Entry Zones

BarroMetrics Views: Entry Zones

This week I’ll reply to the questions I have received – either to my email or comments here.

ZH raised the questions in the attached doc file. For those who have not read Nature of Trends, I use statistical price and time info as the first filter to position sizing.

Answer:

You have misunderstood what I said in NOT – easy to do, I admit.

Let’s turn the chart you sent me. I have added the black line, labelled 0-1.

The stats I refer to in NOT I use as a first filter to determine position size. The stats you refer to are based on the magnitude of the swing line of the first higher timeframe. If we assume that 60-minutes is your trader’s timeframe, then the black line will represent the 290-minute (EURUSD trading hours/5). If your charting software does not chart 290-minutes, then use the 240-minute.

So, if:

  1. you assess that the trend is down, and
  2. you assess the trend is likely to continue, and
  3. you see sell signal at a zone when
  4. the black line has gone mean -1 one stdev,

then you look add a normal size position.

Where you have misunderstood my comments in NOT is the timeframe to which the passage refers.

If you are applying the time and price windows to the corrective moves in the trader’s timeframe, then normally I’d be looking to trade a normal position size at “mean +1 to mean -0.5” (i.e. normal correction) of the corrective mode. This comment assumes we are seeing, on the first higher timeframe, a swing magnitude that is normal, or in some cases, less than normal.

It is very important to appreciate that I do not use the swing magnitude of the first higher timeframe to determine if I should take a  trade. I first determine if current conditions qualify as a trade, and only if so, do I determine position size: ‘below normal’, ‘normal’ or ‘above normal’.

As for the second question: you need to calculate impulse and corrective stats separately. Combining them in one population will not produce the results you seek.

zh-2013-07-14.doc

zh-2013-07-14.png

9 thoughts on “Entry Zones”

  1. Thank you for answering my queries. It clarifies this part of the NOT book and allow me the chance ( I hope) to really understand it.

  2. Hi Ray,
    a. Are EUR/USD prices truly Normally Distributed?

    If they are not, are those Regression Analysis, Standard Deviations & Correlations concepts still really meaningful & useful?

    b. Andrea Unger trades Breakout, he taught daily EUR/USD Breakout strategies (with filters).

    Could I summarize that you trade Breakout too
    – Breakout of the Entry Zones (when the entries are right)?

  3. Hi Paul

    a) No

    It depends entirely on how you calculate the stats. If you Pete Steidlmayer’s approach, then yes, absolutely.

    b) I am not familiar with Unger’s works. Anytime you enter on stop, you are using a ‘breakout’ approach for ENTRY. But this is very different to using breakout to not only enter but also to qualify a trade. Studies to date show that the latter will make money around 30% of the time.

  4. Hi Paul

    There is material on Market Profile. Unfortunately most now follow Don Jones’s approach (e.g. Tom Alexander) rather than Pete’s.

    As far as mathematically proven…I don’t know what that means.

  5. Hi Ray,
    a. Is it possible that you do a write-up on Pete Steidlmayer’s approach?

    I am very very “amazed” that when EUR/USD prices are not truly Normally Distributed, many famous traders trade with Bollinger Bands!

    ATR x 1, or 2, or … would be more suitable?

    b. It could be proven that for the Normal Distribution, 1 Standard Deviation range accounts for 68.27 percent of the set …

    ONLY if it is Normally Distributed!

  6. Hi Paul

    a) Probably not. But MarketDelta carries an article on Pete’s methods at:

    http://support.marketdelta.com/entries/114777-How-Is-The-Value-Area-Calculated-for-the-Footprint-and-Market-Profile-Charts.

    Note that Method A was the original method. I am using Menthod B.

    b) I can’t comment on why others use BB.

    I used to use it because it gave me a potential way of identifying overbought in a ‘normal’ trending market.

    Experientially, in a normal trend, prices at the top of the BB have a strong probability of moving to the moving average.

    The same for the bottom band.

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