Author Archives: Greg

Reading Context (by Greg)

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In my last missive here on Slope, I mentioned the importance of context to trading.  I also mentioned how different traders have different ways to frame price action in an understandable context that significantly raises the odds on their expectations for a given setup.  In this example, I'm going to show you exactly what I look at, and how I read the tape and anticipated the blast off in the market that happened over the last couple of days.  If you go back to my tweets (gmcgary), you're see I mentioned the market was setting up to rape the shorts, the day before the launch occurred.  In this post, I'm going to walk you through what I was looking at and how I read it to reach that conclusion.

We'll use a daily chart of the ES as our big picture for gaining a feel for the context of price action:

2010-12-02-TOS_CHARTS

What we have is a set of Keltner Channels draw on the daily chart and one horizontal line drawn at 1174.50.  We'll pick up price action at the first oval.  From left to right I'll refer to them as 1 through 5.

1) At this point we have the trend reversal hitting it's first key support level, which is the confluence of both the horizontal support level and more key the centerline of the Keltner Channel I have draw.  Nothing unusual here.  At reaching this level, I'd close shorts as the expectation is to bounce and back test the underside of the underside of the upper channel line.  Move along nothing to see normal price action.

2) The underside kiss of the upper KC is expected, what is very funky is to do so with a hanging man.  Also such a large range at this point is odd, and not normal for what my brain cells recall in this exact situation.  That put's us on yellow alert.  Price action is not acting according to known price and volume profiles that lead to a pattern completion, which in this case would be 1125. 

3) At oval 3, we get a close below the mid line of the KC.  That is consistent with a upcoming move to 1125, but the previous Hanging man calls for caution as we're still on yellow alert.  Being suspicious of this market I'd only day trade at this point.  The next day's close above the KC centerline is totally not per know price action in this situation that goes on to the original target of 1125.  The pattern is basically blown at this point, so as far as a short opportunity we are on red alert.

4)  While point 4 closes below the mid KC line, one might conclude wee haw we're on our way to 1125.  Not so fast.  Experience tells me we need to have two days close below the centerline in a row for the pattern to have any chance of completing.  So at best we can go back a notch to yellow alert (as far as shorts are concerned).

5) The doji at oval 5 confirms it with a close above the KC midline.  The pattern is completely blown.

The next day the only point in question was would da boyz get a close above the centerline during the day which I believe was around 1187, or would they go the after hours route and ramp the open.  The simple fact was it was too costly to get a close above 1187, and as long as only one close was below the centerline, people who know this stuff wouldn't pile on short, so they had the option of doing the buying during Globex.  Seeing the setup against the shorts, is what caused me to tweet that shorts were being setup to get raped.  The rest is as they say history.

The take away I'd like you all to have, is there is a way that volume and price play out relative to a given setup.  There is only one way to know what that is.  Which is by watching live charts.  Over time your inherent natural pattern recognition will just know what is normal, and know what isn't.  It's all about trade expectation, but what no book I've ever read tells you, is how to decide when to take a given setup.

If you want to rock at trading you need to know the things that are out there in many books, but the real key is as MarketSniper likes to always say is right between your ears.  You need to be aware of the context and how price action is playing out within that context.  If you have read about risk management, trade setups, and God knows what, and are struggling at being profitable, then take a look at your efforts in understanding context.  Again to quote MarketSniper "I only trade on my terms."  What he really means is that when he has a setup that is occurring within a familiar context where he has a high expectation, then he takes the trade.

Lastly, I want to say thanks again to Paul aka "Peachin", who clued me into reading the tape.  He's an old timer on slope, and pops in once and awhile.  Listen to what he says if you get the chance.  It's all golden.

Elements of a Trading Plan (by Greg)

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This morning I was responding to an email about trading, and it got me thinking about what makes a successful trader and I thought I'd share those thoughts with the family here on slope.  As I see it there are basically three necessary elements to consistently profitable trading, which are: 1) Context or filtering, 2) Setups, 3) Risk management. 

What I found frustrating was lots of books talk about setups or risk management or ocassionally both, but they come up short in the area of filtering.  By filtering, I mean when does a price action setup have a higher expectation of going on to do what you expect as opposed to when is it more likely not to. 

