For me, the two critical elements for entry are:
- What is the trend? Is it likely to continue or change? This gives me my strategy i.e. it tells me if I am to be a buyer or seller.
- Is the market in a zone where I want to take the trade? Unless there is a zone, I by-pass the trade.
Do I miss trades because they fail to get into a zone? Sure!
But think on this: that question is like asking will I always catch a move? Of course I won’t and I am OK with that. What is important is that the trades I do catch occur in an environment where I can limit my loss if the market fails to act in the way I think it will.
Once I have my zone, I look for chart patterns that tell me a zone has held and/or the trend has re-asserted it itself (or has changed) and tells me I should initiate the trade. My favourite patterns I call Negative Development.
Negative Developments patterns are robust patterns that fail. For example. Let’s say I am trading the 18-day swing (monthly trend) and that it is presently correcting on the 5-d (weekly trend). The market breaks a swing low but instead of continuing with the downtrend, the market re-enters congestion. The ‘failed swing low’ is the setup and the entry is the close back into congestion. The failed breach and re-entry that occurred in a zone, tell me that there is a high probability that 18-d trend is about to resume.
A different sort of Negative Development pattern took place at the S&P low on 11/27/2007.
The Ray Wave indicated that the high probability scenario was the Market Profile bottom 3rd standard deviation (the zone I call the Primary Buy Zone in the Nature of Trends). Figure 1 provides the perspective for the move.
Figure 1: S&P Daily Yearly, Quarterly and Monthly Trends
Figure 2 shows the Market Profile zone.
FIGURE 2: S&P Zones
The zone ran from 1370.60 (low at B) to 1411.60 basis cash S&P. On November 26 2007, the S&P moved into the zone with a bar that was above average in volume and range. Indeed its volume and range exceeded mean +2 standard deviations. To me that meant that after a one-day pause, the market should form a lower low and lower high bar. More importantly, we ought not see the market breach the high of November 26.
The market did form an inside bar the next day. Given the range and volume of November 26, normally the market would have been expected to break November 26 low on November 28. If instead it formed a buying conviction bar up closing above the high of November 26, we’d have negative development setup and an entry.
This sort of Negative Development pattern I call the “Big Bar Down, No Follow Thru” Buy.