A Question for Price Action Traders

[BlueHorseshoe 10]

Here are two different scenarios from a 15min chart of the ES:

 

1) Price is in a longer term uptrend, and makes a pullback. When my indicator shows that price has pulled back to an oversold level, I buy on the close. Having been oversold, I have bought the market right on the low tick of the pullback, and the market now takes off back in the direction of the long term up trend.

 

2) Price is in a longer term uptrend, and makes a pullback. When my indicator shows that price has pulled back to an oversold level, I buy on the close. Having been oversold, the market continues to become more oversold. Eventually, at a point significantly below my entry, the market turns back in the direction of the long term uptrend.

 

Now, as a price action trader sitting watching the DOM , Time and Sales etc, what would have told you in the first instance that I was about to buy the low tick (or thereabouts), but in the second instance that the market would continue to fall? What specific signs would you have been looking for in terms of other trader's orders and the market's behaviour?

 

Any thoughts would be greatly appreciated.

 

Bluehorseshoe

[phantom 16]

Now, as a price action trader sitting watching the DOM, what would have told me in the first instance that I was about to buy the low tick (or thereabouts), but in the second instance that the market would continue to fall? What specific signs would you have been looking for in terms of other trader's orders and the market's behaviour?

 

If there were a "one size fits all" answer to this question, we'd all be very rich!

 

But you get hints by looking at the sheer volume of orders resting above versus below the market. As the move depletes itself, so will the number of sell orders.

 

Also, since the ES market has a tendancy to making spike bottoms, you might look at how long the market lingers at a price point; the longer the market stays somewhere, the more likely it is to continue in the downtrend.

 

 

Luv,

Phantom

[steve46 12]

For me there are three elements that come together to confirm a reversal

 

First there is the confluence of time and price...I look at my time based pivots...they tell me if there is reason to look for a reversal

 

Second I look for price to test a previous area of supply or demand

 

Third I look for a recognizable reversal pattern...those are patterns that show me that the market is starting to react to a change of direction...starts on the 10 minute time frame, moves to the 3 minute and finally you see what I call an "algorithmic reversal pattern" on the minute or sub-minute time frame...

 

Once I see that last element (the reversal pattern) I know that I have a low risk entry

 

In your first scenario, relying on overbought/oversold indications means nothing....markets can remain overgbought/oversold for extended periods of time...its called trend...there's your first problem...and nothing in your statement "tells" me that you have bought the low tick....

 

In the second scenario, having acted on data that is meaningless you have a position based on random chance, so you're screwed...either it works out (by chance) or it doesn't....bad position to be in, but thats what most retail traders find themselves doing....typically your account bleeds to death fast or slow depending on your stop size. Most retail traders are risk averse (because they don't have a system that works), so as they see price move adversely they get out and try it again....rinse and repeat.....until the account is gone...that is the usual scenario...

Edited March 11, 2012 by steve46

[electroniclocal 10]

Oversold markets don't usually have "V" bottoms. Depends on timeframe/periodicity. Usually a low followed by a higher low shows a rebound, especially if you can measure how oversold you are eg distance frm an MA,BolBand/keltner.

 

Some testing will show you the probabilities of different setups.

 

EL

[BlueHorseshoe 10]

In your first scenario, relying on overbought/oversold indications means nothing....markets can remain overgbought/oversold for extended periods of time...its called trend...there's your first problem...and nothing in your statement "tells" me that you have bought the low tick....

 

In the second scenario, having acted on data that is meaningless you have a position based on random chance, so you're screwed...either it works out (by chance) or it doesn't....bad position to be in, but thats what most retail traders find themselves doing....typically your account bleeds to death fast or slow depending on your stop size. Most retail traders are risk averse (because they don't have a system that works), so as they see price move adversely they get out and try it again....rinse and repeat.....until the account is gone...that is the usual scenario...

 

Hi Steve46,

 

Thanks for your reply.

 

You seem to be making a fair few unfounded assumptions though.

 

Relying on overbought/oversold indicators doesn't mean 'nothing' when they are used in an appropriate fashion (such as to buy pullbacks in longer term trends, which is what I do). What it has meant for my swing trading account for the past two years is a happy profit, and this would have been true for each of the prior twelve years that I have backtested. I know that my system has worked well historically, and I am not risk averse (I trade without a stoploss, relying on underleverage to manage risk).

