[Trends, Balance Areas, and Stop Placements]

[Soultrader 12]

Please Read First:

 

"The stronger the trend, the greater the distance between successive balance areas. As the auction ages, this distance decreases. In the late stages of a trend, price may continue to rise but the next balance area will often be resting on top of or within the prior, lower balance area."

 

- James Dalton from Markets In Profile -

 

CLICK HERE TO VIEW VIDEO

 

 

Charts created by Tradestation

[WinSum 10]

I'm also playing around with a new concept on stop loss placement on Trends. Here is another technique.

 

From Don Jones's book on Value-Based Power Trading (pg 139), he uses a more longer term technique for position traders (minimum of 10 days).

 

1) There is no target price at the beginning of a trend. The stop-loss price for a trend is 1.5 octants from entry.

2) The initial stop-loss point is maintained until the first node forms.

3) After one or more nodes have formed, the trade is exited when price returns to the mid-point of the prior node.

[walterw 10]

I'm also playing around with a new concept on stop loss placement on Trends. Here is another technique.

 

From Don Jones's book on Value-Based Power Trading (pg 139), he uses a more longer term technique for position traders (minimum of 10 days).

 

1) There is no target price at the beginning of a trend. The stop-loss price for a trend is 1.5 octants from entry.

2) The initial stop-loss point is maintained until the first node forms.

3) After one or more nodes have formed, the trade is exited when price returns to the mid-point of the prior node.

 

Winsum : are there any indicators to see does octants on a chart, would be interesting to have a visual aid to follow does octants... wich sounds pretty logic to create a trailing sistem... cheers Walter.

[WinSum 10]

Don Jones have software/service that you can get it from him , otherwise you will have to build your own.

[dalby 10]

I have always had "a problem" with the concept of risk/reward as defined by stop size vs. target size. The CW (which I think is wrong) is that a lower risk/reward is "better". In other words, risking 20 pts to make 10 pts is not an intelligent trade.

 

I think IN GENERAL that has merit. However, I have several setups that set a smaller initial target than the stop, and thus would have a "risk/reward" ratio of 2 or greater. Now, that is somewhat problematic since I scale out, but the point is the same.

 

What matters in addition to (so called) risk/reward in stop distance is the positive expectancy of the setup.

 

If you have a setup that has 90% winning trades, with a 3/1 risk/reward ratio (in terms of stops to target distance), is that a "bad" risk/reward.

 

Clearly not. If you crunch the #'s that trade has high positive expectancy.

 

I agree that there are a # of concepts about stops and none is necessarily better. I like to consider the average true range of the timeframe I am trading because I find that using a # related to that metric is going to generally keep you from getting stopped out by "noise".

 

Good video, btw

[dalby 10]

In regards to the octant thang.

 

Most charting programs have a Fib tool that will draw lines at ratios of a outlined range. The classic #'s are 38.2% 50% etc.

 

However, if your charting package allows you to use user modifiable percentages, then you just need to set the retracement at multiples of 12.5%

 

.125 is 1/8 so, that will draw lines at the octants

 

it's kind a down and dirty technique, but it works

[walterw 10]

Winsum : do you have a chart that we can see of does octans in action ?

[WinSum 10]

No, I have a TPO Overlay Demand Curve that I use to see the market profile structure but I do the Octet calculation by hand because my programming skill is limited.

 

The ODC allows me to see the previous Balance Area nodes and its POC, so I know where the stop losses are likely to be located for trend traders.

 

The interpretation is that the break-out Trend has come back into Value and a Stopping Point of the Trend has been created and the market will now transition from Imbalance back into Balance.

[traderwilliam 10]

WinSum, would you please elaborate on where are the stop locate for trend trader?

[WinSum 10]

Sure, prior to last week, most ppl would agree the market was in an Uptrend.

 

If you bring up a TPO chart on the Russell 2000 from 12/7/06 to 2/23/07, you can see a node forming on the top of the uptrend. From 831.90 to 821.30, the node was developing into a bell curve profile. If the uptrend was going to continue, it would break out of this balance area and continue its move up.

