Trading The Right Way

Trading should be about practicing safe trading methods, and making money a side effect.

When price made a consolidation level, you would ultimately see a break out.

The break out would be of 2 steps: a pick of a direction and then the break-move that would go undisturbed until reaching an unfinished business level (i.e. an extension).

The important give away here is that the market would show you the direction to proceed in before hand.

In this first example the market upon having reached a high level of consolidation,

  1. makes the opening move
  2. retraces back to the starting point (and a little bit beyond)
  3. makes the break

In this second example the market upon having reached a high level of consolidation,

  1. makes the opening move
  2. retraces back to the starting point (and a little bit beyond)
  3. makes the break

In this third example the market upon having reached a high level of consolidation,

  1. makes a move in the wrong direction
  2. makes a larger move in the opposite direction that also turns out to be the wrong direction upon encountering the extension
  3. returns to the starting point

One thing that can be pointed out immediately is that those first moves that were made in the direction of the future break were larger than 60 pips from the consolidation level, whilst the move in the wrong direction stayed below 60 pips.

Now we have another high charge, but neither of the first two attempts have reached 60+ pips distance, they got to 49 and 49 pips away from the consolidation level before returning to the consolidation level.

Are there any edges here, how could you have made low risk trades here?

You could have utilized the decision distance on the first push away: fade the first move away from the mean at 45, 55 and 65 pips distance for a move back towards the consolidation level. If the opening move went beyond 60 pips, aim for re-capturing only 70% of the way back.

Now let’s look at the hourly continuation divergence-breaks for a second to see if there is a similar theme to be found about how the market breaks out.

How did this breakout happen (eerily similar looks to the fluctuation maximum whip) – the sequence of the events was

  1. makes the opening move
  2. retraces back to the starting point (and a little bit beyond)
  3. makes the break

Of course in this case the break out only got to the end of the next support, and there were other warning signs such as the RSI2 squares: the first RSI2 reading gets the move going, the second winds it down – and there was a beat for a good measure. Yes, on the upside you are showing a starting RSI2 maximum (buying exhaustion).

The point to be had here is that for a safe entry wait until a continuation divergence break, then put a limit order 10 or so pips beyond the divergence point & get ready for a ride.

How? By utilizing the Free Trade concept. Once you are in gains, you put a protective stop loss (perhaps a trailing one) at 1, 2, 3 pips beyond your entry – now you cannot lose on this trade.

For me, the auto trading on my desktop takes care of it all: I set the stop loss to code “2” for a short, and I would get locked in 1 pip after 4 in gains, 3 pips after 8 in gains and then beyond 20 pips the lock in gets pulled at 16 pips behind (1/2 fluctuation size).

I got stopped out with $20 gains right after I could had taken $90 and soon after there was an opportunity to take $140, yet I am happy with what happened: I haven’t lost anything and have dry powder to play the next pullback after the initial move. I practiced disciplined trading. I should had payed more attention to the limitation around the consolidation level (+- 50 pips) and cut the positions for optimum gain. But this is how I can shape myself up to perfect, low risk trades. By noticing the sequence, by acting on them and factoring in the possible obstacles.

The following image shows how multiple continuation divergences can be broken one by one. In this sequence the price came back by 35 pips beyond the break point, but if you only started buying 10 pips+ beyond, your maximum draw down would had been 25 pips, and there was at least 70 pips to be had.

Those 3 upper brown divergence lines got knocked out one by one.

As for sizing, your total risk should little enough that you could withstand a 60 pips move against you – the explanation was on this page earlier. They know well that most retail traders cannot take a 40-pip move against them, hence the fluctuation maximum is somewhere around 42-45 pips.

Below: see how you can use RSI2 in exchange for choppiness exhaustion readings. The (2) did not make it to a 98-read, it only reached 96, so that does not show.

This continuation divergence break, however minute it was, lived.

Cat A signals:
Extension fill (scale in fade)
Full Charge = Reset (no direction)
4H Exhaustion Beat + Forest (high base)
Aim: 80+ pips

Cat B signals:
Cover Longs + overbought Comfort Level (>70)
Cover Shorts + oversold Comfort Level (<30)
Cover Shorts + spike low
Cover Shorts + spike high
Beat of 2nd RSI2 square plot in the same leg
Beat of 15min stochastic bar + Forest
Aim: 60+ pips

Cat C signals:
Continuation divergence break (pullback entry, scale in, trail)
Aim: 50+ pips

The Fluctuation Maximum Whip

3 trades in one.