 

1) Context

There are many ways to get a read on the context of price action.  Personally I like Keltner Channels on different time frames.  If you study them enough, they can give setups a nice context, they can be used to quickly identify a trend vs. a range day, and they can also be used to identify scale points and targets. 

Trader1 has been very generous with his knowledge, and has explained how he reads support and resistance and how in an uptrend it stair steps up, and in a down trend it stair steps down.  From that he has his buy zones or buy like hell zones, and his sell zones and sell like hell zones.

Futuretrader71 uses volume by price or volume profiles to frame price action in a context that makes sense.

Some traders prefer to get a sense of context via pivot points such as MarketSniper.

Now all of these methods give you areas to watch or look for setups.  The key to remember is that it's not that price gets to these areas, but it's what does price and volume do once it get's there.

 

2) Setups

Setups are nothing more then a price action sequence that tends to resolve in one direction with a greater expectation then another.  A high close Doji or a low close Doji are but two common ones.  There are books out there that will identify a number of setups.  What I have noticed for me personally, is where I have taken a published setup and tried to trade it, I haven't had much luck with that.  MarketSniper likes to tell people the Holy Grail to trading is right between your ears.  He's right you know.  

Here's the thing.  To really be successful at trading, you need confidence.  What gives you confidence?  Knowledge that trading a particular setup in a particular way has a profitable expectation.  In my humble opinion the best way to gain trading confidence is to blaze your own setup trail by paying your dues watching live charts and observing the nuance of how patterns unfold.  My suggestion is you closely watch price and patterns unfold, while closely observing how volume builds or doesn't relative to the change in price.  While observing price action directly, keep the greater context in mind as well.  In time, what you will notice, is kind of like the approach a plane takes to landing on a runway.  I call it a volume profile.  Overtime your brain will just recognize the nuance of what volume does relative to price, and you will notice the key volume signals that will allow you to filter when to take a given setup.  Additionally as you identify your own setups, I suggest you develop your own rules for trading the setup, and your own criteria that tells you when the expectation is blown long before your stop is hit.  Also you can identify when things are going as expected, and under what conditions it's adventageous to add to the trade.

 

3) Risk Management

MarketSniper likes to say, get the risk out of the trade as soon as possible.  He also likes to mention trade expectation.  In 2) above I talked about identifying your own setups.  You also need to have in mind what the expectation is for price action and set you scale out points as soon as you enter the trade.  In the setups I use, I have hard and soft stops, and scale and close targets.  I also have criteria where if price action isn't going as I expect, I quickly scale down the trade, and if it is I have points where I quickly scale up the trade.

I think that wraps up the thoughts I had this Saturday Morning.  I hope it helps a couple of you put together a viable trading plan.

Tape Read (by ChelanBound)

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  2010-11-18-TOS_CHARTS

OK, Tim needs a little material, so how about a quick tape read example.

Starting from left to right:

The highest volume bar on the left is the stop run of those who thought a gap into globex highs and resistance should be faded.  LOL I think they missed the KC multi-time-frame long signal, I might explain that another day.  OK back to a bread and butter tape read.

Next the first point circled 1)

The wick and high volume tells me we hit resistance.  The next few down bars on declining bars tells me going short here isn't a good idea.  No conviction on the decline.

Point 2) again shows resistance on the up side and solid rejection.

At Point 3) we get a pick up in volume on the climb, with a third strong rejection.  Notice how the volume spikes are are losing steam.  At this point we have a triple top.

As price action falls below the upper KC line, I set a short sell on the ES at the a point a tick below the previous 3 highs, and get filled.  I used a stop just above the 3 previous highs that got rejected.

Given how long price has diddled in a 2 point range I set my target at 1194, which was 4 pts below my fill at 1198.  The tape read theory here is the run ups were on increasing volume which told me people were setting up for a move higher.  Those same people would need to sell by the end of the day, so I was anticipating a bit of a tail falling downward near the close as they gave up hope.  By the way I tweeted this trade real time using a conductor analogy, and suggest people exit the train at door 94.  LOL

Anyway, that's how I read price and volume. Remember, every dollar you make is a dollar out of the pockets of our criminal elite, so trade well.

