How Do You Determine Your Direction at the Start of the Day?

[suby 10]

How do you determine your directional basis for the start of the day....?

 

If we were to analyze the ES leading up to this mornings trading day (Oct 19th 2012), it was trending along support and fell off a cliff and continued to trend downwards.

 

If you are a mean reversion trader going into todays trading session on the ES you would know that the mean price of the ES is 1443 and the Standard deviation is roughly +/-12 points with Negative Kurtosis.

[addchild 10]

How do you determine your directional basis for the start of the day....?

 

If we were to analyze the ES leading up to this mornings trading day (Oct 19th 2012), it was trending along support and fell off a cliff and continued to trend downwards.

 

If you are a mean reversion trader going into todays trading session on the ES you would know that the mean price of the ES is 1443 and the Standard deviation is roughly +/-12 points with Negative Kurtosis.

 

 

Couple things to think about,

 

Mean is just a function of the data set, and your data set determines your trading environment/ timeframe. If you had those numbers going into this morning I would assume you are not generally intraday trading.

 

For intraday, look at a smaller data set, and remember this "Kurtosis is king."

 

Tread very carefully with mean reversion in instruments that are as volatile as futures, days like today are frequent, and will kill and feed on people saying "this thing can't go much lower"

[wrbtrader 10]

How do you determine your directional basis for the start of the day....?

 

If we were to analyze the ES leading up to this mornings trading day (Oct 19th 2012), it was trending along support and fell off a cliff and continued to trend downwards.

 

If you are a mean reversion trader going into todays trading session on the ES you would know that the mean price of the ES is 1443 and the Standard deviation is roughly +/-12 points with Negative Kurtosis.

 

Market Context will more often than not over-ride any technical analysis. Then again, with all the contrast amongst us traders that use TA in the trading plan...I'm sure there are those out there that would say today's price action was not trending along support. In contrast, they would say that their TA showed price hitting a ceiling (resistance) and that it then dropped as expected with tons of help from the overnight situation involving Europe (ECB) decisions.

 

Therefore, to answer your question, I get my directional bias (you used the word basis) from market context (e.g. key schedule and unscheduled market events). I then use my TA to help with position size management. For example, if I'm bearish via my market context analysis and I get a Long signal via my TA...small size only in the Longs and normal to large size in the Short positions.

 

The above approach works very well for me.

[suby 10]

Couple things to think about,

 

Mean is just a function of the data set, and your data set determines your trading environment/ timeframe. If you had those numbers going into this morning I would assume you are not generally intraday trading.

 

For intraday, look at a smaller data set, and remember this "Kurtosis is king."

 

Tread very carefully with mean reversion in instruments that are as volatile as futures, days like today are frequent, and will kill and feed on people saying "this thing can't go much lower"

 

ADD,

 

Thanks for putting it into context for me. I have been neglecting the seminal rule of "Kurtosis being King"

 

The close of the ES confirmed my distribution; however, I just didn't think that it would drop 2 standard deviations from the mean....

[suby 10]

Market Context will more often than not over-ride any technical analysis. Then again, with all the contrast amongst us traders that use TA in the trading plan...I'm sure there are those out there that would say today's price action was not trending along support. In contrast, they would say that their TA showed price hitting a ceiling (resistance) and that it then dropped as expected with tons of help from the overnight situation involving Europe (ECB) decisions.

 

Therefore, to answer your question, I get my directional bias (you used the word basis) from market context (e.g. key schedule and unscheduled market events). I then use my TA to help with position size management. For example, if I'm bearish via my market context analysis and I get a Long signal via my TA...small size only in the Longs and normal to large size in the Short positions.

 

The above approach works very well for me.

 

WRB Trader,

 

Thanks for the reply and insight towards your methodology regarding Market Context. Essentially a market is nothing more than buyers and sellers... Call me naive but in regards to the ES and S&P who are the biggest players on deck that you really have to factor into your analysis of market context?

[steve46 12]

Direction based on the longer term distribution, and on the historical record for the DOW or the S&P Market (or any market a person might be interested in) is relatively easy to anticipate.

