Trend - depends on lots of things doesn't it?

The books tell you that are are many ways to determine the current trend and that you should trade in the direction of the trend.  Want an easy way to figure out the trend? 

Look at the chart below and I think it tells you where is it in the trend picture.  The yellow levels are demand and supply zones.  The books tell you that the trend is currently UP.  All you need to do is map out the supply demand levels and see where you are in between these levels.  Drill down to a finer time frame and rip the profits. 

I'm doing this right now with currency futures.  The performance data you see on this blog on forex is my MT4 account, thats only for spot.  I use Amibroker and Interactive Brokers to trade the futures.  I also use Tipster Trendlines AFL code for Amibroker to place and adjust the trades.

EURUSD

The last post on EURUSD talked about some basics and a short update as price was playing with the trend line. I am currently long and I plan on holding for the ride.


WEEKLY CHART From the weekly chart we can clearly see that price has entered an "air" zone, there is no meaningful resistance on the way up to the top of the yellow box.

Daily Chart - Long History The last time price had to overcome resistance it popped through the orange trend line on the third attempt (yellow circle). Price followed the upward red trend line and is still following it. More on this line later on.... We just broke the blue trend line, and as it happens, on the third attempt just like the prior break. No we are into the yellow free air space.

Daily Chart - Closeup Price just broke through the blue horizontal trend line, on the third attempt, same as the last horizontal trend line break. The pullback after the breakout above the orange horizontal trend line came to the upwards trend line and the 50% retracement. Note that it did not come back to the orange trend line, indicating a strong upward trend following the red line. Keep this in mind when looking to enter on the recent break.








Intraday The yellow area is the S/R "zone" from the weekly chart. It looks like we are clear for now. A good area to place a but LMT order would be at 1.4790 to 1.4844 for a low risk opportunity.







What's next?


Breaking the upward red trend line - This would only mean that the rate of increase or rise in price has slowed. Once it breaks through, look for it to come back to it and test it, then fall. No telling when this line will break.


Pullback - look for a pull back to the upward red trend line or the blue horizontal trend line. The best choice might be whichever one of those area also lines up with a fib level and a round number. I might even load up more on a pull back.


Be patient and wait for the pullback. If you need some help with pull backs watch this Pullback Video.


Do you have a position right now? Are you planning on geting in on this move?

EURUSD

UPDATE
Looks like a false breakout to me. It could also be a shakeout but I dont think a shakeout is that easy in forex and given this is a well watched trandl ine, there are too many participants at this level to do that.




Original Post
I was looking at the EURUSD chart today, deciding how to play pair as it nears long term S/R. My son came into the room and asked me what I was doing. I explained the bar chart and told him that we could make lots of money if our prediction was right. I asked what he thought the chart would do, first taking no more than one minute to show him how prices bounces off previous S/R levels, showing him the trend lines and S/R lines I drew. His 30 second view into the future is attached below and I have to tell you, its as valid as any other.

I'm playing this as a breakout for one reason only, this level has acted as resistance four times already and there is upward pressure from a very long trend line. There are three outcomes I see in the next week or so;

1: Breakout and huge move to the upside because of the long term nature of the two trend lines.
2: Breakout and a failure within a few days, price will move back below the 1.4821 area in a classic 2B move and then tank over multiple weeks if not longer.
3: Price will bounce off this area and head lower, below the uptrend line, then we are moving sideways. until a low is broken.

BTW - I have used Tipster Trendlines to place my trades. Check out this AFL for Amibroker for placing error free trades. "Error free" refers to the task of placing the trade, it does NOT refer to a trading system. the AFL also offers a risk management tool.

In short - this is a great place to watch price and place a trade. In other words, don't waste your time trading in between S/R lines on your chosen time frame.

Not sure about the long term, I'm focusing on the weeks ahead. Just for kicks, I'm posting what a 9 year old boy thinks of this market.

Wolfe Wave - look for them

A while back I received an email from a reader (Michael) who stated that he uses wolf waves as one of his tools, and with some success. I have done some reading on wolfe waves and understand them to some extent, and I've even noticed the pattern a few times while trading. They are, like most patterns, obvious after the fact to the extent that you know if they were profitable or not.

