Monday, January 15, 2007

TTS - Target Trading System

What do you expect from a trading system?

It should give you

  • an Entry
  • an Exit
  • a Stop
  • an Edge

If you are reading this Blog, you can't have missed the fact, that  I have changed my charts. That now I'm using Price Histogram Charts and that I have removed most of the lines on my chart, especially Moving Averages, Bollinger Bands or Regression Lines I used to have on my charts. On the other hand I have kept the commodity Channel Index on my charts

Now let's take a look, why I've done it and what I have gained by doing the switch.

The Ensign charting package I use plots the Market Profile directly into the chart avoiding the use of these cryptic ABCDE... letter charts, which in my opinion make Market Profile Charts a bit difficult to understand at first. Different to Market Profile Charts Ensign can base the Price Histogram on Volume instead of price traded within a certain 30min period and it can be applied to any timeframe you like.

Now let's look at a very ordinary situation we all have to face. I have been starting my trading day at 10:50am CET with the markets open for about 3 hours.

DAX had opened Monday morning with a Gap up and held support at 6770 on 3 occasions before breaking that support and making a first Gap close attempt. Prices have bounced back and CCI would have me looking for a short on a possible sling formed one or two bars later.

Now let's look at the Price Histogram in a slightly different way. I've turned the chart counterclockwise, which gives me the following picture.

You see how the market has formed a kind of triangle with the highest volume at the peak and you see how prices are always returning, oscillating around that volume peak at 6777.5

What I noticed looking at a lot of intraday charts is, that you often have not one but two distinct volume peaks during the trading day.

Take this GBP/USD chart as example

So at the days close I expect to see either this

or that

Of course there is no guarantee, that the market will form 2 peaks, but I've noticed one more thing. If the market is not able to break through to a new level, where a second mountain can be formed, prices return back to the level of high volume trading or back to the peak. In the situation I was presented with this morning that meant:

If prices can not break down to the old peak build on Friday at 6756.5 in a spike, prices should return to trade at 6777.5 and, if we have enough momentum, prices should continue north to build a new higher peak around 6792, which corresponds with the 6750 Dax index level.

The CCI would support both assumptions: The breakdown scenario means we will see a sling on the CCI, the breakup scenario means we see a Shamu, a pattern introduced by Woodie a few years back, which resembles a ~ with the CCI crossing the zeroline to the upside.

Now which pattern has the higher probability? Of course the Sling as it is a trend continuation signal, but the potential sling would form just on this 5min chart. On longer term charts the trend is up and you don't need to look at the longer term charts to know that, as we still trade above Friday's highs and the Gap is still not closed. So longer term charts should support a long trade. Add to that, that a breakdown attempt was just rejected and we trade again a today's support at 6770. For me that meant prices would return to test the 6777.5 area at least before a new breakdown attempt would be made by the market.

I went long at 6770.50. Stop was 6764.5. A bit more than I like it to be, as I prefer a 10 tick stop on the DAX, but that would put the Stop at 6765.50 or one tick above the previous low. Really not a level you want to have your Stop. Even 6764.50 is not a real good Stop as a Gap close attempt would mean a spike into 6762 and we might trade back up right after. Still 12 ticks was the room I was willing to give the trade.

Target was 6777.5 or 14 ticks (usually I have a 15 tick target, but I have seen it too often, that prices just touch the POC (point of control or area of highest volume) and get rejected. So for this trade the target was 14. Trading 2 or more contracts the first target would have been 6777.5 the second 6792.

The trade went 3 ticks against me stopping very short term traders, which had taken 6769 as support, as that level had held for 20 minutes as support. Interesting enough suddenly big orders crossed the tape and the market reversed. Prices traded up to 6776.5 where sellers brought the market down to 6772.5 again, before a second attempt was made to trade up to the POC. The market ran again into offers and the CCI started to form a true sling at the zeroline with the TurboCCI above the 100 level. Seeing a profit of 12 ticks I moved the Stop to 10 ticks as I was not convinced, that the market had enough momentum to take out the POC on a slow day like today with the US on vacation.

True enough the market traded back to my entry at 6770.5 before it spiked into the POC at 6777.5 and was rejected a third time.

As of the time of this writing the market is still meandering at the 6770 level and it might continue to stay within the trading range made this morning, as there are no impulses coming from the US today. But coming from one week off I don't need to rush things and I sure don't need to force a trade on a slow day.

Right now I have made a few observations, which might be the basis for a KISS trading system.

  • Prices oscillate around a volume peak
  • If a low volume area is not broken, then prices return to the high volume area
  • If a low volume area is broken to the up- or downside a new area of high volume forms
  • A trade taken around the POC has as target an area of low volume
  • A trade taken in a low volume area has as first target the previous point of control (POC)
  • CCI patterns are traded around the POC or in a low volume area
  • Before taking a trade, you need to identify where the market is trading at the moment


MidKnight said...

Hey croc,

With regard to using MP on forex charts like GBP/USD, keep in mind that they are not displaying volume. Due to the decentralized nature of forex, you will never know the true volume or the true price. All the profile is charting there is cumulative tick changes and again, those tick changes do not represent the entire market or even an active trade. All that has to occur for forex to distribute a tick change is a change in the bid. No transaction has to occur.

Once I learned this about forex, I never traded it again and focused entirely on futs.

I like your new charts btw.

Best regards,

Globetrader said...

Hi MK,
that's why I usually trade the currency futures, which show good good volume, if you trade the main pairs (Euro/USD, GBP/USD or JPY/USD). But also CAD/USD or AUD/USD futures are fairly liquid.