 

As WBtrader commented, longer time frame context is where a skilled person starts the process....then simply reviewing how the market has acted in the "context" of previous similar circumstances...the human beings who move these markets are creatures of habit, and so one can count on them to repeat what has been done before...

 

For our own pre-market prep, we identify both long & shorts, however we do that as a matter of professional discipline....for the S&P Futures market, the historical record shows a tendency for reversal whenever price tests a distribution extreme. This can be confirmed when you bring analysis of volume to bear....simply, on the test or retest of any high, do we see increasing volume coming into the market on the buy side..if not, we wait for the price to stage a reversal pattern and AT THAT TIME, WE LOOK FOR PRICE TO CONFIRM THE MOVE WITH INCREASING VOLUME...This exercise is called "reading volume" and it is one small element of what I was taught to do.

 

It never fails to identify a move...

 

Finally I have to say, that I am growing a bit short of patience with the so-called vendors (actually they act more like use car salesmen) who regularly show up here claiming to have something to offer traders, and yet we seldom see them offer comments of this nature....one assumes that they either don't have the knowledge (or the skills to) do it correctly themselves...

 

Good luck

Edited October 20, 2012 by steve46

[addchild 10]

ADD,

 

Thanks for putting it into context for me. I have been neglecting the seminal rule of "Kurtosis being King"

 

The close of the ES confirmed my distribution; however, I just didn't think that it would drop 2 standard deviations from the mean....

 

Haha I don't think I would call it a seminal rule, but it can be used very effectively.

 

With more time you will start to notice that days like these are not infrequent.

[BlueHorseshoe 10]

If you are a mean reversion trader going into todays trading session on the ES

 

Mean reversion is a function of stochastic behaviour in an essentially random time series. Such behaviour is more pronounced in lower timeframes (higher frequency sampled data), where price is very noisy. In higher timeframes trends can and do persist; once the intraday noise has cancelled itself out we are left with the net results of higher timeframe participants on a daily chart, for example.

 

What does all this mean?

 

It means that as a trader of reversions to the mean in lower timeframes, your edge can be greatly improved by employing a higher timeframe bias.

 

Going into the trading day you would therefore identify the longer term trend, wait for the market to become overextended in the opposite direction, and then trade on the assumption that it will revert to its short term mean.

 

Of all the markets I have examined, the ES is the one in which all of this is most clearly manifest.

 

BlueHorseshoe

[BlueHorseshoe 10]

for the S&P Futures market, the historical record shows a tendency for reversal whenever price tests a distribution extreme. This can be confirmed when you bring analysis of volume to bear....simply, on the test or retest of any high, do we see increasing volume coming into the market on the buy side..if not, we wait for the price to stage a reversal pattern and AT THAT TIME, WE LOOK FOR PRICE TO CONFIRM THE MOVE WITH INCREASING VOLUME...This exercise is called "reading volume" and it is one small element of what I was taught to do.

 

Hi Steve,

 

Though I agree with what you say above in the context you provide, I think it's important to note that this can be market specific. The indices have a buy-side bias, as there are always a large number of participants who never actually short the underlying securities. In my experience this means that the indices tend to top out on low volume as buyers lose interest, and bottom on higher volume as buyers step in to take advantage of 'discounted' prices and thereby support the market. Active short sellers can almost be disregarded.

 

What I describe can easily be seen on a daily chart of the ES without any need for over-involved data analysis. Simply mark a series of what you consider to be short term highs and lows on the chart, place a volume subpane below, and then start counting the number of highs that occurred with lower volume and the number of lows that occurred with higher volume. Last time I tested, the 'edge' was about 6%.

 

Hope that's helpful.

 

BlueHorseshoe

[SunTrader 10]

5 min chart price action spoke loud and clear at 935am ET. No need to know in advance when there is a clean break:

[Steve66 10]

Since I trade a 24 hr market, I try to determine if the market is short, long or neutral based on the settled price of yesterdays market with today's developing overnight distribution high and low. Depending on where the market opens, I have a few scenarios that I have prepared before hand that I have areas to place trades.