Trade 1: breaking the continuation divergence low (RSI2) -> 42 pips target (fluctuation maximum) if the 89 Iguana does not cut this short

Trade 2: the stop out = long back beyond the continuation divergence trigger low – examples show 6 to 24 pips slack

Trade 3: new low – I would cover upon seeing a spike

(the EMA restricted trade turned around at the EMA, 32 pips away / fluctuation size)

A continuation divergence as a reminder is a higher low with a more oversold oscillator reading or a lower high with a more overbought oscillator reading.

the upside with less volatility

The 89-Eyed Iguana

(from the series, “The Averages Are Moving”)

Let’s talk about this purple colored reptilian creature for a moment, for to better understand the obstacles, we must.

This Sechuan Leguan aka 89 EMA can spit in you cabbage soup. Not that you would notice it.

The point is that it has an eight ball, which has three sides, square – says on the first triangular side, spike on another and let go on the third.

No, I don’t know how Milligan comes here.

The act of squaring – examples

This squaring that takes place at this EMA is an opportunity to dump excess longs/shorts for 20 to 50 pips better price.

A let go is what follows a squaring – and at times they appear as a combo like on the image above.

Practice their logic on the image below. The theme is squaring, let go and spike always in this sequence, and sometimes you get multiple spikes.

Notice the fresh high before a spike on the upside and a lower high that brought on squaring instead of another spike.

Hopefully you are starting to understand now the difference between the racer and the eraser.

Appendix

Cover Shorts + spike = Category B Buy; Cover Longs + spike = Category B Sell

Notice the inside bar 2x fork lining up with the Iguana for a possible spike.

spike ~ candle closing back up / down by 12-14 pips+, stands out and occurs out of medium term overbought / oversold – or originate from a reptilian but the latter is in the direction of the movement, not against it

   if (High[i+1]-Close[i+1]>140*Point && High[i+1]>High[i+2] && High[i+1]>High[i] && stoch30[i+1]>35 && High[i+1]>iMA(NULL,0,89,0,MODE_EMA,PRICE_MEDIAN,i+1)){
      ObjectCreate("Objeceat"+DoubleToStr(i)+DoubleToStr(3), OBJ_ELLIPSE, 0, Time[i+2],  High[i+1], Time[i], Close[i+1]);
        ObjectSetInteger(0,"Objeceat"+DoubleToStr(i)+DoubleToStr(3),OBJPROP_COLOR,clrCrimson);
         ObjectSetDouble(0,"Objeceat"+DoubleToStr(i)+DoubleToStr(3),OBJPROP_SCALE,.045);
        ObjectSet("Objeceat"+DoubleToStr(i)+DoubleToStr(3),OBJPROP_BACK,0);
        ObjectSet("Objeceat"+DoubleToStr(i)+DoubleToStr(3),OBJPROP_WIDTH,8);
   }
  
  
     if (Close[i+1]-Low[i+1]>120*Point && Low[i+1]<Low[i+2] && Low[i+1]<Low[i] && stoch30[i+1]<65 && Low[i+1]<iMA(NULL,0,89,0,MODE_EMA,PRICE_MEDIAN,i+1) && Open[i+1]>Close[i+1]){
      ObjectCreate("Objeceat"+DoubleToStr(i)+DoubleToStr(3), OBJ_ELLIPSE, 0, Time[i+2],  Low[i+1], Time[i], Close[i+1]);
        ObjectSetInteger(0,"Objeceat"+DoubleToStr(i)+DoubleToStr(3),OBJPROP_COLOR,clrDarkGreen);
         ObjectSetDouble(0,"Objeceat"+DoubleToStr(i)+DoubleToStr(3),OBJPROP_SCALE,.045);
        ObjectSet("Objeceat"+DoubleToStr(i)+DoubleToStr(3),OBJPROP_BACK,0);
        ObjectSet("Objeceat"+DoubleToStr(i)+DoubleToStr(3),OBJPROP_WIDTH,8);
   }
  

High Consolidation VS Extension Fill

The show down of the titans.