 

There was a node below that and the POC was at 817.60. If price comes back into the POC of the prior node, this would be the uptrend has stopped and trend traders should be alerted and have their protective stop losses in place. They will no longer be bias long.

 

People who were pullback buyers on 2/27/04 got clobbered because the other time frame buyers were no longer bias long. The price has gapped down below the prior node's midpoint.

[traderwilliam 10]

Winsum, thanks for your explanation:D

[Bfbusa 10]

Soul, the link to this video is missing.

[Soultrader 12]

Bill, can you try viewing it again to see if there is still problems? I am viewing it fine from here. Thanks

[Jennifer 10]

Soultrader,

 

Thank you for this interesting concept. I am trying to get a sense of how to define "balance areas"... Is there an indicator that would help outline or define the balance areas or would you explain a little further what the criteria is for a balanced area?

 

thanks

Jennifer

[Guest cooter]

People who were pullback buyers on 2/27/04 got clobbered because the other time frame buyers were no longer bias long.

 

Yep, and if you set your stops around the GAPPs (generally accepted pivot points), look for them to get hit more often than not.

[Soultrader 12]

Soultrader,

 

Thank you for this interesting concept. I am trying to get a sense of how to define "balance areas"... Is there an indicator that would help outline or define the balance areas or would you explain a little further what the criteria is for a balanced area?

 

thanks

Jennifer

 

Im not sure about indicators but look for congestion areas. In other words, the markets will move and then take a breather. Trend > range > trend > range.

 

How would you define a congestion area? Its really up to you... might be when price touches the same S&R twice, when price rotates back and forth at a reference forth, etc...

 

I dont use strict rules for what defines a balance area or not. I just eyeball it.

[WinSum 10]

A Balance Area will look like a Normal Distribution.

 

If you show the picture below to a Market Profile trader, they will say the market is in "Balance". It's has a Normal Distribution profile and it closed back into middle of the chart at the end of the day.

 

MP traders don't need indicator to see balance area, they can just eyball it.

 

It just takes screen time to be able to recognize it.

[Jennifer 10]

Hi...

 

Would it be possible to look at the volume distribution for each bar and then to use a consolidation or cluster of trading within a tight range with several consecutive bar to begin to identify a base?

 

I guess I am trying to think of a way to build an indicator that will map out bases. Does that make sense or am I going down the wrong path?

 

thanks

Jennifer

[WinSum 10]

It sounds good, test it out to see if it will work for you.

 

The only exception to your concept on how to identify a Balance with using "tight range" don't fit. "Tight Range" are begging for a Break-out and are not a stable balance area.

[Jennifer 10]

WinSum....

 

So I am not sure I understand what you are saying... Is a "Balance Area" seen as a stable area or is it seen as a break out begging to happen? I would think that both would perhaps be true since essentially every breakout comes from a balance area or some sort... correct?

 

To begin to define what is a balance area we have to define it from a trend or just basic "chop"... so my thought would be to define it as a tight range of consolidated volume/trading over a given period of time. Does that sound ok so far?

 

Jennifer

[WinSum 10]

WinSum....

 

So I am not sure I understand what you are saying... Is a "Balance Area" seen as a stable area or is it seen as a break out begging to happen? I would think that both would perhaps be true since essentially every breakout comes from a balance area or some sort... correct?

Jennifer

 

Correct, Market goes from Balance to Imbalance and back into Balance and then back to Imbalance again.

 

I use Market Profile to see developing Balanced Area, if your indicator is similiar, then I would agree.

[walterw 10]

WinSum....

 

So I am not sure I understand what you are saying... Is a "Balance Area" seen as a stable area or is it seen as a break out begging to happen? I would think that both would perhaps be true since essentially every breakout comes from a balance area or some sort... correct?

 

To begin to define what is a balance area we have to define it from a trend or just basic "chop"... so my thought would be to define it as a tight range of consolidated volume/trading over a given period of time. Does that sound ok so far?

 

Jennifer

 

Yes Jennifer, that could also be called Coils or rectangles, now that is derived from price action itself, I think the "term" balance area cand be used also for being inside vah and val.... so in that case you will be monitoring the break outside vah and val.... not a price action coil.... cheers Walter.