 

A market cannot remain overbought/oversold for extended periods of time in the trader's perception if they don't allow it to. For instance, a trader might have a rule that says something like: "three consecutive down bars in an uptrend is oversold, but a fourth consecutive down bar indicates serious downside momentum - await an up bar and then re-commence the three bar count". A similar analysis can be obtained by using standard indicators such as an RSI with a very short lookback - try setting up a 2 period RSI on your chart, now can you really find many examples of where it remains at extreme overbought/oversold levels for sustained periods?

 

So what I am doing now is exploring the possibility of adapting this strategy to intraday trading, and looking for ideas from other traders on the forum for how to refine entries by watching the DOM etc.

 

You talk about looking for reversal patterns in sub minute timeframes, an idea that I find interesting - can you expand on the type of thing that you'd be looking for?

 

Many thanks,

 

Bluehorseshoe

[BlueHorseshoe 10]

Oversold markets don't usually have "V" bottoms. Depends on timeframe/periodicity. Usually a low followed by a higher low shows a rebound, especially if you can measure how oversold you are eg distance frm an MA,BolBand/keltner.

 

Some testing will show you the probabilities of different setups.

 

EL

 

Hi ElectronicLocal.

 

Thanks for replying. I'm trying to gather ideas such as the ones you suggest, and then I will test and mechanize them and see where I end up.

 

One of the problems is that I am looking for predictive rather than reactive ways to refine entries. So your suggestion of awaiting a reversal would most likely mean that my entries came too late for the strategy to be profitable. For instance, on an oversold down bar, I could buy on the close in anticipation of a reversal to the upside, or I could place a buy stop at the high of the bar so that I am only taken into a position if the market actually reverses to the upside. Unfortunately the performance of the buy stop is far worse than that of the buy on close (which, in turn, is worse than that of a buy limit at the low of the bar!).

 

So, around the time that I observe an oversold close, I need a method that encourages me to either buy on the close at this level, or to anticipate even lower prices on the next bar. What I cannot afford to do is buy at a level above the close by awaiting a reversal.

 

What you say about 'v' bottoms is interesting. Does this mean that a reversal to the upside should be considered more likely if price has spent a significant amount of time consolidating in a sideways range around the oversold level, where as a sharp rebound from the oversold level should not be bought?

 

Many thanks,

 

Bluehorseshoe

[steve46 12]

Hi Steve46,

 

Thanks for your reply.

 

You seem to be making a fair few unfounded assumptions though.

 

Relying on overbought/oversold indicators doesn't mean 'nothing' when they are used in an appropriate fashion (such as to buy pullbacks in longer term trends, which is what I do). What it has meant for my swing trading account for the past two years is a happy profit, and this would have been true for each of the prior twelve years that I have backtested. I know that my system has worked well historically, and I am not risk averse (I trade without a stoploss, relying on underleverage to manage risk).

 

A market cannot remain overbought/oversold for extended periods of time in the trader's perception if they don't allow it to. For instance, a trader might have a rule that says something like: "three consecutive down bars in an uptrend is oversold, but a fourth consecutive down bar indicates serious downside momentum - await an up bar and then re-commence the three bar count". A similar analysis can be obtained by using standard indicators such as an RSI with a very short lookback - try setting up a 2 period RSI on your chart, now can you really find many examples of where it remains at extreme overbought/oversold levels for sustained periods?

 

So what I am doing now is exploring the possibility of adapting this strategy to intraday trading, and looking for ideas from other traders on the forum for how to refine entries by watching the DOM etc.

 

You talk about looking for reversal patterns in sub minute timeframes, an idea that I find interesting - can you expand on the type of thing that you'd be looking for?

 

Many thanks,

 

Bluehorseshoe

 

I can only react to the question you post...to me using a 15 min chart, implies an intraday framework...on that time scale, a market can remain overbought or oversold all day (and the next day as well)...again its called "trend". If you want a comment based on a longer time frame, it would be helpful to indicate that in the body of your question.

 

My comments on the subject of reversal patterns are posted in the emini daytrading thread. Quite a few chart examples posted there as well.

