TICK Divergence Setups

Excellent TICK Divergence Setups

The last 2 days have seen a lot of excellent trading setups, with a wealth of tick divergence setups.  On 2/26/14 within the 1st 30 minutes of the market there were 4 high probability setups, 2 of which were tick divergence setups.

2/26/14 AM TICK Divergence and other trading patterns
2/26/14 AM TICK Divergence and other trading patterns

In less than an hour we saw 2 additional tick divergence setups along with a high probability reversal trade.  What was interesting about this set of trades was that the 1st tick divergence was only good for about 2 S&P points, with the price stopping at intermediate support.  The market then traded to an even higher tick divergence setup pattern, which proved to be a much better trade.  This was then followed with a high probability reversal trade, with the tick filter indicating a lower low and a lower high going into the trade.

2/26/14 TICK Divergence Setup
2/26/14 TICK Divergence Setup

If all these trades weren’t good enough, in about another hour we saw a tick divergence long trade which was then followed by a high probability reversal trade, which again had the tick filter going in its direction for support.

Today we saw a near repeat of the tick divergence trades.  The 1st 2 tick divergence setups were similar to the trade yesterday, in that the 1st tick divergence trade within exhaustion pattern only traded to the intermediate resistance zone.  This was then followed by a 2nd tick divergence trade, and in similar fashion to the previous day, a very profitable trade.  These 2 trades also illustrate the risk of taking a trend trade when there has been a tick divergence pattern preceding it.  In each case where the trend trade failed, the tick filter was not supportive of the trade and the tick divergence pattern, traded and exceeded the opposing blue counter trend zone.

Next we see a 2 tick divergence trades, one that is successful and one that is not.  What is interesting about the trade that failed was that on 2 occasions the market had traded at the blue counter trend zone and then traded for 4 ticks a favorable excursion.  I previously written in the manual and on this blog about what happens when price trades at a zone and initially gives a trader this 4 tick favorable excursion, only to see price come back and take out the entry.  Take a look at this blog post concerning trade management.

http://zonetraderpro.com/new1wordpress/trade-management-the-trade/

Going into the afternoon trading we saw another 5 high probability low risk trading setups, 2 of which were tick divergence setups.  The 1st trade saw an exhaustion trade that initially had tick divergence, however at the low of the move the tick was exceeded by 17, thus negating the divergence.  The exhaustion trading pattern however is still a valid trade.  We next saw an exhaustion trend trade in which the tick filter was favorable for the trade and resulted in a very profitable exit.  An exhaustion trade followed, with the tick divergence setup, trading into another successful tick divergence setup.  What should be noted in the tick divergence long set up is what happened when it reached the intermediate zone and essentially matched the previous tick high.  Look at the lower indicator on the chart which is the actual $TICK value.  Notice that after making the initial high, the tick became divergent each time he tried to go higher as the market traded sideways.  That, combined with the fact that there was a successful tick divergence exhaustion short trade, would’ve been a very good reason to exit and consider the short exhaustion trend trade or completely flatten the position for profit and wait.

The tick divergence setup has a setting in the indicators to adjust when it will appear on a trading chart.  The current default setting is that it will appear 2 ticks away from the blue counter trend zone.  In the last example on the chart you see the tick divergence symbol being given, then immediately followed by a black dot.  The black dot signifies that the tick is no longer divergent.  This is then followed by a red dot which is the ZoneTraderPro tick filter indicating that the tick is now been exceeded by over 100.  This is noted because if you remained in the trade with no valid trading pattern, you took a loss.  In the trade from one hour earlier, there was still a valid exhaustion trading pattern.

The point of this and the previous example is that no trading symbol is going to be perfect.  Conditions will change after a trade is indicated and entered.  If your trading plan questions negative information, such as the tick becoming non-divergent after the trade is entered or 4 ticks of favorable excursion is suddenly wiped out, then you have a trading plan that would’ve survived without taking a full loss on these 2 trades.  And you have a trading plan that would’ve shown profit from the 15 other ZoneTraderPro trades that did work.

