Trading Adverse Events

[steve46 12]

and here is a follow-up to the previous post, where you can see how the S/D nodes work and how trades taken on these tests would have work out for both longs and shorts.

 

For those interested I put my S/D analysis in place at the start of each week. I review the placement of each node at the end of RTH and before the start of the Globex, and of course I put in each Globex session about 30 min before the Globex open...Its part of a more comprehensive approach that I was taught quite a long time ago by a very gracious gentleman at a Chicago firm called Gelderman.

 

For the ES contract this is all I need, two charts, NYSE tick, the Time & Sales strip, and my execution software..and it all fits on a laptop

Edited April 7, 2011 by steve46

[steve46 12]

and here is the chart showing end of RTH for today April 7th 2011

 

So what I would direct folks to in this chart is the obvious observation that when you see increase volatility, it is often represented in the form of a large wave, and as we move through time the amplitude of each following wave gets progressively smaller...having this concept in the back of your mind as you trade makes it psychologically easier to trade the oscillations that follow the "main event".

 

USING TIME BASED PIVOTS

 

Also for those who are trying out my time based pivots can see that today...at the end of the day price tested the previous DAILY TIME BASED PIVOT

 

open at 1334.50....high of 1336.50.....low of 1325.25

 

Price tested the previous day's low at 1325.25 at 10:45am PST, and again at 11:25am PST, taking those trades would have provided a nice safe high probability entry. The last one was good for 4+ points into the close.

Edited April 7, 2011 by steve46

[bobcollett 10]

. To identify these areas, generally one has to look at longer term charts and work toward shorter time frames. The rule that helps you is simple, you want to see price rally (or drop) significantly (from a swing high or low), then you want to see it create a base, and finally you want to see it retrace and re-test that orignal swing point. This is just one or several scenarios that you could use to identify high probability setups and most importantly....the principles work for all markets (even currency markets)...

 

In my posts, what you are seeing is my identification of supply/demand on shorter time frames and that may confuse you....As you may appreciate, working on shorter time frames requires experience and there is a bit of "art" to it, more than I can describe in a short post (this is in part why I intend to pursue a venue where I can give people more personal attention)

 

Dear steve

I have struggled to work out how you identify demand/supply.

You highlight some swing highs / lows and leave others out.

Easy , you are using a long term chart.I cant wait for the open on Monday

bobc

[steve46 12]

Well Bob

 

Supply & demand are only a part of my decision making process. I do indeed leave out some areas of overhead supply and underlying demand depending on my judgement. At this point in my career I feel that I have earned the right to use some discretion, and fortunately it usually works out for me.

In addition to supply/demand analysis, I look at the available pricing for opportunities to buy wholesale value and sell retail value...Also I monitor time based pivots because in my experience they are honored by institutional traders (who want to make sure they earn bonus money at Christmas), and finally I read the tape...in fact this along with supply/demand analysis are really the backbone of my approach...combining the two elements (supply/demand analysis and reading the tape, trading becomes much less stressful and more like a walk in the park) Today for instance was exactly that kind of scenario as we sold (like most institutions) retail value at the top of the local distribution, and watched it approach wholesale levels at 1327

 

I look at the markets the same way every day....and it works because there are a lot of other similarly trained individuals doing the same thing...At this late date I would suggest that there is no mystery to it, only the subtle differences that I attribute to skill level, experience and capital requirements (some folks have more capital to move, some less)...Now if you will pardon me I am still short the market looking for a test of 1325.25 at which point I am done for the day.

[steve46 12]

Its just after 10am today and I have a doc's appt so I will stop myself out here at 27

 

Normally I would stay in case it continued down but I think its near enough to my target that I can call it a day..

 

The red arrows at the top of the screen show the short entry pricing at the top of the local distribution....As can be seen on the chart we hit that price point twice, once right at the open and then again about 5 minutes later...I tend to display volume and market breadth differently, but the "tell" for me, was that when price tested that previous high the $ADD showed me that institutions were selling it....

and a few minutes later I got confirmation that the broader market wasn't supporting a move up...(the NYSE Tick displayed successive lower readings of 854, then 574, and finally 254 and at that point you have your confirmation that the bus is headed south....Once you have confirmation of market bias, you can add size or just hold on and watch as price moves toward the next lower level at 1333 and then lower to 1330...once you get some breathing room, it is much easier to just put your stop in and take a look periodically to see how you are doing.