[maxblaser 10]

long above the open short below the open

[Colonel B 10]

2 words BONDS / NOTES. If you want to successfully trade the ES and make a living at it instead of a hobby then you should be looking at the 10 year notes and the 30 year bonds. If you are not looking at the notes and bonds then you are trading at one of the biggest disadvantages that you can be at in the ES. It is like playing defense in football with only 5 players. It is like racing your car with out a steering wheel. You stand no chance at winning long term. A really good high school football team has a chance at beating a pro team as long as the pro team is using less then half the required players.

 

Seriously BONDS and NOTES. I am not sure why so many people don't suggest this and give all sorts of fluffy crappy advice. The trend is your friend and every system works with proper money management nonsense.

 

Here is what works CORRELATED MARKETS. Write that down... CORRELATED MARKETS. Oh and while you are at it throw up a CL and NQ chart and watch what they are doing.

[steve46 12]

long above the open short below the open

 

So this is interesting....and I when I say "interesting"....its because this is one of the very very "old" school strategies that NAZ traders used to employ....and it worked pretty well by the way...

 

For me the question is how would that strategy work in today's market (and by that I mean trading the ES, the NQ or even the Russell for example).

 

And to make it more interesting. I KNOW that a variation of that strategy works very well, based on my "preferred times"...now will anyone actually do the homework...I doubt it...

 

Seeya

[Phil-n-Texas 10]

pre-market i look at market profile and initial balance for first 60 min. after mkt open...

 

also long term volume distribution (180 days) for support and resistance.

 

internals:

advance-decliners

up-down volume

pivots

 

also using rangebars adjusted for volitility makes it easy to see trend (HH/LL) or consolidation, S/R levels, and patterns (flags, triangles, etc.)...

 

where the close is at 60 mins. in relationship to open is often a good indicator of possible continuing trend towards close... YMMV

[kuokam 10]

Pardon my ignorance. How are those instruments correlated?

 

 

2 words BONDS / NOTES. If you want to successfully trade the ES and make a living at it instead of a hobby then you should be looking at the 10 year notes and the 30 year bonds. If you are not looking at the notes and bonds then you are trading at one of the biggest disadvantages that you can be at in the ES. It is like playing defense in football with only 5 players. It is like racing your car with out a steering wheel. You stand no chance at winning long term. A really good high school football team has a chance at beating a pro team as long as the pro team is using less then half the required players.

 

Seriously BONDS and NOTES. I am not sure why so many people don't suggest this and give all sorts of fluffy crappy advice. The trend is your friend and every system works with proper money management nonsense.

 

Here is what works CORRELATED MARKETS. Write that down... CORRELATED MARKETS. Oh and while you are at it throw up a CL and NQ chart and watch what they are doing.

[Colonel B 10]

The ES, ZN, and ZB? They are correlated in every way. Treasuries vs Equities. The 10 and 30 are positive and the spoo and 10 are negative. The NQs and the spoo are positive. Put all 4 up and watch the ranges. I use 30 min market profile split but a 30 min candle chart works just as well. Now that you know that, you can look at the RTH ranges and look at where they are going to open. You get a good heads up considering the treasuries open 70 mins prior to the equities. Is the 10 year making new lows and the ES isn't making new highs? Is the 10 year trading in the previous days range and the ES is opening out of range? The bonds do a great job of forecasting the temperament of the ES.

[ForexTraderX 10]

2 words BONDS / NOTES. If you want to successfully trade the ES and make a living at it instead of a hobby then you should be looking at the 10 year notes and the 30 year bonds. If you are not looking at the notes and bonds then you are trading at one of the biggest disadvantages that you can be at in the ES. It is like playing defense in football with only 5 players. It is like racing your car with out a steering wheel. You stand no chance at winning long term. A really good high school football team has a chance at beating a pro team as long as the pro team is using less then half the required players.

 

Seriously BONDS and NOTES. I am not sure why so many people don't suggest this and give all sorts of fluffy crappy advice. The trend is your friend and every system works with proper money management nonsense.

 

Here is what works CORRELATED MARKETS. Write that down... CORRELATED MARKETS. Oh and while you are at it throw up a CL and NQ chart and watch what they are doing.