 

Trade Management – Trade Exit

Trade Management – Trade Exit

Trade Management is the most important aspect of ZoneTraderPro.  When I was learning to trade and went to a seminar, the guru was always saying “Develop a Trading Plan.”  The only problem was that he never went into how a trading plan was created.  That’s just a minor detail that should have been included in the $3000 seminar fee.  In this series of blog posts, we will look at 3 aspects of trade management and how a trading plan is developed for ZoneTraderPro.   Those three aspects are the trade entry, what you do once you are in a trade, and your trade exit.  Nothing in this post is meant to endorse a trading plan or method, it is only a discussion of the relevant issues when making a trade.  It is incumbent on the trader to test and develop any trading plan with trade management strategies before executing a live trade.

One important aspect of this series is that almost every example used in this series came from 2/07/14. I didn’t have to go and search through months of charts to illustrate a point.  That is because the fundamentals of the pattern trading and filters used by ZoneTraderPro are continually repeating themselves.

The Profitable Trade Exit

The profitable trade exit is probably the most difficult part of a trading plan to accomplish and why proper trade management is important.  In real time the trader is faced with greed.  The trader will look at the target, no longer worrying about getting stopped out, and asking how much further will the market trade past the target that is already established.  Then warning signs that the market will reverse and retrace are ignored, and that 3 point profit is suddenly only a 1 point profit, usually due to poor and no trade management.  It is very common to hear a trader say, “If I could only just make two points every day.”  If this is what you have said in the past, then you need to understand that day trading is a job.

Do Your Job

The job of day trading is hard because you are your own boss.  If you allow yourself to deviate from your established trading plan, then you have not done your job.  If however, you realize that you have six hours to sit and wait for a perfect setup, then you understand your job.  If you set a profit target at 8-9 ticks, and don’t move that target, then you understand your job.  If after your first successful trade of the day, you either go to the beach or again only wait for high probability trades with great setups, then you understand your job.  If you have created a trading plan that includes trade management and done your own statistics, then you really understand your job.

There are three possible trade exit scenarios.  The first trade exit scenario is the fixed profit target.  The fixed profit target says that you want to get a certain number of ticks out of each trade.  If you take this approach then you need to understand that the average winning trade statistics.  Did you go back and create your own statistical database and know what the average winning trend trade was.  Does the TICK divergence trade higher a higher winning average number of ticks?

2/03/14 Trades
2/03/14 Trades

The second consideration is the statistics that are found on the website.  The eSignal version of the software had a counter trend trade pattern programed.  That pattern simply took a trade every time the market traded at the blue counter trend zone.  While this trade was statistically a winner, it did not account for proper risk/reward because the average reward was just the retracement to the intermediate zone, generally just 6-7 ticks.  The two exceptions to this in the Ninja Trader version is the exhaustion and TICK divergence trading patterns.  But it did provide a very important statistic.  That statistic was that 50% of the time there was not adverse excursion in the trade.  This means that half of the time you are in a trade, and price is approaching that blue counter trend zone, the market will take back at least 6 ticks of the profit you just earned.

One justification that could be used to place a lower target would be if the TICK filter has been hit as the market approaches the blue zone.

Trade management and moving a profit target
Trade management and moving a profit target

This trend trade, again from 2/07/14, illustrates the profit target problem.  In it we see a perfect setup for a long trend trade.  It has a perfect TICK setup and the dollar is favorable, and was good for a 2.75 point profit.  Because of the way ZoneTraderPro works, you had 5 minutes to determine where to place the exit.  ZoneTraderPro was painting the blue counter trend zone exactly 5 minutes before the market traded to exactly that price.  Price did not trade through the blue zone, and if you placed the target 1 tick short of the zone, your contract would have been filled.  Then if you evaluated the TICK divergence, that trade was good for another 3 points.  In this instance however the TICK divergence didn’t go to the opposite blue counter trend zone.  So the point of looking at it is to ask yourself the question, is your strategy to take 3 points or do you hold out for the 4-5 points.  The only way you can answer this is by doing the statistics, or instituting a hard profit target as described above.

