View
242
Download
10
Category
Preview:
Citation preview
Divergence Trading
Workshop
Day One
presented by
Thomas Wood | MicroQuantSM
Naked Trading and Price Action
Risk Disclaimer
Trading or investing carries a high level of risk, and is not suitable for all persons. Before deciding to trade or invest you should carefully consider your investment objectives, level of experience, and ability to tolerate risk. This content is subject to change at any time without notice, and is provided for the sole purpose of education and assistance in making independent investment decisions. ValueCharts.com has taken reasonable measures to ensure the accuracy of the information contained herein; however, ValueCharts.com does not guarantee its accuracy and is not liable for any loss or damage which may result directly or indirectly from such content or from an inability to access such information or any delay in or failure of the transmission or the receipt of any instruction or notification in connection therewith. Any past performance results are shown for illustration and example only, are hypothetical and as such have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Past performance is not necessarily indicative of future results.
CFTC Rule 4.41 (Hypothetical Disclaimer)
U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED WITHIN THIS SITE, SUPPORT AND TEXTS. OUR COURSE(S), PRODUCTS AND SERVICES SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE USED TO INVEST REAL MONEY. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS SHOULD BE YOUR OWN.
Workshop Outline
• Understanding Price Action Trends – Definition of Up and Down Trend (Review)
• Knowing When a Market is Consolidating • Timing Entries on Bounces Using Breakout
Strategy • Trading the Second Break, How Should Market
React • Trading Head and Shoulders Reversals • Trading Channel Breakouts, Higher Probability of
Higher or Lower • High/Low and Low/High Reversals
Definition of an Up Trend or Down
Trend
Definition of a Trend
• One mistake that many traders make is they zoom in on the chart too much. We want to keep the entire market in focus and stop ourselves from getting caught up in the noise of the market.
• Use the following examples to be able to tell if you are looking too closely at your chart
Definition of a Trend
• One mistake that many traders make is they zoom in on the chart too much. We want to keep the entire market in focus and stop ourselves from getting caught up in the noise of the market.
• Use the following examples to be able to tell if you are looking too closely at your chart
Definition of a Trend
• One mistake that many traders make is they zoom in on the chart too much. We want to keep the entire market in focus and stop ourselves from getting caught up in the noise of the market.
• Use the following examples to be able to tell if you are looking too closely at your chart
Definition of Up Trend or Down Trend
• You cannot have an up trend without a series of Higher Highs and Higher Lows
• You cannot have a down trend without a series of Lower Highs and Lower Lows
• When we are looking at a trend, we are paying attention to the large swings in the market. The ones that take multiple bars to complete
• We are NOT watching the minor swings that take 2-5 bars to complete (Unless the market has had an extremely fast swing to reverse trend
Definition of Up Trend or Down Trend
• You cannot have an up trend without a series of Higher Highs and Higher Lows
• You cannot have a down trend without a series of Lower Highs and Lower Lows
• When we are looking at a trend, we are paying attention to the large swings in the market. The ones that take multiple bars to complete
• We are NOT watching the minor swings that take 2-5 bars to complete (Unless the market has had an extremely fast swing to reverse trend
Definition of Up Trend or Down Trend
• You cannot have an up trend without a series of Higher Highs and Higher Lows
• You cannot have a down trend without a series of Lower Highs and Lower Lows
• When we are looking at a trend, we are paying attention to the large swings in the market. The ones that take multiple bars to complete
• We are NOT watching the minor swings that take 2-5 bars to complete (Unless the market has had an extremely fast swing to reverse trend
Definition of Up Trend or Down Trend
• Once we have identified the major swings and can say “This is a down trend” or “This is an up trend” then we can start watching the smaller swings for a Micro Trend
• A Micro Trend is formed when you have a higher low, within the context of a major down trend. Or, it is created when you have a lower high, within the context of a major up trend.
Definition of Up Trend or Down Trend
• You only need one higher low, or one lower high, to form a Micro Trend
• A Micro Trend remains a Micro Trend as long as the previous major swing high or low is not broken to reverse the trend
Definition of Up Trend or Down Trend
• Once we have identified the Micro Trend, we will draw a trendline connecting the lows or highs to give us our entry point
• We do not need to wait for the price bar to close above or below the line to enter, just for it to break by a small distance
• Once broken, you should see follow through in your direction within 2-3 price bars
Definition of Up Trend or Down Trend
• You only need one higher low, or one lower high, to form a Micro Trend
• A Micro Trend remains a Micro Trend as long as the previous major swing high or low is not broken to reverse the trend
Definition of Up Trend or Down Trend
• You only need one higher low, or one lower high, to form a Micro Trend
• A Micro Trend remains a Micro Trend as long as the previous major swing high or low is not broken to reverse the trend
Questions on Definition of a Trend?
