Suggestions for new traders

Netarchitech,

Thank you for your eloquent and thoughtful replies and for sharing your knowledge and archive. I have had some remarkable inspirations about volume recently and have made some exciting and original discoveries in this field culminating in the invention of a new volume indicator! I haven't been able to find any past references to this concept and to my knowledge no one has done similar work before. This has occupied a lot of my time and I apologize for the delayed reply.

I have been using my new volume indicator for divergence and it seems to have a very high win percentage in day trading and swing trading SPY and /ES on back testing and in real time. I am still in the process of tweaking/refining it and studying it in real time before jumping to final conclusions. It also seems to have a high win rate in AUD/JPY because AUD/JPY has high correlation with SPY. This concept can be expanded to develop similar divergence indicators for IWM and QQQ and that will be my next project.

I agree that divergence is an exciting subject and I have had good success with momentum divergence (awesome oscillator modified to 7 and 14 period settings) and my volume divergence indicator in SPY. The net OBV indicator that I posted in the thinkscript thread also gives good results with divergence. I have heard about CCI divergence but haven't tried it yet.

I also agree with volatility as being of fundamental importance. Volatility is derived from price action so in this case all roads lead back to price as well! If trading options, any option strategy should be implemented according to the volatility (vega) and projected volatility, in addition to delta, gamma and theta. Most option traders forget about the volatility aspect or ignore it, and that is the fundamental reason for their poor results. In trading stocks or futures, I use ATR as an indicator of dynamic volatility and have successfully employed it for stop loss, targets and exits. I use a dynamic volatility trailing stop indicator based on ATR x 2, which plots trailing dots on the price chart. I have also used ATR x 2 as first target for initial scale out when there is no close support/resistance that can be used for this purpose, and daily ATR distance from intraday low/high for day trading exits.

I also agree with the contrarian approach although sometimes it can be difficult to time the contrarian trade. On an intraday basis for day trading purposes I have successfully used the exhaustion or exuberant long green or red candle on high volume after an extended move as a contrarian indicator for exits or to fade the move, which works out pretty well.

Look forward to more intellectually stimulating and thought provoking posts in future, of course time and circumstances permitting.

Continued from:

[www.researchtrade.com]


Rob Miller, JML,

When trading breakouts the only weakness is a fake breakout. I include a lot of other conditions also which help to avoid these fake breakouts thereby improving my winning chances. I have a much more advanced script which helps me with the other conditions. Following are some rules that I would recommend, but these are mostly for stocks and major market indices. Some of them such as #1, #2, #6, may not apply to some futures such as ZB, GC, CL etc.:

1. Market internals should be bullish for trading breakout to upside and bearish for trading breakout to downside. The more bullish the internals, the stronger the upside breakout, the more bearish the internals, the stronger the downside breakout.
2. In addition to being bullish, market internals should also be moving/trending up to trade breakout to upside, and in addition to being bearish, the internals should also be moving/trending down to trade breakout to downside. 5 minutes is not enough to determine trend so I use 30 minute opening range and trade breakouts from this range instead of 5 minute opening range. Additionally major news usually comes out 30 minutes after market open, which is another reason to trade 30 minute opening range. Breakouts from 5 minute opening range can be more profitable but chances of fake breakout and loss are higher with 5 minute range than 30 minute range.
3. I also include the condition that price should be above previous day close for breakout to upside and below previous day close for breakout to downside, in addition to opening price and pivot. Additionally, I also keep an eye on previous day high/low. If price is beyond previous day high/low at time of breakout, the breakouts are usually stronger and price is automatically beyond open price, pivot and previous day close if breakout is traded in same direction.
4. Price should be in an uptrend on hourly and lower time frame chart to trade breakouts to upside and in a downtrend on hourly and lower time frame chart to trade breakouts to downside.
5. ADX should be above 20 and sloping up on lower time frame chart at time of breakout.
6. General market (such as SPY) should be moving/trending in the same direction as the breakout of stock. This rule is almost the same as #2.
7. Ascent of slope of price move should not be too long or too steep before breakout. Price should be consolidating in upper third of 30 minute opening range before breakout to upside and in lower third of range before breakout to downside. Examples are cup pattern, ascending triangle, box before breaking out to upside, and inverted cup, descending triangle and box before breaking out to downside. Usually 21 EMA is also in upper or lower third of range before breakout when this happens.
8. Breakout should occur on above average volume. The higher the volume of breakout candle, the more likely that it is a real breakout. After breakout, price should move up on higher volume and pullback on lower volume. If pullback happens on higher volume than the up move after breakout, the chance of fake breakout is higher and look for immediate exit.
9. Candle should close above opening range high + ATR before entry in breakout to upside, and should close below opening range low - ATR before entry in breakout to downside.
10. There should be no resistance within ATR x 2 distance from opening range high and no support within ATR x 2 distance from opening range low, such as yesterday high/low, daily 8 EMA, 21 EMA, 50 EMA and 200 EMA or previous daily gaps or other previous daily swing high/low points on daily chart. Pre-market or extended hour high/low can also act as resistance/support.