Trade Management taking profit at the Zone
Trade Management taking profit at the Zone and a TICK Divergence Reversal short trade

The last possible exit scenario was briefly touched upon in the last post.  What do you do if you get into a trade and it gives you 7-8 ticks but your target isn’t hit and filled?  Since the previous post already looked at example from 2/07/14, I am going way back in the archives to 2/06/14 for this example.  This trade has exactly this problem, and one other.  The prices spikes 3 ticks in a single bar (very unusual and a sign of less liquidity) and the TICK filter is hit.  If you had moved the stop to the previous high +1, the stop would not have been hit, and then the market immediately reversed hard. Shortly after that, the dollar goes bearish and the TICK filter is hit to the down side, and the market trades to strong trend support.

 

Trade Management – Once you are in the Trade

Trade Management – Once you are in the Trade

Trade Management is the most important aspect of ZoneTraderPro.  When I was learning to trade and went to a seminar, the guru was always saying “Develop a Trading Plan.”  The only problem was that he never went into how a trading plan was created.  That’s just a minor detail that should have been included in the $3000 seminar fee.  In this series of blog posts, we will look at 3 aspects of trade management and how a trading plan is developed for ZoneTraderPro.   Those three aspects are the trade entry, what you do once you are in a trade, and your trade exit.  Nothing in this post is meant to endorse a trading plan or method, it is only a discussion of the relevant issues when making a trade.  It is incumbent on the trader to test and develop any trading plan with trade management strategies before executing a live trade.

One important aspect of this series is that almost every example used in this series came from 2/07/14. I didn’t have to go and search through months of charts to illustrate a point.  That is because the fundamentals of the pattern trading and filters used by ZoneTraderPro are continually repeating themselves.

What can happen?

There are five possible outcomes here.  The first outcome is that you have a winning trade.  In a winning trade what you normally see is the market trading to the entry zone, trade briefly there, and trade to the blue counter trend zone for an exit.  Here we see a great reversal trade from 2/07/14, which was the third perfect setup reversal trade in an hour.

The second possible outcome is a loss.  In another reversal trade later in the day, we see a less than perfect setup and the trade is a loss as it trades to the theoretical stop.

The next three outcomes are why you need a trade management strategy.  Trade management is not just about entering and exiting a trade, it is dealing with what the market can throw you once you are in a trade.

The third possible outcome is a trade that initially goes in your favor by at least 4 ticks.  In this trade example we see a reversal trade that has the TICK filter being hit as the market trades at the entry.  This trade was chosen as an example for two reasons.  First it illustrates how powerful the TICK filter really is.  If you were in the trade, you were immediately given the opportunity to exit at a profit.  This trade then illustrates a trade that goes 4 ticks of favorable excursion.  At this point you need to make a decision to move the stop and reduce the risk, somewhere near the previous high.

The fourth possible outcome is a trade that has 4 ticks of adverse excursion but does not trade to the stop.  In the first entry on trade management we saw two trend trades with 4-5 ticks of adverse excursion.  Once there has been a 4-5 adverse excursion, you only have an 8.6% statistical chance of winning the trade.  In each of these trades, the market traded back to breakeven, giving the trader the opportunity to exit without a loss, then turned into a loss.  It is also important to remember that that the market does not care where you personally entered the market.  When you back test this strategy you will be using the exact trade entry, the beginning of the zone.  So if you entered 1-2 ticks short of the zone, where will the exit target be placed?

The last possible outcome is a trade the goes in your favor, but not to the blue counter trend zone, so that your target is not hit.  This trade is a divergent exhaustion trade, which is followed by an exhaustion trend trade.  If your profit target was not hit on the first move down, do you adjust the profit target to the area of the next blue counter trend zone and adjust the stop to reduce risk?

The first two outcomes require no trader input, the targets and stops are simply hit.  But the next three outcomes determine if your trade management strategy will be even more successful or will take unnecessary risks.