How Can You Tell if a Market Is
Consolidating?
When is a Market Consolidating?
• Now that we understand what the definition of a trend is, we can say “anything not making higher highs or lower lows is consolidating or reversing”
• We assume a market is consolidating until it breaks through the previous major high or low
• Any price action taking place inside the range of the previous swing high and low is also consolidating and can give us a breakout entry
When is a Market Consolidating?
• Now that we understand what the definition of a trend is, we can say “anything not making higher highs or lower lows is consolidating or reversing”
• We assume a market is consolidating until it breaks through the previous major high or low
• Any price action taking place inside the range of the previous swing high and low is also consolidating and can give us a breakout entry
When is a Market Consolidating?
• Now that we understand what the definition of a trend is, we can say “anything not making higher highs or lower lows is consolidating or reversing”
• We assume a market is consolidating until it breaks through the previous major high or low
• Any price action taking place inside the range of the previous swing high and low is also consolidating and can give us a breakout entry
When is a Market Consolidating?
• Once we are able to identify when a market is in consolidation, we can then look to trade the breakout from consolidation
• Often times when a market finally breaks out of a period of consolidation, it will continue to move for several bar intervals (days, minutes, etc) in the direction of the breakout
• This breakout can often times be a great entry into the remaining part of the trend
When is a Market Consolidating?
• Once we are able to identify when a market is in consolidation, we can then look to trade the breakout from consolidation
• Often times when a market finally breaks out of a period of consolidation, it will continue to move for several bar intervals (days, minutes, etc) in the direction of the breakout
• This breakout can often times be a great entry into the remaining part of the trend
When is a Market Consolidating?
• After a consolidation breakout occurs, if it is a channel, pennant, wedge, etc. many times a market will have a “last kiss” before the big moves
• A Last Kiss setup takes place after a definite breakout has occurred. Once a support or resistance line is broken, it now flips sides. So support becomes resistance and resistance becomes support
When is a Market Consolidating?
• The Last Kiss is when the market pulls back to retest the previously broken support or resistance
• The market does not always stop at the exact price point, but more in the general area. Once it has tested or broken the kiss, then you look for the break of the previous bars high/low to enter the trade and your stop is placed above the high/low of the kiss
• With a last kiss, the market should move your direction very quickly and get you in the money with a breakeven stop
When is a Market Consolidating?
• Last Kiss setups actually have a higher probability of success than the original breakout
• The tradeoff between a last kiss and a breakout is not every breakout has a last kiss, so you will have less signals but a higher probability of success
When is a Market Consolidating?
• The Last Kiss is when the market pulls back to retest the previously broken support or resistance
• The market does not always stop at the exact price point, but more in the general area. Once it has tested or broken the kiss, then you look for the break of the previous bars high/low to enter the trade and your stop is placed above the high/low of the kiss
• With a last kiss, the market should move your direction very quickly and get you in the money with a breakeven stop
When is a Market Consolidating?
• The Last Kiss is when the market pulls back to retest the previously broken support or resistance
• The market does not always stop at the exact price point, but more in the general area. Once it has tested or broken the kiss, then you look for the break of the previous bars high/low to enter the trade and your stop is placed above the high/low of the kiss
• With a last kiss, the market should move your direction very quickly and get you in the money with a breakeven stop
Questions on Market Consolidation?
Timing Entries on Bounces Using
Breakout Logic
Breakout Entries
•Now that we can tell the overall trend in a market, as well as when we are consolidating or no longer trending, we can start to time entries on “normal” bounces as a market moves higher/lower
Breakout Entries
•As we discussed, a market rarely goes straight up or straight down, it normally will have small counter trend moves where it “catches its breath” •These breaks in the move often times can give us a great entry point using “breakout logic”
Breakout Entries
•Breakout logic is looking at the previous “X” number of bars highs and lows, then initiating a trade on the break of the highest high or lowest low from the past “X” number of bars •After you enter the trade, you can place your stop below/above the previous high/low
Breakout Entries
•A 3 Bar Breakout Long would look like the following
Breakout Logic Buying
•Breakout logic is looking at the previous “X” number of bars highs and lows, then initiating a trade on the break of the highest high or lowest low from the past “X” number of bars •So a “3 bar breakout short” would be entering a trade on the break below the lowest low of the previous 3 price bars
Breakout Entries
•A “3 Bar Breakout Short” would be an entry that would look like the following example
Breakout Logic Selling
•Breakout logic is looking at the previous “X” number of bars highs and lows, then initiating a trade on the break of the highest high or lowest low from the past “X” number of bars •So a “3 bar breakout short” would be entering a trade on the break below the lowest low of the previous 3 price bars
Breakout Entries
•Now that you understand breakout logic for entries, we can start to use this to time our entries into a bounce •This will help us to know when it is time to resume the underlying trend after a counter trend move has taken place
Breakout Entries
•There is a tradeoff with the number of bars you want to break before entering •If you use a 1 bar break, you will get in much quicker with a smaller stop, however, you will have a higher probability of a false break •If you get in with a larger breakout, then you will have a larger stop, but a higher probability of the market following through
Breakout Entries
•If you use too many bars for your breakout though, then you run the chance of getting long from the top or getting short from the bottom. So we really need to use what appears like a “good move” normally I look for roughly a 50% retracement of the bounce
Breakout Entries and Stops
•Breakout logic is looking at the previous “X” number of bars highs and lows, then initiating a trade on the break of the highest high or lowest low from the past “X” number of bars •So a “3 bar breakout short” would be entering a trade on the break below the lowest low of the previous 3 price bars
Breakout Entries and Stops
•Breakout logic is looking at the previous “X” number of bars highs and lows, then initiating a trade on the break of the highest high or lowest low from the past “X” number of bars •So a “3 bar breakout short” would be entering a trade on the break below the lowest low of the previous 3 price bars
Questions on Timing Entries Using
Breakout Logic?