First the findings.

I marked up in gray abrupt bursts above 59 CI and reaches over 65 CI (7–sample).

(ChoppinessIndex(7,i)>65 && ChoppinessIndex(7,i+1)<65) || (ChoppinessIndex(7,i)<59 && ChoppinessIndex(7,i+1)>59 && ChoppinessIndex(7,i+2)<59  && (ChoppinessIndex(7,i+3)>54 ||  ChoppinessIndex(7,i+2)<50))

I also plotted the by now filtered extension projections, but the basic idea is still having a qualified move (large enough during a time limit) pointing to 50% more to be accomplished further down the road.

iHigh(NULL,240,i+3)-iLow(NULL,240,i+1)>FSize*26*Point && iLow(NULL,240,i+1)<iLow(NULL,240,i+3) && iLow(NULL,240,i+1)-(iHigh(NULL,240,i+3)-iLow(NULL,240,i+1))*.5

The last change I made was changing the ATR filter to a fixed size measurement.

Now, the images & the conclusions.

Enter with a size that can bear draw down of 60 pips. At 60 pips draw down from the consolidation level (Enter) if price went against you, hedge. At 70-pips you double the size of the counter holdings. You hold them into the next extension fill, where you scale out. You take off the original holding 40 pips back from the extension fill level (see article about Squaring).

Yea, that’s all I’ve got right now.

bonus image 1

bonus image 2

bonus image 3

Nick’s Lessons #8 – Stochastic Combo

– developed for you –

Only this indicator or combination with others?-

By itself is ok

This looks so niceā€¦. What are the rules?

Put on the two MAs
67 exponential median Maroon

207 exponential median Green

consider the configuration and the price’s relationship for a preferred side to play

you can use Maroon for a target, and Mr. Green as well

look at how the last wave structure started from the cover longs area wave 1, 3 and 5 all ended in selling going crazy – to cover shorts

currently in a volatility whip where the hourly rsi maxes out on the upside then on the downside

this was the volatility whip – the purpose of this motion is to calibrate the market + work up some volatility for the next move (it brings the starting point closer to Maroon)

the volatility whip isn’t part of the wave structure

God Almighty only works in the direction of the current wave structure (a continuation)

you can see that the indicator did not call the cross down a short, because the longer term stochastic was too oversold

I had written the filter right the first time around (refer to what I said about using Maroon as a target)

wave 1 started when the whip finished (after 5 waves down) and it was a wave 1 because it managed to reach beyond Maroon

wave 1 always fails back to the other side of Maroon (minimum) or 2 dojis down (normally) or it can even make a lower low if necessary

wave 2 came down to check in with the unfinished extension fill at 1.1179 before traveling abroad

the rally tagged the Mean (green line) – aka Secondary Target

“the Green River can stop a move, any move”

believe or not, you are now in a wave 3 up – the count remains until the low of wave 2 gets violated at 1.11683

and now whilst nobody understands what is happening, you can

price drove into the forest and hit a tree

Interestingly enough, the peak was at 1.12543

Currently in a buy zone
The opposition calls this a break of the beat at 1.1179, and has a count 1 issued. The break should run to a 4-H exhaustion + beat and count would be at 7 or 8 by then. 4x 4 hours to go if the selling prevails. If this is a break, it is a rather weak one. You were in 2 pips gains at the close?!
The last cyan zone is different from the others. It is not a resistance tha became a support but more of a resistance not properly backtested with an empty area between the new support and the old resistance. We were having that back test yesterday. Look for candle sequences of 1-0-1 (white-black-white / black – white – black) to find a spot of a show down where a decisive action was made.

Ok, I surrender. The market is trading away from the peak charge – it was back tested at 1.1249. The smallest move came out of this kind of charge was 126 pips, but there are examples for up to 250 pips.

The next two support lines down are 1.1191 and 1.10949

Squaring

I’d like to propose the utilization of the extension fills for squaring.

There are not many points on the chart where you can have 40+ pip reaction with a guarantee.

Say you start following rules for a change.

  • You figure a maximum personal risk.
  • You know your risk off level at the time of placing the orders.
  • If you get hedged in, you wait out the opportunity for squaring.