Additionally, money management is extremely important:

1. Stop loss ATR x 2 distance from entry or below last swing low or above last swing high, whichever is greater.
2. Position size should be calculated based on the stop loss, and trade number of shares that risk 0.5 to 1% of account size on a single trade. Personally I risk only 0.3 to 0.5% on single trade based on how strong the above mentioned conditions are.
3. Entry 1/2 position initially after price closes beyond range + ATR or range - ATR, then enter remaining half position on pullback to the fudge factor zone. Usually there is a pullback after breakout when price tests the support (previous resistance before breakout). Entry on pullback to this support after a real breakout has the highest probability of winning in breakout trading.
4. First target ATR x 2 after entry or last swing high (when entering on pullback after breakout), whichever is closer, to scale out 1/2 position. Move stop loss to break even if scaling out of 1/2 position after pullback to fudge factor zone. Scaling out of 1/2 position on first target locks in a profit and increases the chances of a winning trade tremendously. Try for reward to risk ratio on entry of at least one or more.
5. Final exit on 2 closes below 8 EMA after breakout to upside or 2 closes above 8 EMA after breakout to downside, or at a major resistance/support such as mentioned in #9 above.

You have to know your stop loss, entry, target, and size of trade (SETS) before you enter in a trade.

Lastly, trade only those stocks which have the following parameters:

1. Price > 10, preferable > 15
2. Daily average volume > 3,000,000
3. Daily ATR > 1, preferably > 2
4. Daily ATR% > 3%
5. Bid-ask spread not more than 1-2 cents.
6. Daily and intraday candles should not have very long wicks or too many gaps.
7. Look for stocks that usually respect 30 minute range as support/resistance.

I mostly trade SPY or /ES and some stocks within the above parameters. I avoid trading options due to higher bid-ask spread and influence of the greeks which usually reduce the odds of winning.

Hope this helps.



Edited 1 time(s). Last edit at 03/12/2016 01:56PM by tanman.

How do you scan for this?

4. Daily ATR% > 3%

Texas John,


Following is scan for daily ATR percent:

def ATR = WildersAverage(TrueRange(high, close, low), 14);
plot ATRP = Round((ATR/close) * 100, 1);


Following script will show bid and ask prices in a label on upper chart:

def BidPrice = close(priceType = "bid" );
def AskPrice = close(priceType = "ask" );

AddLabel(yes, "Bid: " + Round(BidPrice, 2), Color.DOWNTICK);
AddLabel(yes, "Ask: " + Round(AskPrice, 2), Color.UPTICK);



Edited 1 time(s). Last edit at 03/12/2016 08:29PM by tanman.

Tanman,

Please accept my apologies for the delay with this reply. Life seems to get in the way of the plans I would prefer to make. Thank you for the kind words. Warning...don't be too nice to me or you'll have a hard time trying to get rid of me...hahaha As for sharing and exchanging information, I prefer to think the gift is in the giving...and for that, thank you for all you so generously share with the community and our posts going back and forth...

Congratulations on your recent discoveries and advancements with your new volume indicator! It certainly sounds very exciting. As for the time/delay it takes to correspond back and forth, I think we can agree that if time and circumstances allow then the dialog will hopefully continue. With that said, I certainly have enjoyed our conversation thus far...

Coincidentally, I have been working with a friend on some simple applications of divergence (RSI, Stochastics, MACD), but using your new volume indicator sounds very intriguing indeed. I certainly understand the need to test and retest and retest some more. There have been far too many occasions where I thought I stumbled onto something significant, only to find that it was, in fact, a mirage...

I must admit I have been focusing exclusively on equities. I can certainly understand the temptations of leverage and exploring new markets, but I have found that focus for me is one of the primary keys to hopefully achieving the lofty goals I have set for myself...

Yes, we do seem to always come back to the basics a/k/a "all roads do lead back to price" (and volume), despite the allure of the many derivative indicators out there. I have been employing ATR with a 2.0 multiple as well. The application of the "dots" on the chart sound interesting to me, especially given my proclivity to being a "visual" trader, but I must admit I have constructed a simple spreadsheet that generates sufficient targets. I've found myself drawn into complexity time and time again only to find a simpler approach usually works best...

Yes...Timing is Everything! I agree that there is much difficulty, but there needs to be balance also. I'm sure everyone would like to see trees grow to the sky, but reality dictates there is a time for growth and a time for "retrenchment". With the markets being historically biased to the long side, it isn't easy to take the other side, that is unless you make the market and can see both sides, but I digress, the thing about being perpetually long is complacency gets too comfortable and the forces of nature will be denied for only so long. Winter comes, despite how nice a day it might currently be...

Didn't mean to wax philosophical or get off course there, I guess sometimes I find myself taking a little longer view of things when the trend seems to be to compress the timeframe as much as possible. In closing, I too look forward to a continuing dialog going forward...

All the best with your current and future trading endeavors...especially that new volume indicator