Get’r done (by Greg)

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A lot of people come here to slope wanting to learn about trading.  The information shared can be tantalizing.  New traders search and search for that holy grail for trading.  So what is it?  From experience, I can tell you the answer lies within, and is right between your ears.  You're thinking come on that's a cop out.  Actually it's not a cop out.  

Every traders journey towards success is unique.  For me, the individual who I learned the most from is a guy who uses the user name Peachin.  While I never observed exactly how he traded, what I did learn is the importance for having a feel for the interplay of price and volume. 

If you want to become a good trader, my suggestion, is for you to study the patterns that develop on a chart, and pay close attention to the interplay of price vs volume.  You have to watch a live chart to see that interplay.  That is the number one thing you need to understand in order to gain an insight as to where price will head next.  

Now that you are focused on the only thing that pays as far as trading is concerned, you need to identify what sequence of events: Chart pattern, price and volume interaction, which results in what kind of outcome.  This takes time and dedication.  But here's the deal.  If you are focused on these elements eventually you will identify a sequence where in you identify an outcome that happens better then 50/50.  This is called a trade setup.  The next thing you need to do, is identify the rules to use to optimize your trading outcome when you've identified this particular sequence of price pattern, and volume interplay.  You should also have an expected target in mind, and scale point identified before entering the trade.  I'd suggest you consider both hard and soft stops for the setups you identify.

My best setups when entered correctly will actually give you about a 1/2 point profit even on a blown trade.  

The thing about finding your own setups, is that you're in control, and you devise the way they should be played, and you own and accept the outcome.  The other thing that's nice about a setup trading style, is that when the sequence occurs, you pull the trigger, and you play it according to your pre-established rules.  Those rules you establish are your safety net.  Stick to them, and emotion is removed from the trade. 

My final thought, is if you use the hard stop and soft stop approach, considering adding as price probes near your hard stop.  I generally enter a small position under my setup criteria, and then if the trade is acting as expected and price probes hard against my trade, I will often scale up hard.  I like to use a set loss amount maximum.  If I can enter within a point of my hard stop, then I'll load double what I would 2 points away from my hard stop point.  The thing is the risk reward is more favorable the closer to my hard stop I can achieve an entry.  Anyway, you can manage the trade anyway you want, but follow what ever plan you have in place.

I think that get's across what I wanted to share this beautiful day.

Best of luck out there.

Greg

How to Compute a Hedge (by mmTesla)

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This post will be dedicated to calculating your hedge using
the S&P 500 emini futures.

First order of business is to know how many dollars you are
up for the DAY. Let’s say for the sake of the example on Friday when the ES was
hovering on support around 1106 you were up an arbitrary number of $3,400
alright so from the close on Thursday which was 1124.5 and the current ES price
of 1106, is 18.5pts ES. $50 per point per contract so $925.

So we take 3,400/925=
3.67 contracts. When we used to hedge we liked to round down, and it is more of
a personal preference whether you would like to be slightly over or under
hedged. So if you chose to round up and used 4 contracts in this example and
decided due to how close we were to support, increasing delta, market internals
etc that you wanted to protect your gains. You would buy 4 contracts at lets
say 1106, and by the end of the day your hedge would have made
1119.5-1106=13.5, 13.5×50=675, 675×4=2,700. So instead of having 3,400 become
$700 in gains, you have locked in your $3,400.

As a general rule of thumb in this example IF you decided to
hold your hedge overnight due to fluctuating beta you would drop the 4th
contract and be holding 3. You can always drop your hedge pre-market, overnight
or during regular trading hours. So on one hand you are muting your gains but
that is a small price to pay for protecting profits, lowering risk and peace of
mind against gaps. When you hold overnight your hedge can be losing you money
but generally when the market opens your other positions will make up the loss.
But understand the risks of holding overnight!! Worst scenario would be you
held too much overnight and got a margin call because of some news that
happened while you were sleeping! So unless you know what you are doing don’t
hold overnight.