 

Good luck

 

Steve

Edited March 11, 2012 by steve46

[BlueHorseshoe 10]

I can only react to the question you post...to me using a 15 min chart, implies an intraday framework...on that time scale, a market can remain overbought or oversold all day (and the next day as well)...again its called "trend". If you want a comment based on a longer time frame, it would be helpful to indicate that in the body of your question.

 

My comments on the subject of reversal patterns are posted in the emini daytrading thread. Quite a few chart examples posted there as well.

 

Good luck

 

Steve

 

Hi Steve46,

 

Just to be clear, I am talking about trading on an intraday timeframe (but using an adaptation of the strategy that I am already using to trade from a daily timeframe).

 

When a market remains overbought or oversold all day then I would be trading back in the direction of that longer term trend. So when it was overbought all day (uptrend), I would be looking to buy brief pullbacks to oversold levels within that uptrend. So in as far as my definition of trend is correct, then I would never be trading against the long term trend, but rather looking to trade corrections to this trend in favour of it.

 

I hope that makes a bit more sense than what I originally posted.

 

If you wouldn't mind pointing me towards your posts on chart patterns then that would be greatly appreciated. Thanks for your reply.

 

Bluehorseshoe

[SIUYA 11]

BlueHorseShoe - I am with Electronic local on this and as soon as you talk about oversold/bought then you are picking bottoms/tops and you know what they say about that. IMHO overbought and oversold are constructs from brokers....period.

V bottoms are rare..... dependent on time frame, and how long you wish to run something

 

However - if you wish to try and do that then combine it with something simple as --- support, 50% (or whatever) fib retracement, break to new low then instant reversal..... This is as close as you might get if you wish to anticpate as opposed to react.

 

Waiting for a retracement (of the retracement in your example) and then a resumption of the original uptrend might not mean you get the bottom, but will probably be less stressful sitting it out and/or trying to catch a v bottom. Waiting for a higher low, will often get you in near the bottom anyway.

As an example look at the rumpled one - he waits for a signal within the 20 pip low range, and while not taking every signal (backtesting will show you this may chop you up a lot), having a bit of patience, waiting for the initial bounce can pay, and then applying a simple Rat reversal method might be profitable.

 

(This is interesting as I have been trying to auto mate similar contextual/discretionary things.....so far not to a satisfactory level for me - due to the issues of overtrading, not being able to replicate my discretion (support, retracement) etc, and I am wondering if this is where you are heading. Additionally Electronic Local and his blog seem to have come to the same conclusion, and hence a mixture of automation and discretion is still needed - EL please correct me if I am massively wrong (I dont have a programming daughter ))

Edited March 11, 2012 by SIUYA

[indextrader7 10]

It's great that you've recognized the overall market conditions (uptrend in your example) and are looking for a high probability entry with the bias.

 

Personally, I like to see a bit of confirmation, rather than "catching a falling knife". There are many ways to get confirmation such as a reversal pattern on a lower timeframe, break of a trendline, bullish candle pattern, an indicator of choice, etc.

 

The rare times when I take a position before some type of confirmation (going long as in your example),is when price is showing weakness as it enters a major support level.

 

Regardless of what your confirmation is, it also gives you a reason to exit the trade when the setup becomes invalidated.

 

-Best

[Patuca 13]

not sure on 15 min Es charts as I trade 5 min ES charts. in a bull trend with a pullback. When in the pullback use two charts. use a 5 min ES chart. open one up with your indicators on it i.e. overbought/oversold etc then open another chart in a second window but make it the emini naz. make this second chart a Heikin Ashi 512 tick chart. watch them both. when you see the ES chart get into oversold in the pullback and the Naz chart starts trending up consider going long. usually the emin Naz will lead the ES when trend changes. reverse the process for overbought conditions. you might play around with this concept on a 15 minute ES???

 

now to answer your question. ifthe emin naz chart is NOT trending up I would not buy the oversold condition. If it is I would.

[Patuca 13]

i failed to answer your question about using the dom as a sort of confirmation to going long on a pullback in an uptrend. in my experience the dom would not be too helpful in this as usually the dom is good for reading 1 to 2 maybe a max of 4 ticks profit. that is, the dom is useful for scalping, not so useful for trading pullbacks. i think the heikin ashi e mini naz would be much more useful than the dom for your purposes. you may have to play around to see how to use it in conjunction with a 15 min es chart but it is useful using it with a 5 min.

Edited June 4, 2012 by Patuca