R) 2.15 – 2:00 (Must Have R:R)= .15 (Moat).

        By multiplying the moat to the profit range and adding it to the low of the move, we have the maximum allowable retracement to stay with the R:R of 2:1.

        Sorin asked why a R:R 2:1?

        For the purposes of the example I have assumed that both traders want a 0.20% edge. After that I just adjusted the Col V inputs until I had the 0.20% edge. I am sure that there is a maths formula that covers the calculation. But, since I don’t know it, I used the trial and error method.

        Turning now to Andrea Unger. In reply to Paul’s insight that Andrea does not use stops….I made the comment that other well-known traders. So?

        My point is there has to be some quantification of what is ‘near’ enough to our price targets. Once that is defined, we can then create strategies to ensure we take second third profits close to that required by the Expectancy Ratio.

        Final comments……

        …For those who have done my courses, I remind you that the Rule of 3 is best applied to end-of-day trading. It is less useful when day trading. For day-trading, you are better off using expected range of the day….but that is another story.

        …..Finally I posted today  because on Monday I want to talk about the S&P.

        expratio.jpg

        FIGURE 1

        Left Brain Thinking III

        BarroMetrics Views: Left Brain Thinking III

        Yesterday I said that Trader B had to exit immediately. Why?

        Figure 1 shows that, given his win rate, his required reward:risk return (2:1) is secured at 0.8103; in our example this was where the AUDUSD was trading. So, he had no safety moat; and with the AUDUSD now trading at long-term support, a bounce has to be included in the possible scenarios – especially with the view I have taken on the FOMC (see blog later tonight around 8:00 PM HK time).

        For risk management reasons, then, Trader B needs to exit now.

        Trader A on the other hand, given his win rate, can afford  a bounce of 520 pips. That being the case, Trader A can review his technicals to see where he can place his trailing stop in an attempt to maximise his core profit exit. As long as the trailing stop is below .8555, he will secure his targeted outcome, even if a bounce occurs.

        So there you have it. Feel to comment.

        expratio.png

        FIGURE 1