The other beauty about this technique in hedging is that it
allows you to practice day trading the futures for free. If the trade goes
against you, your other positions should make up the loss. So if you are net
short, then hedge by going long and taking every high probability signal to go
long. Worst that can happen in that scenario is the market continues down and
your other positions make up the loss. Although if for the flash crash for
example some stocks did not react very strongly to it so being hedged on the ES
could have hurt you. That however is an outlier event, that should be prepared
for.

NOW for the other side of this sword, some people will hedge
by chasing the market. That is a mistake because that will most likely lead to
you losing on your hedge and locking in muted gains. IF you plan on using this
technique I would recommend learning some day trading set-ups and studying the
flow of the futures market, and if it resonates with you practice hedging in
paper.

Anyways I hope this helps. I think Tim’s disclaimer also
covers his guest posters but if not, you are responsible for your own actions.

ES & Keltner Channel (by Greg)

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Here's another example of using a Keltner Channel to trade the ES,

ES 2010-03-31-TOS_CHARTS

1) We have a classic candlestick reversal (I missed it for some reason).

2) At point 2 we have my favorite setup, which is a back test of the reversal as it tests the edge of the Keltner channel that it just broke through.  The key here is price (5 min candle) should not close below the lower channel.  If it does you close immediately.  The other thing is you enter long as it is at, or probing below the channel.  Typically 1/2 point below the channel can be used as the stop.  I often use 3/4 of a point, but then I enter long as price is probing below, so it's often a 1/2 point stop.  Another key to the setup is a compatible volume profile.  In this case, volume dropped substantially on the back test, which further supports the setup.  Basically, the action suggests longs are just doing a little profit taking, and sellers have stepped aside. 

3) I'd close at the doji that printed on the far end of the channel, especially since the doji closed below the channel.  A reload, could be done when the mid-channel line held all 5 min closes.

4) After printing a double top that brought in additional selling one begins to wonder if we'll have a sell off.  During the push to the second double top, we probe support on the middle channel.  The advance warning to the break down comes with the doji close below the mid-channel line.  Bingo another signal.

5) The close of this last setup is the 3 SMA (Close) cross with the 5 SMA (pivot).

One of the things you might consider is eliminating anything from you charts that isn't used as part of you setup or trade management.  I think almost all traders can be hindered from effective trading by information overload.  It's taken me a while to realize simpler is better.  I often trade with iSwim, which forces you to chose just a single study.  After much consideration, my single study of choice hands down is the keltner channel.  In a lot ways, it's all you need besides price and volume.

I hope this gives you another idea to but in your bag of tricks.

Weakness in the ES? (by Greg)

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Let's start with a few ES charts:

ES 2010-03-24-TOS_CHARTS Hrly

The above chart is a little busy, but it shows we've reached a low volume by price area, which often means price would hang out for some time to fill the void with more price discovery.  Also note the massive volume in the area of 1200 on the ES.  My take is we get there, we'll see plenty of sellers show up.

Let's zoom into the hourly:

ES 2010-03-24-TOS_CHARTS hrly

Looks to me like we got a tad bit of rejection in the 1170 region.  Could be those from the 1200 area just itching to sell.  Note also how we tagged the channel line, and then fell to the next lower one, broke through and back tested and got rejected?  A touch of selling maybe?

Now let's zoom in once more:

ES 2010-03-24-TOS_CHARTS 2

Don't know about you, but it's looking like the recent parabolic move on the ES might just finally be a little long in the tooth.

The other thought I wanted to share was about listening to the market.  When we trade, we all have TA of some sort that catches our interest be it setups, indicator's patterns are what have you.  The one thing I think we sometimes miss in our rush to trigger a trade, is hearing (although with our eyes) what the market is telling us.  No matter what system you chose to trade by, it all boils down to filtering when to take the trade, and when not to.

For some it's a purely a mechanical process, for others something completely different.  My suggestion is watch closely how price and volume are playing out at any given moment when you near a point you might trigger a trade and see if you have a sense of it, and what it's telling you.  If focus your attention on hearing it's message, and are successfully you'll often have both better confidence and success in your trades.