Trending and Improving Your Chances of a Successful Trade

[Fender85 10]

I just wanted to share a technique I use in order to improve my odds of a successful trade. As we all know, trading with the trend greatly improves the odds of making a winning trade, but there will come a point where a change in market trend seems to build, however it can be difficult to tell whether this is the turning point, or if there is still another leg (or more) to go before a top or bottom is in place.

 

I do use Wyckoff channels, which I'm sure most everyone is familiar with, but I also needed another indication of trend that could work in a less defined market, or to also possibly give me a little bit of an earlier entry instead of waiting for price to have to break cleanly out of the channel and then wait for an entry at some point afterward.

 

Since adding the parabolic SAR study into my charts, it's made reading the market much more clear. When the dots are below price action, one should be looking for longs, and conversely looking for shorts when the dots appear above price action. The basic idea is that as the trend continues, an acceleration factor built into the study will cause the dots to accelerate closer to the price action, and so price action itself must also accelerate if the trend is to hold. Once price crosses the dot, on the next bar the dot will take the other side of price action and it begins again. That's a very elementary explanation, but that's really all you need to know in order to trade with it.

 

Attached is an example from yesterday's trading session on a 2 minute ES chart. I trade the 2 min with profit targets of 1.5-2 points (usually 2 points on the first trade off of a top or bottom, and then 1.5 points on the subsequent no supply/demand bars as the trend continues), but also adjust that as needed due to floor pivots and the 1 min 200 EMA.

 

The first area shows a trade where the parabolic SAR study kept me out of what would've been a losing trade, and then the second area shows where it would've confirmed my analysis and helped me enter a successful trade. The drawings aren't the best, but it's the idea that matters. There's also a little extra clutter on the chart - a few moving averages and so on. I don't really trade with them, but just use them to help illustrate trends and areas of congestion.

 

So for the first area, we see what is relative high volume (it certainly was at the time - my volume auto-scales and since we have the later much higher volume showing, it's scaled this volume to look smaller. However, at the time it was quite high compared to what was before it). It appears on two up bars with long tails that close on their highs after having selling in the background, which can indicate some professional interest (buying) coming into the market.

 

From there we see a little bit of a move up, and then a test back into this area where the buying entered the market. At this point, I have indicated what would appear to be a no supply bar. It is a down bar on very low volume (and lower than the the two bars preceding it) on a test of the area where some professional buying had entered the market. However if you got long on the close of this bar (or even placed a buy stop just above this bar to play it a little safe), you got smacked down on the next bar. However if you'll notice the parabolic SAR (the blue dots), they are still above the price action at this point, indicating that you should not be taking any long positions at this point.

 

Next is an area I've circled that looks like no supply bars and even this time we have parabolic SAR on our side, but I did not enter here because the down bar after that first no supply signal did close on its low, which suggested there still might be some supply to work through.

 

This is confirmed in the following bars leading up to those next no supply bars, as we can see how price is congested (up bar, down bar, up bar, down bar) all on low volume. A lot of times when we get this near a market bottom, we need another shakeout to force out the weak hands and trap some shorts (who will later have to cover and provide fuel to our rally). However just in case, I did have a buy stop above the high of that last strong down bar, just in case price did rally up without another shakeout.

 

However a final shakeout is what occurred shortly thereafter. This definitely caught my attention, as you can see how massive the volume is at this point. Also, I had created a Wyckoff channel from the previous two highs and intersecting low, and so seeing this massive accumulation take place underneath the oversold (support) line was also another indication that this was more likely to be a real reversal.

 

Following that, I have circled a no supply bar, however the parabolic SAR is still above price action, so I did not get long here. However two bars later we do get another no supply bar (the last bar circled), this time with parabolic SAR below the price action, and so this was my trigger bar to get long.

 

An argument could be make that I could've gotten in on the previous no supply bar when parabolic SAR was still above price action, but I find that for the one trade I miss, it keeps me out of several bad ones. As Tom Williams would say, you need to wait for your bus.

 

You still need to do your analysis, but I find that incorporating the parabolic SAR into my studies helps give confirmation that I'm trading on the right side of the market, and that it also makes getting to that point a lot easier because I'm only looking for one type of set up (long or short) depending on which side of price action the bars are currently being displayed.