The way I interpret the pattern is that it is a counter reaction to an over reaction. In other words, when price moves to fast in one direction, it often moves back quickly in the opposite direction. The catch is the entry in the wolfe wave. It gives you a relatively low risk entry to reward ratio. I see the pattern quick often in the volatile forex market. Take a look back on your charts and see if you can spot some of these. Better yet, slowly scroll forward and draw the lines as the pattern emerges, see if you get faked out or if you profit. And the same goes for any pattern, understand why it works and what the emotions are that are behind it and you will see it better.

I asked the reader if he would like to have a post here on wolf waves so we could better understand the pattern. Michael recommends a book called "Streetsmart" as it explains the pattern very well.

Here is Michael email (edited slightly):

There are two types of wolfe: one for going up, one for going down. so long and short. The key of the analysis is to discover 5 points and the last point 6th is the target

For Long:

Point 1 and 3 are the downside points, the 3rd must be lower tha 1st

Point 2 and 4 are the upperside points, the 4th must be lower than 2nd and higher than 1st.

When the trend goes to form the 5th point, which is lower the all the previous 4 points, and then begins to move up, you trace a line from 1st to 4th point, which gives you a projection to another point, the 6th point, which is the target.

So if the movement is right, price should go up and you make a huge gain. The stop can be placed below the lowest low, and now you can see the profit potential.

For Short, it is just contrary of this. I have enclose several pictures so you can see what I mean, one picture is worth a thousand words.

Chart Trading Question

A reader emailed a question about the tipster trendline chart trading code that I thought would be beneficial to others if I posted it. I'm not offering any advice or opinion on the set-ups profit potential, only how the code works and IB's order triggers.

"I attached a graphic, in which you can see, on 1st of Oct. I wanted to short IMS, on breakout of the bottom of the previous candle, but as you can see the candle of 1st of Oct, is a strong up candle. My stop order of sell should not trigger, and my buy stop (which is my stop loss) is set to 12.39$, so what happen in IB."

Line BS is the buy stop order. The price must go below this level for the order to trigger. This is the "Parent" order.

Line ST is the stop loss order. This is a child order, child of Parent order "BS". This order is will not trigger until the Parent order triggers (BS).

Line TA is the target order. This is a child order, child of Parent order "BS". This order will not trigger until the Parent order triggers (BS).

So in this example, if the BS order was a "DAY" order and not a "GTC" (Good 'Till Cancelled) order, at the close of Oct 2 the order BS has not triggered, therefore ST and TA will not trigger. At the close of the day the orders will automatically disappear from TWS and you would not have a position.

How does this work in TWS? To see how this works, left click on the coloumn titles of your order page inside TWS. You need to add a field called "OCA" (One Cancels All). The Parent order (BS) will be blank. The two child orders (TA and ST) will have the same numbers in the field.

When you set up a bracket order manually within TWS, this is basically what TWS is doing for you. You can also do it manually. Try it manually to learn something. You can also use this technique to capture a breakout of a range, such as a squeeze in price, if you want to catch a move to the upside or downside. I haven't played with this type of order very much but I'm sure it can be done so that when you get a break in one direction, the orders for the other direction are cancelled.

Another example of trading with trendlines

I thought I would take the "potential" set-up Brian Shannon spoke of in his video today to show the "Trading with Trendlines" code I have written for Amibroker, interfaced with Interactive Brokers TWS platform. Both the set-up video by Alphatrends and my own video are below.

Alphatrends



Trading with Trendlines

Support and Resistance

Here is a great article on Support and Resistance. It's by Sam Seiden of Online Trading Academy. I receive emails from them periodically.

You read about this concept all over the web, and in books, but I have never seen it explained like this before. He explains WHY it works, and more importantly, what to look for. Time does play a role, the amount of time price spends at a price level while bulls and bears kick each other in the balls and struggle for control. This article has not only helped me understand where the low risk entries are located, but also where to place stops more effectively. If I looked to place an intraday stop, sometimes I looked at support and thought it would be at cluster lows. That was probably not the best place to put the stop. As explained in the article, look for areas where price spent the least amount of time. This is where the buyers/sellers stepped in big time to snatch up any offerings, and with one side dried up, prices moves fast. Read this article several times and understand the concept. Memorize it so you don't have to think about it. Thinking, not reacting, can get you into trouble.