In real life, this is how it goes:

You open a position with 1/3 of your personal risk. The market moves against you. You add another 1/3 11 pips out. Market surpasses. You place your last 1/3, again 11 pips out. You knew at the start that you are going to be forced into a hedge.

Your risk off level should be 42 pips away (fluctuation maximum) from your 1st order, 31 pips away from the 2nd and 20 from the 3rd. With even chunks of positions you would have a draw down of 31 pips overall locked in.

The hedge would be sacred until the next projected distance level – encounter.

You are coming up against the green lines & values.

You close off the long hedge at 1.1128 and the shorts 40 pips lower (1.1088).

This way you would have some gain despite of the swaps charged in the meantime.

Now, what would happen if on top of opening up the hedge you would also add to your naked position 11-pips out (at 1.1139) another 1/3?

You already know the short exit level, so why not make that 51-pip gain?

What would happen if the market was to rally another 27 pips after going naked?

You already placing a pending short for the duration of squaring 11 pips out at 1.1405. Place another one as well 22 pips out and make that 62 pips trade as well, not?

The last such squaring opportunity happened on Friday.

The 51, 62-pip trades were not hit, but they should be taken off now that the squaring move hit its 40+ pip target.

I’ll let you figure the values on the last image.

Where do you take off your short hedge?

Where do you add to your short?

Where do you add for the 2nd time?

How much was the excess if the high came in at 1.10077?

Trading The Commuter Market #2

The commuter market is any market that is not embedded in the overbought / oversold field and is sustaining above / below the mean.

The name of the game in the following example is buying a swing low and holding for 7, maximum 8x 4 hours before selling.

Without going into the difference between exhaustion and beat (the beat requires a 4H low taken out) and other things such as what is a dip, what is a deep pullback, I present you with the meat of the upside action.

  1. You see a swing high, you get excited.
  2. You want to see the 7-sample choppiness above 50 to ready your entry.
  3. You scale in
  4. You abide your time, and start scaling out in during the 7th 4-hour print.

Your code:

for (i = 100 ; i >= 0; i--) {
   swinglowcounter++;
   swinghighcounter++;
   
   if (Low[i]>iMA(symbol,0,52,0,MODE_EMA,PRICE_MEDIAN,i) && iFractals(symbol,0,MODE_LOWER,i) && !eu[i+1] && !eu[i+2] && ChoppinessIndex(7,i)>50 && ChoppinessIndex(7,i+1)>48 ){
      j=i+1;
        while (!iFractals(symbol,0,MODE_LOWER,j) && !iFractals(symbol,0,MODE_UPPER,j) )  j++;
        
        if (iFractals(symbol,0,MODE_UPPER,j) || (iFractals(symbol,0,MODE_LOWER,j) && Low[j]<Low[i]) ){
      
         swinglowcounter=1;
                ObjectCreate("SWING"+i,OBJ_TEXT, 0, Time[i], Low[i]-30*Point);
                 ObjectSetText("SWING"+i, swinglowcounter, 23, "Arial Black", clrNavy);}
         
      }
   if (swinglowcounter==7 || swinglowcounter==8 ){
      ObjectCreate("SWING"+i,OBJ_TEXT, 0, Time[i], Low[i]-30*Point);
                 ObjectSetText("SWING"+i, swinglowcounter, 23, "Arial Black", clrNavy);
   }
  
}

Basic

What is a support? A memory of price being moved by buying.

The materialization of a support / resistance is price slipping off the trail counter the direction.

Although a reversal down may start with a lower high, what I am monitoring for is a lower low – and on a 5-minute chart.

The idea is that if these are holdings, the seller – or someone else – may step in again to defend the position.

Here’s my automatized version.

I invented different colors for those buys that occur below S1 support and not close enough to the lower limit.

Olive Green – not the best location.

Green – apparently when green overlaps Green, it becomes blue. Gotta love computer logic.

The Million Dollar question today is how far this Wave 5 up going to get?

Downside targets are easy to figure at 50% and 80% length of the range.

I do have a problem with picturing a break here.

I already showed you that someone went short at 1.1380 & 1.1360

Dip buying isn’t promoted here because of those legs spiking through Mr. Maroon.

There is energy to make a beat of the current exhaustion move up, yes – but the last Exhaustion -> Beat -> Break sequence hasn’t been completed yet.

I’m of the belief, that this Wave 5 up would remain a lower high.