Trade Management – Trade Entry

Trade Management – Trade Entry

Trade Management is the most important aspect of ZoneTraderPro.  When I was learning to trade and went to a seminar, the guru was always saying “Develop a Trading Plan.”  The only problem was that he never went into how a trading plan was created.  That’s just a minor detail that should have been included in the $3000 seminar fee.  In this series of blog posts, we will look at 3 aspects of trade management and how a trading plan is developed for ZoneTraderPro.   Those three aspects are the trade entry, what you do once you are in a trade, and your trade exit.  Nothing in this post is meant to endorse a trading plan or method, it is only a discussion of the relevant issues when making a trade.  It is incumbent on the trader to test and develop any trading plan with trade management strategies before executing a live trade.

One important aspect of this series is that almost every example used in this series came from 2/07/14. I didn’t have to go and search through months of charts to illustrate a point.  That is because the fundamentals of the pattern trading and filters used by ZoneTraderPro are continually repeating themselves and fundamental to Trade Management.

Risk and Reward

There are 5 patterns that ZoneTraderPro is programmed to identify.  Those are the trend trade, reversal trade, exhaustion trade, exhaustion trend trade, and the TICK divergence trade.  The software is currently being updated to automatically identify TICK divergence.  Because each trade is different, there is different risk/reward for each trade.  Generally I would like a 2:1 reward to risk ratio.  ZoneTraderPro will place a blue line on the chart which is the theoretical stop.  ZoneTraderPro does endorse or support any specific stop and it is incumbent on the trader to develop a trading plan that includes stop placement.

Trade Management – Trend / Reversal / Trend Exhaustion Trade Entry

The ZoneTraderPro software is set to display a trading arrow one tick from the (red/green) intermediate zone.  The arrow may move 1 tick until it touches the intermediate zone, and then it will not move any further.  The arrow will not disappear or redraw after it touches the intermediate zone.

Here is a nice series of trades to illustrate the entry into two winning patterns and two patterns that would be classified as breakeven.  We will come back to these trades in part 2 and part 3 of this series.  But let us look at the entry and possible stop placement of these trades.  The short trend trade is first.  This trade had a good setup.  The TICK filter was hit going into the trade with a lower TICK low and when price traded at the intermediate resistance zone the TICK basically matched the previous high.  The Euro/dollar indicator was bullish, and turned bearish when the ES making a new high which is very unusual.   The chart is however bullish when the market trades 4 ticks through the intermediate zone, setting up the reversal trade.  The trend trade was not stopped out using the theoretical stop.  The theoretical stop was drawn 6 ticks from the entry of the trade.  Six ticks was developed because at this point there is only a 3.6% statistical chance the trade will win, once there is this much adverse excursion.  The theoretical stop for the exhaustion trend trade has similar reasoning.

Trade Management of Trades from 2/07/14
Trade Management of Trades from 2/07/14

The long reversal trade is next.  The TICK high going into the trade is 334 and the previous high was 344, so we have basically a matching high.  Going into the trade the TICK low was a -300, and the previous low was -395, so we have a higher low which is what we want to see.  We see that the risk was two ticks.

How was two ticks calculated?  There was a short trend trade that had 4 ticks of adverse excursion which setup the reversal pattern.  Notice that there is a line drawn 6 ticks from the intermediate zone which had trend trade adverse excursion.  The statistics indicate that that when there is a 4-5 tick adverse excursion on a trend trade, there is an 8.4% chance that there will be a winning trade.  So with 4 ticks of adverse excursion there is a pretty good reason for the stop to be drawn there.

The identical patterns (in reverse) are next identified on the chart.  We have a long trend trade, that had a higher high TICK filter of 585 and a higher low TICK of -145.  But as in the previous trend trade we immediately developed 5 ticks of adverse excursion.   Additionally note the trend line of the $TICK at the bottom of the chart.  Not until the trend line was broken was there a reason to buy the market.  This leads us into the last reversal short trade.  This was again a perfect setup with a lower low TICK filter, and a lower high TICK.  The dollar was still bearish.