Trading the Second Break, How Should
the Market Move?
Trading the Second Break
• Often times after we identify a breakout pattern from consolidation, or a micro-trend, the market will bounce and run the stops. That is alright with us because this will give us a great precise entry we can use by combining our breakout logic with a 1 or 2 bar breakout
Trading the Second Break
• If we are trading the bounce that takes place after a support/resistance or trendline break, then we want to make sure the bounce occurs in the right spot
• If the bounce is going to be a good entry, it should only have 1-3 bars of a retracement after the break, then move back down and break the previous bars high/low
Trading the Second Break
• Once the previous bars high/low is broken, the market should move our direction very quickly and should never go back below/above the lowest/highest bar
• This should all take place almost touching or actually touching the support/resistance/trendline that was just broken
Trading the Second Break
• Once the previous bars high/low is broken, the market should move our direction very quickly and should never go back below/above the lowest/highest bar
• This should all take place almost touching or actually touching the support/resistance/trendline that was just broken
Trading the Second Break
• Once the previous bars high/low is broken, the market should move our direction very quickly and should never go back below/above the lowest/highest bar
• This should all take place almost touching or actually touching the support/resistance/trendline that was just broken
Trading the Second Break
• Once the previous bars high/low is broken, the market should move our direction very quickly and should never go back below/above the lowest/highest bar
• This should all take place almost touching or actually touching the support/resistance/trendline that was just broken
Trading the Second Break
• Once the previous bars high/low is broken, the market should move our direction very quickly and should never go back below/above the lowest/highest bar
• This should all take place almost touching or actually touching the support/resistance/trendline that was just broken
Trading the Bounce
• Now that you understand how to trade the second BREAK, you can also apply this bounce entry logic to a bounce that does not “break” the trendline twice
• If you see a breakout long, then a lower price bar high, you can get long on the break of the previous bar’s high. Similar to a bull/bear flag
Trading the Bounce
• Often times these bounce entries right after a break give us a very high probability trade with very well defined risk
• When trading this setup, you should get into profitability extremely quickly and we should be able to move stops to breakeven rather fast
Trading the Bounce
• Once the previous bars high/low is broken, the market should move our direction very quickly and should never go back below/above the lowest/highest bar
• This should all take place almost touching or actually touching the support/resistance/trendline that was just broken
Trading the Bounce
• Once the previous bars high/low is broken, the market should move our direction very quickly and should never go back below/above the lowest/highest bar
• This should all take place almost touching or actually touching the support/resistance/trendline that was just broken
Questions on the Second Break?