The last higher low on the downside went like this:

Exhaustion – Beat – Exhaustion

No break after the first beat, and later no beat followed the exhaustion either.

The break of the beat usually happens within 4-7x 4 hours. There has been 14x 4 hours since the beat was made.

Building A Trading System

Setting up the charts.

Gauge 1:

Weekly Comfort Levels

Lots of info here.

The last two weekly peaks show a continuation divergence down -> likely lower high. Does not mean that a slight beat of the recent high isn’t possible still. You can also see the reversal divergence between the last two lows made in the oversold area.

Support & resistance levels would be re-calibrated based on the last 15-min consolidation come Sunday night (with the new ATR), so ignore them for now.

Based on recent history, there would be another week making a try with the overbought zone, likely the one coming up just now.

The story is currently trying to sustain in the overbought zone, but that’s not a given at all.

Gauge 2:

4H

Price is above Mr. Maroon, so we are interested in the increment of the highs.

The last increment was less than 25 pips or more than 64, so it is printed in Gray – dip buys are not promoted here. A break out would be a buy even a couple of pips above, and the projected distance of this last move up is at 1.1445 – just keep it in mind, have a good trail stop and be ready to bail if price comes back by 9-10 pips below the high.

As long as price stays above Mr. Maroon, we do not have a Wave 1 down yet.

The Green one is the mean, where we would expect price to return to once Maroon gives its consent.

Gauge 3:

15 min

The 15 min shows the range that was expected to be failed. 1.1380 was a peak.

When the Safety concern was overrun, that made this move a qualified Shot Over the Bow – which is typical of a Wave 4 down. If price stops here, Wave 5 would have the opportunity to make a run for the projected high.

We are still in Strength Buy mode, as the bottom left ticker shows, but if price was to meander lower, this move would be a qualified Wave 1 down, and would expect the rally (Wave 2 up) to fizzle out.

Gauge 4:

1H

The 1H shows a break out that occurred at 1.1261 – then a back test of that along with the 2nd doji up. The close of that doji + maximum 4 pips is where I would strongly consider getting out of the Wave 2 up – if that is what’s coming next.

I am a bit bothered by the stochastic bars making a print on the high, for the market rarely finishes on a high note.

Gauge 5:

The 30-min doubles down on the importance of the break at 1.1261 with the highlight, and gives accurate distance readings from the mean putting the divergent highs to 6.7x and 6.4x stretch from the mean.

Most recently price made a move back down from 5x stretch to 3x (quite a bit of volatility crush).

The 4×4 hours of deflation increases the possibility of a rally ensuing next just as what happened the last time (2×4 hours up) – see blue line below.

Buy Weakness is still in effect and disregard the Short reading that is based on the location of the Energy bands that were unable to keep pace with this move up. The cover level just reinforces the notion that if there would be a break out, it would be a failed one. Refer to its maximum projection earlier.

Gauge 6:

5 min

This chart shows the Buy level of below 1.1287-, and price has made 5-6 attempts trying to get lower – unsuccessfully.

The hedge level was not violated. The upper hedge level of 1.1404 brings attention to the possibility for a squirt above, and 1.1351 should serve as a resistance if this is going to remain the same wave structure to the downside i.e. we would get a wave 2 of Wave 1 down.

Current downside hedge / risk off level is at 1.1252

Snippets

Advice / comments here & there.

Hi Mac
Is it going to be a reversal?

Upper reversal stands for the bottom of the reversal zone (85%-95%) – price is making a turn in the overbought zone in this field. Above 95% odds are a new high, coming back below 85% – odds are losing the overbought status. The largest moves happen out of losing overbought / oversold.
Target 1: median at 50%

Target 2: the opposite end (overbought -> oversold)
You are definitely looking at the right chart
Fresh overbought/ oversold is toxic, would get rejected out of the zone

After 3 daily closes inside the overbought/oversold field price is “embedded” and higher highs / lower lows are guaranteed => overbought / oversold safety

by no beat I mean not one visible on the Daily chart
Beat by 21.5 pips

This is a break down, better get out of those longs.

Something I can’t explain: same account, same broker, same MT4, same instrument, same data, yet my Tosiba Laptop puts a vertical powder blue on the previous block too, how do the same calculations end up with opposite results?