 

Ahh... but you forgot to include a chart of copper futures (daily chart is good enough... but if i'm going long in the ES...I like to see an upward daily trend in copper futures). you also failed to mention the ES/DAX/BUND/EURO connection. Basically, the DAX, the ES, the EUR/USD, and the 10 year German Bund YIELDS are all positively correlated. (not to mention U.S. bond/note yields of course)

 

When correlated markets are all supporting the "expected" movement of one another, you can combine this with some longer term trends, and some intraday technical levels...and trading actually becomes kind of stupid easy. As long as you don't get stupid, or think it's too easy of course :p

 

FTX

[Colonel B 10]

Yes you are right. I must talk to you already on a daily basis and I just don't know it. Oh and BTW Im totally stealing that line. I'm a kung fu ninja killa when it comes to turning knives into paychecks. I EFFIN LOVE THAT !!!!!!

[William H 10]

I generally take into account yesterday's high and low and whether I am above or below the current pivot level.

[TRADEZILLA 10]

You get a good heads up considering the treasuries open 70 mins prior to the equities. Is the 10 year making new lows and the ES isn't making new highs? Is the 10 year trading in the previous days range and the ES is opening out of range? The bonds do a great job of forecasting the temperament of the ES.

 

This question is for both Colonel and ForexTraderX,

 

How would you use that information in your trade? For example,

 

If the 10yr is making new lows and ES isn't making new highs, does that mean ES is weak and short it or perhaps buy support as ES may be supported by the weak bond market?

 

If the 10 yr is trading in the previous day's range and the ES is opening out of range, would you see that as ES eventually coming back into range and fade a level or ES is behaving especially strong since its moving out of range regardless of what the bond is doing?

 

Thx,

TZ

[Colonel B 10]

This question is for both Colonel and ForexTraderX,

 

How would you use that information in your trade? For example,

 

If the 10yr is making new lows and ES isn't making new highs, does that mean ES is weak and short it or perhaps buy support as ES may be supported by the weak bond market?

 

If the 10 yr is trading in the previous day's range and the ES is opening out of range, would you see that as ES eventually coming back into range and fade a level or ES is behaving especially strong since its moving out of range regardless of what the bond is doing?

 

Thx,

TZ

Sorry I had to wait till today to get an example REAL TIME so I could show you. So this is what was going on before the ES open.

 

Let me decifer the bones/charts. The one on the far left is the bonds 30 year. The middle one is the 10 year notes and the right is the ES. The ES chart is a SPLIT chart so that means that the profile you see is the overnight action on the ES. The profile next to it yesterdays action. The bonds and notes are both RTH (Real Time Hours). So no over night action on them. The notes and bonds open at 6:20 my time and the ES opens at 7:30 my time as well. The "A" period on the bonds and notes is set for 10 mins not the usual 30 mins

 

So the bonds/note opened and in the first 10 mins went up then down. You can CLEARLY see that the 30 years get into yesterdays range and the notes did not. Divergence!!! But which way? Hard to say but so far they are both going back up to the open. So far it looks like rejection off of yesterdays high and we are moving back up.

 

Now look at the ES and you will notice that its trading near its over night highs. Well not close per say. You can see its at 1407 and the high is 1411. There is no gap in the ES signaling some rally. But the bonds might rally today. If they reject off yesterdays highs and go up all day then that means the ES will go...

 

DOWN ALL DAY.

 

I am willing to bet (and I did) that folks will come in JUST LOOKING AT THE ES and get long!!!!! If you just look at the ES it looks like rejection over night and there are folks going to get long first thing. The information they are looking at is old and the bonds are telling a different story. My guess was at the open we go higher. My plan was to start shorting every level I have up above till either the bonds look like they are going lower or till something sticks in the ES. Took me 2 shots. So far that black line at 11.50 is the HOD. My guess is down and we look below 1400. Watch for folks to get long there and crushed all day long. Does this mean we go down for the next few months?? Does this mean that Obama is a sure winner??? Does this mean that the Mayan calendar is correct and expect the word to end on the 21st of December??? Stay tuned.

 

Just from what I see today my bias is to the down side.

 

Here are my trades the blue one is a buy at 1/2 size. I didn't want to get caught with a full boat with all ores in the water. Second was a short and it got hit full size. The third was a winner. Moved over the box so you can see the volume. But the bottom of the red box is my entry and the top of the blue is my entry there. Look at what the notes are doing there. Dumping volume and getting ready to go up a bit. So that means all the folks in the ES that are on the blue side are about to be trapped. And there is alot of blue up there.