Support and Resistance, a Deeper Understanding

Often, I talk about supply (resistance) and demand (support) in articles. I use simple examples and pictures to help explain how markets work and prices move. Today, let's take our level of understanding to a deeper level by actually simplifying the picture of quality support and resistance, the way we do in the classroom during the Professional Trader Part 1 and 2 courses . I was recently reviewing the pages in the stock class, and came across a page that showed what I considered something very close to the perfect picture of support (demand) and resistance (supply). The message that page conveyed to me was something I want to share with you here in hopes of improving your level of knowledge and understanding.

Price and Time: Price spends the least amount of time at price levels where supply and demand are out of balance. Price spends the most amount of time at price levels where supply and demand are NOT that out of balance.

In other words, price levels on a chart where price spends the LEAST amount of time are where the most quality trading opportunities are found. What this picture looks like on a chart is a pivot high and a pivot low, NOT a cluster of trading activity. Let's have a look...

Notice the turning points on this stock chart. If you focus on the pivot high point in the upper left portion of the chart, that provides for solid resistance when price returns to it on the 29th. That is a quality supply level. Notice the demand (support) level on the bottom of the chart, the pivot low on the 29th. Price shoots up from that level because supply and demand are so out of balance. Price spends so little time there because demand greatly exceeds supply. When price revisits that area two days later, that is the time to buy as price is revisiting a quality demand level. Next, notice the circled cluster of trading from the 28th. Price declines from that area and when it returns to that level, it moves right through it like a hot knife through butter. This is because supply and demand are not that out of balance, the cluster of trading tells us so. The fact that price spent more time in that base than it did at those pivot high and low points tells us that the great supply and demand imbalance is at the pivots, not the cluster of trading. While I may show these clusters in letters, they are for understanding. For application of support and resistance, pivot highs and lows are where the greatest imbalances are found.

Let's go over the turning points in this forex chart. Notice pivot high area "A". We call that a "pivot high" because price could only stay there for a few minutes. Why? Because supply (resistance) was so much greater than demand at that level. "B" was the first time price revisited "A" which was the low risk/high reward time to sell short. Area "C" on the chart is a pivot low. "C" happens because of a major supply and demand imbalance. There are so many more buyers than sellers that price can only stay there for a few minutes, creating the pivot low. The first time price revisited that level was the time to buy "D" as the risk was low and the reward was high. Next, notice "E", the cluster of trading that is followed by a decline in price. When price comes back to that level for the first time at "F", it goes right through it without turning lower. This is because of the time issue. Price spent more time at "E" than it did at "A" which is why "A" is a higher probability shorting opportunity (turning point) than "E". The same issue is true at "G". The cluster of trading provided no support when price revisited that level at "H". Again, time is the key issue here which is why the pivot highs and lows are the low risk/high reward support and resistance levels, not the clusters of candles.

Breakouts

What is better, indicators or trend lines, what has better results for an auto trading system? I have tried, as many others have, to use indicators to buy and sell Forex. It works about half the time. Why not just use a random number generator to trade then? What about breakouts?

Look at a 5 or 15 minute chart, how far is 10 pips in relation to the average bar length. How hard can it be to make 10 pips? It's harder than it looks. My next system involves breakouts and trend line trading. Here's the idea;

I set the chart up with 1 to 4 lines, when the line is crossed it trades, setting stops and targets, and gets locked out until I reset it. I can use horizontal or sloped lines to do this in Amibroker (AB). The code I have done so far works OK. I'm amazed how how simple the code was to do this. The "system code" is very small compared to the auto trading interface code need to talk from Amibroker to TWS via the IBcontroller. I'm waiting for the bugs to show themselves. I was surprised when I was testing this, I would trigger it to test signals and next thing I know I'm hitting the profit target of 10 pips.

I can't find many others that have coded this or auto trade this way, I searched with Google and found very little. The AB Knowledge Base doesn't have much either. If you trade Forex this way I'd like to chat via email, drop me a line. Email link is at the top of this page.