Trading Head and Shoulders Reversals
Head and Shoulders Reversals
• Head and Shoulders reversal patterns are one of the best and most common reversal patterns you can use to find market reversals
• When we are trading a head and shoulders pattern, we want to wait for the BEST setups, do not try to MAKE a market have a head and shoulders
Head and Shoulders Reversals
• Just like any other breakout strategy, once the market hits your entry point, it should begin to move your direction very quickly
• With a head and shoulders or inverted head and shoulders pattern, there are three different entry opportunities you can use
Head and Shoulders Reversals
• You can enter on the break of a trendline drawn connecting the lows of each shoulder. You can enter on the break of the lowest shoulder. Or you can enter on the break of the higher shoulder
• It is safer to enter on the break of the neck line, however, we can also enter using breakout logic on the right shoulder
Head and Shoulders Reversals
• Ideally, a head and shoulders pattern will be located at the top of a strong up move in the market
• We do not want to trade a head and shoulders pattern that is located at the bottom of a down move, as we are trying to identify the TOP, not a continuation
Head and Shoulders Reversals
• You can enter on the break of a trendline drawn connecting the lows of each shoulder. You can enter on the break of the lowest shoulder. Or you can enter on the break of the higher shoulder
Head and Shoulders Reversals
• Similar to a normal head and shoulders pattern, an inverted head and shoulders pattern can be used to identify the bottom of a market
• All you have to do to identify an inverted head and shoulders, is look for a head and shoulders that has been turned upside-down
Head and Shoulders Reversals
• Just like with a normal head and shoulders, an inverted head and shoulders should move our direction very quickly after breaking the neckline
• You also have three entry opportunities using an inverted head and shoulders
Head and Shoulders Reversals
• Just like with a normal head and shoulders, an inverted head and shoulders should move our direction very quickly after breaking the neckline
• You also have three entry opportunities using an inverted head and shoulders
Questions on Head and Shoulders
Reversals?
High Probability Channel Breakouts
High Probability Channel Breakouts
• When a market moves very rapidly in one direction or the other, you will often times see it enter a period of consolidation for 10-20 bars where we are range bound and moving sideways
• When you see a market enter this type of consolidation, the probabilities are that we will break out of this consolidation in the direction of the original move
High Probability Channel Breakouts
• Now you treat this setup the exact same way you treat a trendline break or support or resistance break. Just because probabilities are there that it will break lower, it does not mean that you enter before the market moves through the support
• Once support is broken, we should see a decent move in our direction, followed by a strong bounce in the opposite direction
High Probability Channel Breakouts
• Because we are expecting a bounce in the opposite direction, we can trail our stops using breakout logic with a 1 or 2 bar breakout. That way we will exit very quickly after the market starts its bounce
High Probability Channel Breakouts
• Because we are expecting a bounce in the opposite direction, we can trail our stops using breakout logic with a 1 or 2 bar breakout. That way we will exit very quickly after the market starts its bounce
High Probability Channel Breakouts
• Because we are expecting a bounce in the opposite direction, we can trail our stops using breakout logic with a 1 or 2 bar breakout. That way we will exit very quickly after the market starts its bounce
High Probability Channel Breakouts
• Because we are expecting a bounce in the opposite direction, we can trail our stops using breakout logic with a 1 or 2 bar breakout. That way we will exit very quickly after the market starts its bounce
Questions on Trading Channel
Breakouts?
High/Low and Low/High Reversals
High/Low and Low/High Reversals
• One of my favorite reversal patterns is essentially a two bar reversal and it is called a high/low or low/high reversal
• A Low/High reversal occurs when a price bar breaks the low of the previous price bar, then reverses and breaks the high of the previous price bar
High/Low and Low/High Reversals
• A high/low reversal occurs when a price bar breaks the high of the previous price bar, then reverses and breaks the low of the same price bar
• The logic behind this setup is that a market is running the stops before reversing and going its true direction
High/Low and Low/High Reversals
• Some of my favorite markets to watch for this setup are the NQ, ES, TF, and YM on a 30 minute basis right after the open
• One thing you want to make sure of when you are trading this setup is that the market has volume and can actually move a decent distance in your direction
High/Low and Low/High Reversals
• Normally you will be in the money within two price bars and the market should never “re-break” the low or high that it puts in, if it is going to move our direction
• The bar that is breaking the high/low or low/high, should close in the direction we are trading
High/Low and Low/High Reversals
• You should be in the money within two price bars and the market should never “re-break” the low or high that it puts in, if it is going to move our direction
• The bar that is breaking the high/low or low/high, should close in the direction we are trading
High/Low and Low/High Reversals
• You should be in the money within two price bars and the market should never “re-break” the low or high that it puts in, if it is going to move our direction
• The bar that is breaking the high/low or low/high, should close in the direction we are trading
High/Low and Low/High Reversals
• You should be in the money within two price bars and the market should never “re-break” the low or high that it puts in, if it is going to move our direction
• The bar that is breaking the high/low or low/high, should close in the direction we are trading
High/Low and Low/High Reversals
• You should be in the money within two price bars and the market should never “re-break” the low or high that it puts in, if it is going to move our direction
• The bar that is breaking the high/low or low/high, should close in the direction we are trading
Questions on High/Low and Low/High
Reversals?
All Together, One Market
All Together
• You should be in the money within two price bars and the market should never “re-break” the low or high that it puts in, if it is going to move our direction
• The bar that is breaking the high/low or low/high, should close in the direction we are trading
Support@ValueCharts.com
FINAL Q&A
THANK YOU!
Follow Me On Twitter @TradesWithTom
Recommended