 

Hope this helps some of you

Edited April 8, 2011 by steve46

[jim380 10]

I had not been to this forum for a long time. Surprised and glad to see you posting again Steve.

[steve46 12]

Hey Jim

 

As you know I appreciate your kind words and hope that you find something of value here.

 

As for the rest of this post, as regards "event trading" this is probably the most significant thing I will put out publicly. Throughout the afternoon, in the press and worldwide news, we noticed comments about the increasing level of alarm over the condition of the reactors in Japan..The context is simple...when you have potentially volatilie news overseas, it is a good idea to stay current (on top of the news)...as you see it develop, you can evaluate the effect that it may have on world markets..If for a moment we put aside the implications of this tragedy on the poor citizens of Japan, we still have this "event" to respond to....Knowing the potential, I looked for the market to show me, how it wanted to respond. At the Globex open we saw the market move up slightly to test the pre-selected S/D boundary...and fail...once that happens I look (as I did in other posts previous) for entry...my outlook depends on the news...and in this case instead of going out to dinner as I might normally do, I stayed home and watched the chart develop...while monitoring news....as you can see the Nikkei took it down from 1530 hours to 1700 hours (HangSeng). Seeing that the situation was deteriorating, I stayed in the postion waiting for a change in the news...the news got progressively worse as Reuters reported an increase in the estimate of damage from the quake, and subsequent reports declared that the status of the problem had been changed to "level 7" (based on the International Scale) comparing it to Chernobyl...by the time you see this kind of volatile comment in world new headlines, it is generally too late to trade it, but you can see what the net effect was (a ten point move off the Globex open)

 

For me the take away is...anticipate further developments when you see headlines that show a volatile situation deteriorating...

the preferred method of entry is off of pre-determined supply or demand levels, and the best entry is the Globex open or at the first test of S/D AND if you anticipate continuing reports based on an event...it is probably a good idea to stay at your screen and monitor the world markets for response..For first timers, I would suggest Bloomberg, CNN and Reuters...all available on the Internet..I will be staying at (or near) my screen throughout the night if I have to...

Edited April 12, 2011 by steve46

[steve46 12]

And here we have the chart of this evening's DAX open, where you can see that the market gaps down, probably in response the news. At this time the S&P was trading at about 1313.25

 

From this point forward I will be monitoring the DAX, the Eurostoxx, Bond and Currencies to see how the world reacts to the escalation of this continuing problem in Japan...

[steve46 12]

and here is the continuation chart for the open and first hour of the S&P futures

 

As can be seen the market went into a consolidation overnight. In the premarket, we labled the overhead supply and underlying demand areas. At the open the market did what it often does, which is continue as before...In this instance we had a number of fake outs as pit locals and institutions tried to activate stops and "strand" folks on one side or the other...Ultimately what happened was the market continued down, and if you had a position in place, as we suggested in the previous post, you would now have a nice profit, which you could take and fold your tent for the day, or stay in the position looking for a further move down.

 

We have an existing position and will stay with it through the reversal move that should happen right along here 8:15am PST. In the afternoon, when folks come back from lunch, we expect a continuation down to 1300 which would allow us to reach our profit target of 20 pts. Whenever that happens we are done for the day.

[Tradewinds 12]

The blue rectangles are my identification of balance/imbalance "nodes" in the order flow....Once I have these in place I then monitor the Time & Sales Strip as price tests these key reference areas. It takes a while to get used to but that is the way I was taught...I lot of offices use this method (or similar methods) rather than the indicators and widgets that are found in most charting software.

 

Where can a person find out how to determine or calculate a supply/demand "node". And thank you for this thread.

 

Node: "In general, a node is a localised swelling (a "knot") or a point of intersection (a vertex)." wikipedia

 

http://en.wikipedia.org/wiki/Node

 

So maybe it's a point of intersection where the balance of supply and demand is switching over from one bias to the other. There must be some threshold level where the balance is considered to be switched over, and that's why it's a band rather than a thin line.

Edited April 13, 2011 by Tradewinds