Why you need Point and Figure Charts as an essential tool of the trade

The answer is because the long term trend matters. Knowing where you are on the road to prosperity is the first step to any strategy. Whether or not you are a long term investor, a daily trader or a swing trader, you need to know how the fundamental law of supply and demand is influencing the price of any stock you wish to trade. If you believe that you can make decisions using price and volume as the main ingredients for your technical analysis, then you must believe that they are caused by simple supply and demand pressures.

Once you know “the condition” of the stock you wish to trade, you will have a different strategy based on its current status. I decided to use two securities picked from Another Brian’s Canadian screen. They are Miranda Techno (MT.TO) and Mega Uranium (MGA.TO). Why? Perhaps I like to be in the Middle of the alphabet. Or maybe the recent uranium price collapse is of interest to me.

I have to assume that you know the basics of Point and Figure Charting (P&F). If you don’t, I strongly suggest you Goggle it. I know that Stockcharts has a good tutorial written by Arthur Hill on that.
Click here for this tutorial

Also, Dorsey Wright & Ass have made it a business and they have some free information available on their web site.
Click here for this tutorial

The advantages of P&F are numerous:
-1- There is no guessing as to what the appropriate trend line is.
-2- The supports and resistances are easy to identify.
-3- Some techniques can be used to make price objectives, but that’s beyond the scope of this article.

Miranda Technologies (MT.TO) is the first stock that I want to review.

Here is the Legend:
Dark Green line = Bullish Up trend line sloping upwards at a 45 degree angle
Red line = Bearish Down trend line sloping downward
Light green horizontal line = Support line
Blue horizontal line = Resistance line
X in a green square = Breakout
O in a yellow square = Breakdown



If your prefer an Excel version to download, here it is

In my experience, drawing trend, support and resistance lines is very straight forward with P&F. Doing the same with a mainstream chart is more of an art and often subject to your interpretation. I prefer the objectivity of P&F. That means that my emotions will not enter into the equation when I must make rational investment or trading decisions.
There are many stories illustrated by this chart. But the main one is shown on the “H10” and “H11” squares. First we had a breakdown from support of $16.50 which put the stock right on the up trend line. Then we had another and more significant breakdown of the up trend line of $16.00. The bull market for this stock was over. That meant that the game was over and from that point on, bull market tactics had to be replaced by bear market strategies. A wise trader would have put a stop loss at $15.50, regroup and realizing that the game is going to be different, take out the bear book and apply the recipes for such an environment. As soon as the breakdown occurred, a new long term trend line appears. It is the Red bearish trend line which will be the new line in the sand. I could go on with this story, but suffice to say that later on in column “I” and “K”, wise traders recognizing the bear would twice short the stock as it attempted to touch and exceed the red down trend line. Yes, shorting at or near the down trend line is often executed by the pros.

So if you trade MT.TO in the near future, please be aware of its current trend. For example, buying into a bear rally is quite different than buying into a bull trend.

Finally Mega Uranium (MGA.TO) is quite a different sight.

If your prefer an Excel version to download, here it is

This stock is still clearly in a bull market trend, so bull market strategies are still in force even after a drop from a top of $8.50 to its present price of around $5.00. Depending of the type of trader that you are and of your risk aversion, there are different trading strategies available to you at this point. Whatever your choice, I find it comforting to know the following points before I trade this stock:
-1- Because we are in an uptrend, I generally should not try to short this puppy until the price has broken the uptrend line at $4.00, the suitable stop loss price for the long term investor by the way.
-2- The stock is currently at double support at $5.50. This is a very likely spot for buyers to come in. Depending on the way you evaluate a target price for this stock, it may be a low risk/high reward trade at this point given that the logical stop price is just under support at $5.00 (T11 is the red square). We could have a loss of $0.50 for a gain of $(...put your estimate here…). I typically require a minimum of 2 for 1 ratio to be worth my while. But 3 to 1 is more to my liking. Of course if we have a breakdown from support the next logical support would be the up trend line at $4.25.

So the moral of the story is that P&F analysis allows you to identify the prevalent trend and using support and resistance it also allows you to evaluate the most likely trading ranges within that trend. I could not do without it

The Word

therealword@gmail.com