End of Development? Nature of Trends Alogorithm

Baz’s questions on this subject stimulated more than a dozen e-mails! Thanks Baz (G).

Whenever I receive a question like this i.e. a question from a reader of Nature of Trends, I am placed in a quandary. On the one hand, I don’t want to answer the same question a dozen times and I do want to assist readers. On the other, I want to be fair to the buyers of the book. If I describe the contents of the book in detail in a free blog, there would be no need to for anyone to buy the book.

So, I make a decision on a situation-by-situation basis.

I’ll go into detail for this question seeing the requests I have received.

Figure 1 sets the context of the problem. After an Initial Price Movement (IPM), XA, the market forms a complex correction. After the high at C is formed, the question is posed: is there any way of determining whether a breakout is likely to valid or false.

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FIGURE 1 Context of Problem

The algorithm in Nature of Trends is one answer to the problem. Last night’s blog (http://tradingsuccess.com/blog/market-profile-terminolgy-360.html) laid out the theoretical underpinnings; tonight I’ll lay out a step-by-step example.

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FIGURE Market Profile ADUS

Figure 2 shows that the IPM takes 27 days. The POC hat 11 hits – 11/27= .4074. The current retracement of the IPM is 0.5523.

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FIGURE 3 Excel

Now let’s turn to Figure 3: the Excel sheet containing the algorithm. The ideal ratio (.8 x .5 = .40). In Column ‘G’, I type in the time ratio .4074; in Column ‘H’, I type in the price retracement, .5523. I then multiply the two giving a product of .2250.

By comparing the current ratio with the ideal, we have a rating that can be turned into a probability assessment, a probability assessment that answers the question: what is the likelihood that development has completed? With that information, a trader can develop strategies to protect himself against a false breakout. The assumption is a breakout is unlikely to be false if development has completed.

In this example, there is a 56% probability that development has completed i.e. ‘normal’ development has completed. All things being equal, in ‘Normal’ development, I accept as valid, the breakout in the direction of the previous impulse move (in Figure 3’s case, acceptance above ‘A’ ) and, as suspect, the breakout against the previous impulse move (in Figure 3’s case acceptance below ‘B’) . This is based on the maxim that ‘all things being equal, a market will exit congestion in the direction of the prior trend’.

The key words of course, are: “all things being equal”. As is the case with all my analysis, context is the critical element. I say this because I don’t want to be read as suggesting today’s breakout in the AUDUSD is valid.

12 thoughts on “End of Development? Nature of Trends Alogorithm”

  1. Thanks Ray,Thats what makes this such an outstanding blog site,is the fact you do go to considerable effort to help people.I am still digesting the relevant data but prima facie it seems a very handy “secondary” tool.Also i think it might be interesting to explore the deviations of Point of Control as a way of placing stop losses statistically close as to maximise profit or risk management of trade. cheers Baz

  2. Welcome Baz.

    Better to work on the standard deviation away from the top and bottom of value.

    In short: how far from the VA can prices go and still snap back to the other side of the VA before prices move to the Primary Zone nearest it.

    For example: How far can prices go above the top of value and still return to the bottom of value without first going to the Primary Sell Zone.

    The POC is a magnet that draws prices but when we did some research we found the stdev to be so wide as not to provide meaningful material. The top and bottom of VA did provide some valuable info.

  3. Thanks Ray, i presume this data influenced the extension plus 20 rule for a stop.Thanks again for your help,cheers Baz

  4. Hi Rob

    I am using Daily data. Do each day is one letter. I assume since you are using 1440M that accounts for the extra TPOs.

  5. Hi, would u mean to say that the tip and bottom prices of the value areas are of more importance than the POC? as the range of value area is so large that it can just zig zag and do nothing?

    Thanks

  6. Hello. Could u advise if the tip and bottom prices of value areas are of more importance than the POC since effectively if we take positions at the previous day POC, we would be subject to whip saws as it rotates ard there?

    Thanks

  7. Essentially i am always in a dilemma if i shd enter prices at top of the HVA or low of LVA in anticaption of a breakout from the previous day value area or enter trades at POC of the previous day

  8. Hi Gary

    Let’s take the easy question first.

    Entering at the POC is not the best trade location. Why I say this will be made clear in tonight’s blog.

    Regarding the other question, and speaking strictly for myself: whether I enter responsively at the HVA (short) or (LVA) long or enter as a breakout (long HVA) or (short LVA) depends on:

    a) my context i.e. is the short term trend up or down and is it likely to continue or change; and

    b) do the probs today favour a one-timeframe or rotational day

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