What was not discussed is the state of the Bond market in each trade, and it matters.  The bond market is an correlated inverse of the S&P market. So when the bonds are at resistance we should look for a long trade.  It is also an important ZoneTraderPro trade filter.  There are 6 points of interest on the bond chart.  I have placed arrows at the same spots on both charts.  What is most important to take away from the bond chart is that from point 1, the bond market is trading at strong trend resistance.  The bond chart then trades to intermediate support and we have a trend trade pattern.

At point 1 the bond market is at strong trend resistance and the S&P is at countertrend support.  You would expect the S&P to go up at this point, but it is a questionable trade because of risk/reward.  At point 2 on the charts, we answer the reason why the trend trade failed.  It failed because the bonds were falling and still 3 ticks from intermediate support. For that trade to have worked, the bonds needed to at point 4 of the chart.  At point 3 the bonds had almost touched intermediate support and traded up.  The chart at this point does not favor the long trade, because price had traded within 1 tick of support, and then traded up.  The long trade however had extremely low risk and $TICK in its favor.  At point 4 the bonds are now solidly trading in support and there are buyers meeting the sellers.  The S&P is at countertrend resistance, and for exactly the same reason we did not take a long trade at point 1, the risk/reward is not favorable here either. At point 5 the bonds are now trading up and the ZoneTraderPro theory would suggest that you would expect the market to continue trading higher.  That is what happens and the reason the long trade has adverse excursion.  At point 6 the bond buying resumes and we have another extremely low risk short reversal trade.

As we see from this chart the bond market was in bullish patterns from the open, with ZoneTraderPro marking the low with an exhaustion pattern and identifying additional exhaustion trades.

Trade Management – Exhaustion Trade Entry

The exhaustion trading pattern has different considerations for entry.  This is because the exhaustion trading pattern starts to print as a test of a high/low.  The arrow will move until it reaches the blue countertrend zone.  The reason that there is a wider entry margin is because about 30% of the exhaustion trades test the high/low and the test ends up holding, so by definition all of the high/low test trades are winning trades.  The theoretical stop is drawn 4 ticks from the start of the blue countertrend zone.  The logic behind 4 ticks that once there is that once there has been that much adverse excursion, it is common that the market will trade to the strong trend zone, about another 4 ticks away.  The TICK divergence trade logic is being currently being written into the algorithm.  The entry to the TICK divergence trade will be the blue counter trend zone so the theoretical stop will be 4 ticks from the start of the blue zone, similar to the exhaustion trade.

The following example is an exhaustion trade that has traded to the blue counter trend zone, and illustrates the reduced risk.  Additionally this trade also has TICK divergence.  The bond market is trading at blue countertrend support and can be seen establishing a base leading up to the trade.

Dow Down 300 – What did ZoneTraderPro Do?

Dow Down 300

After the 10 o’clock news event we saw successful  exhaustion and trend exhaustion long trades.   A long trend trade pattern was detected next, however immediately after the pattern printed, the tick filter was hit indicating sellers were present. This was then followed by a tick divergence trade that was good for 4.75 points. As we saw in the tick divergence trades from Friday this was again a trade that went from a blue counter trend zone to the opposite blue counter trend zone.

2/03/14 Trades
2/03/14 Trades

Forty-five minutes later there was again an exhaustion trade with tick divergence followed by an exhaustion trend trade.  It is important to look at the exhaustion trade and understand the trade management here.  The exhaustion trade with the divergence was only good for 9 ticks from the peak to the trough.  As noted in the previous tick divergence examples, the tick divergence trade is usually good for more than 2 S&P points.  So what do you do?  From a trade management perspective if you are still in the trade, it might be a good idea to consider moving your stop to the previous high plus a tick.  The risk in the following trend exhaustion trade is a mere one tick, with the potential profit of 4 S&P points.  The only thing I do not like about the trend exhaustion trade is that the tick filter was hit as the pattern emerged.