 

Hope this gives a clearer picture of what I was talking about.

[ForexTraderX 10]

This question is for both Colonel and ForexTraderX,

 

How would you use that information in your trade? For example,

 

If the 10yr is making new lows and ES isn't making new highs, does that mean ES is weak and short it or perhaps buy support as ES may be supported by the weak bond market?

 

If the 10 yr is trading in the previous day's range and the ES is opening out of range, would you see that as ES eventually coming back into range and fade a level or ES is behaving especially strong since its moving out of range regardless of what the bond is doing?

 

Thx,

TZ

 

Well, you got an answer from Col.... now I'll give you mine. To save time, I also use a type of market profile analysis, but you've already seen this from Col so I won't post that aspect up.

 

For myself, I put most of my emhpasis on recent daily,weekly, and monthly candle price action, proximity to support/resistance levels, as well as trend, market symmetry, distance and momentum of current swing, and finally, a sort of deductive logical analysis regarding what price levels likely provide high levels of liquidity... and how price has reacted to those levels... and then where the next level is likely to be that will provide liquidity again.

 

I also repeat much of this process in several correlated markets, including the 10 year bond futures, the EUR/USD, and copper futures, and of course I also include the NQ... and I also glance at the cash equivlient markets in the NQ and ES.... just to make sure the levels i'm watching in the futures are the same as in the cash markets... as well as any other market I find may be relevent (sometimes crude, which these days is directly correlated, sometimes the DX...which tends to be inversely correlated, etc)

 

If I had to isolate just the most prevalent, heavily weighted factors that I consider...it would be recent daily candle price action, in conjunction with distance and momentum of current swing, and obvious S/R levels on the daily chart.

 

Ok, so here's the pics and thought process breakdown. I have only included a pic of the 3 most important elements. However, I will include another post that later (probably tomorrow) that outlines more of these ideas and shows how I put them all together.

 

But, honestly, these 3 are a damn good start..and probably will give me 50%-60% of my bias just as they are.

 

 

 

 

 

Lets take a current chart of the ES, and break down what is going on.

 

Click in the pictures below, and you'll see my explanation for how I look to understand each concept.

[steve46 12]

You know as I was writing this I had a change of heart....by all means keep on with what you are all doing....

Edited October 28, 2012 by steve46

[TRADEZILLA 10]

Well, you got an answer from Col.... now I'll give you mine. To save time, I also use a type of market profile analysis, but you've already seen this from Col so I won't post that aspect up.

 

For myself, I put most of my emhpasis on recent daily,weekly, and monthly candle price action, proximity to support/resistance levels, as well as trend, market symmetry, distance and momentum of current swing, and finally, a sort of deductive logical analysis regarding what price levels likely provide high levels of liquidity... and how price has reacted to those levels... and then where the next level is likely to be that will provide liquidity again.

 

I also repeat much of this process in several correlated markets, including the 10 year bond futures, the EUR/USD, and copper futures, and of course I also include the NQ... and I also glance at the cash equivlient markets in the NQ and ES.... just to make sure the levels i'm watching in the futures are the same as in the cash markets... as well as any other market I find may be relevent (sometimes crude, which these days is directly correlated, sometimes the DX...which tends to be inversely correlated, etc)

 

If I had to isolate just the most prevalent, heavily weighted factors that I consider...it would be recent daily candle price action, in conjunction with distance and momentum of current swing, and obvious S/R levels on the daily chart.

 

Ok, so here's the pics and thought process breakdown. I have only included a pic of the 3 most important elements. However, I will include another post that later (probably tomorrow) that outlines more of these ideas and shows how I put them all together.

 

But, honestly, these 3 are a damn good start..and probably will give me 50%-60% of my bias just as they are.

 

 

 

 

 

Lets take a current chart of the ES, and break down what is going on.

 

Click in the pictures below, and you'll see my explanation for how I look to understand each concept.

 

I thought copper would be correlated with gold and silver.. Curious why copper is singled out as correlated to the ES?