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.
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.
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.
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.