2/03/14 Trades
2/03/14 Trades

An hour later there was a 3rd and 4th tick divergence trades.  The 1st was a long tick divergence exhaustion trade, followed immediately by a tick divergence short trade which was good for 5 S&P points.

2/03/14 Trades
2/03/14 Trades

At about 1:50 EST we saw another tick divergence long trade.  This was followed by a successful reversal long trade.  What is important to note about these 2 trades is that if you were simply looking at the big Dow don move and only wanted to take a short trade you would’ve missed two winning long trades with perfect setups.  The market itself will tell you when a trade is not going to work, as we see in the following trend long trade.  Going into the trend long trade we see the tick filter being hit, followed by a significantly lower tick high as the market reached the red intermediate resistance zone.

2/03/14 Trades
2/03/14 Trades

Dow Down – More long Trades?

15 minutes later this is followed by a successful reversal long trade leading into a tick divergence short trade.  As noted in the trade above where the market did not immediately move to the blue counter trend support zone, if you had a trade management plan that moved your stop to reduce risk, and an exit strategy using the blue counter trend zone as the exit, you had an additional point of profit.

2/03/14 Trades
2/03/14 Trades

 

TICK Divergence Friday – 5 for 5

5 TICK Divergence Setups – Over 23 S&P Points

Friday was a great day trading the TICK divergence setup.  ZoneTraderPro uses the $TICK to filter trades.  The $TICK is a measure of actual buyers and sellers at the NYSE.  In the following example from Friday the $TICK made a high on the previous move of 615.  TICK divergence occurs at the next blue counter trend zone when the ES makes a higher high but the $TICK can only make a high of 504.  Additionally, what makes this pattern even better is that it also occurs at a Exhaustion trading pattern, so the typical risk is about 4 ticks.  The trade was good for 4 ES points.  Very nice that the US Dollar turned negative while the market was trading at the high.

1/31/14 Tick Divergence setup
1/31/14 Tick Divergence setup

Next in the period of one hour we see 2 more TICK divergence setups.  All 3 of those were also Exhaustion trades.  What is absolutely fantastic about all three trades is that ZoneTraderPro nailed the exact entry point in each trade and the trades did not have adverse excursion.  The trades total profit was 12 points.  There is also a trading lesson to this picture.  Note that after the 1st TICK divergence trade, there is an Exhaustion trade, that does not lose, but does go against you.  The TICK was a lower high at 135, and going into the trade it was a lower low, so there was nothing good about this setup.  If you waited 10 minutes, you were handed a 3.75 point winner, for the same 4 tick risk.  What’s the better trade?

1/31/14 TICK Divergence Setups
1/31/14 TICK Divergence Setups

The next trade has TICK divergence at the blue counter trend zone, but it is not an Exhaustion pattern.  ZoneTraderPro software is being updated to include this TICK divergence pattern.  Updates to the software are always free.  What is nice about this trade is the winning Exhaustion patterns preceding and following the trade. In the second Exhaustion pattern we see the market making a matching high, without a higher TICK, giving you a very good reason to take the trade. Note the exit of the trade, 1 tick short of the blue counter trend zone.  The TICK divergence trade was good for 7.5 S&P points with no adverse excursion.

1/31/14 Tick Divergence setup
1/31/14 Tick Divergence setup

In each of the TICK divergence trades the market traded from blue counter trend zone to blue counter trend zone.  ZoneTraderPro develops that blue counter trend zone in advance of the market trading there.

More TICK Divergence

At about 2:40 EST time we have a perfect setup for a Trend Trade which was good for 2.25 more points.  Again ZoneTraderPro painted the profit target zone in advance of the market trading there, and as noted in previous posts, there is a 50% chance that the market will go no higher than that zone.  Next you see the TICK Divergence which is good for another 6.75 points and no adverse excursion.

1/31/14 Tick Divergence setup
1/31/14 Tick Divergence setup

Later in the day we see another group of successful Exhaustion and Trend trades.  There is one addition TICK divergence pattern that breaks the rule by just a single tick.

1/31/14 Afternoon Patterns
1/31/14 Afternoon Patterns