Blog for Trading Success

I was looking for a way to round off the current series when Ms Ana Wang, student and friend, referred me to the latest blog by Dr. Steenbarger (http://traderfeed.blogspot.com/). He wrote on the characteristics he looks for in trend days. I thought: ‘Great topic to round off the series!’ Thanks Brett.

Since my approach to day trading relies heavily on the Market Profile, my tendency is to automatically assess: is today likely to be a rotational or one time-frame market? For one-timeframe markets (trend days), I first look at the context to see if the context supports a possible trend day.

Generally, I perform context analysis on the cash S&P because I find it a more reliable analysis.

Figure 1 S&P Cash

Figure 1 shows the three contextual conditions that pointed to a possible trend day on April 1.

1. The buy signal generated by the 5-d Spring Change in Trend Pattern that projects a target to at least 1396.
2. The failure of the market to follow through on the downside volume generated on March 28 2008,
3. The market holding the bottom of the value area on March 31st i.e. there was no acceptance below 1313.

The next condition is the open of today relative to yesterday’s value area. If the market opens above yesterday’s value area, then we are more likely to have a trend day.

The third condition which helps identify a trend day before it occurs is the narrow range day - what Tony Crable called an NR4 (i.e. a day where the range is the smallest of ‘x’ days. NR4 means the narrowest of the last 4 days. It is of additional significance if the day is an inside day - INR4). I look for at least an NR4. The greater the number of days, the more likely a trend day can develop.

I also look at O’Connors Historical Volatility Ratio (HVR). If the HVR (5 and 100) touches 0.5 or less, then the probability of a trend day occurring rises. (http://www.transitionstrading.com/hv.htm)

Figure 2 shows the HVR and NR4

Figure 2 HVR & NR4

Finally if there is an open gap of at least 0.40% (rounded to first decimal place), I utilize the ‘open-gap’ behavioural parameter: this states that if there is an open-gap of at least 0.4% and the market fails to close at least 50% of the gap in the first 60-minute of trading, a breakout of the 60-minute range in the direction will probably signal the start of a trend day.

The above conditions prepare us for a trend day. Let’s turn to managing the trend day once it has started.

Yesterday’s blog (ES Managing Trades on a Slow Trend Day) showed how to manage a slow trend day. The other types of trend day are double distribution trend day and the Steidlmayer Bull or Bear Pattern. The first type starts with a rotation and generally does not develop where there is gap-open and the market moves in the direction of the gap. It tends to occur where the market moves contra the gap-open and/or where the market opens or near the previous day’s close.

Figure 3 shows this. We see the market closing at 1374.4 (N) and the market opening at around 1375 to 1377 (blue arrow). The market rotated until the J period. At J, it tried to break out and failed. This started a double distribution trend day down.

Figure 3 Double Distribution Trend Day

Once the vertical move begins, we can manage the trend day in the same way as the Slow Trend Day. This trade management method will stop you out once rotation begin so you won’t capture the part of the move that closes at the extreme of the day. But, it’s a simple management method and it will capture the directional portion of the move.

The final type is not a traditional Market Profile pattern. I derive it from Pete’s evolution of the traditional Market Profile and it is probably the most common of the three occurring today.

Generally the rotational aspect of the pattern sets up the day before. Today the market opens and starts the directional move which continues until the last hour of so of the day - at that time, rotation begins. Managing this trend day in the way we discussed yesterday, will achieve great results. Figure 4 is an example of the Steidlmayer Distribution down trend day.

Figure 4 Steidlmayer Distribution Trend Day

Bookmark to: