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

Multiple TICK Divergences

Multiple TICK Divergence Calling Tops and Bottoms

Friday’s trading saw some very profitable trades with tick divergence and the exhaustion pattern.  At approximately 1025 a.m. the market bottomed and the ZoneTraderPro exhaustion trade was indicated which included tick divergence.  The previous low tick was a -704 and as the market traded exactly at the blue counter trend zone the tick was only in -531.  The resulting trade was worth 4.5 points.

Next we saw an exhaustion and exhaustion trend pattern immediately following that trade and again marking a short term market top.

But followed next was again another successful exhaustion trade followed by a successful exhaustion trend trade.  You’ll notice that the exhaustion trend patterns also have a typical trend pattern indicated.  There is nothing special about the fact that 2 arrows are indicating the trade.  When there are 2 arrows it does not mean there is twice the likelihood of success.  It only means the algorithm was satisfied for both patterns.

12/13/13 TICK Divergence Trade
12/13/13 TICK Divergence Trade

 

Later in the day at around 1230 p.m. we have an excellent example of a typical trend trade.  Going into this trade we have a higher high tick and a higher low tick, which results in a successful 3.5 point trade.  But what happens next is very interesting because we see low-volume on the way up and tick divergence exactly at the blue counter trend zone.  As you can see from the following picture the market rose on very light volume at 1772 to 1773.50.  This is a situation called no demand.  When no demand occurs, what is happening is that sellers are lifting their limit orders and allowing the market to rise on very light volume, and are then becoming the smart money sellers.  This is also the reason why you see the tick divergence, because nobody at the NYSE is buying the physical underlying stock either.  There was a previous high tick of 827 however when the market traded 2 points higher the tick could only reach 552.

12/13/13 Light Volume
12/13/13 Light Volume

 

After the market trades at the blue counter trend zone the market fell 7.75 points.  What was the reason for the nearly 8 point drop in the market?  Look at the extremely congested area around 1771 which traded between 1215 p.m. and 130 p.m.

12/13/13 TICK Divergence and Trend Pattern Trade
12/13/13 TICK Divergence and Trend Pattern Trade

It was this large number of contracts that was suddenly unprofitable and saw their stops being hit which resulted in the nice selloff.  It is also important to notice that the ZoneTraderPro tick filter told you around 140 p.m. at the market was going lower.  The ZoneTraderPro tick filter is the solid red dot underneath the bar.

Exhaustion Trading Pattern

The ZoneTraderPro Exhaustion Trading Pattern is a pattern that usually occurs after a strong market move without any retracement.  This first retracement is the opportunity for retail traders to enter the perceived trend. Unfortunately for them the program trade that started the trend is over.  The market found value and profit taking has started.

In the below picture the trade occurs after the market open.  The first exhaustion trade occurs on the open and would be avoided as there is no prior TICK information.  The TICK opened strong at 630.  However as the market trades into the second exhaustion trade there is a TICK divergence, the market tops, and this leads to a successful exhaustion short trading pattern.

Exhaustion Trading Pattern
Exhaustion Trading Pattern

 

Exhaustion trading pattern marking market tops and bottoms

The exhaustion trading pattern also does an excellent job at calling a market tops and market bottoms.  In the below described picture we see the exhaustion trade marking both a market bottom and a market top.  The suggested stop loss of 4 ticks of risk is also illustrated in the picture. Also note the TICK divergence on the market top.

Exhaustion trading pattern
Exhaustion trading pattern marking market tops and bottom with TICK divergence

Importance of the ZoneTraderPro Theory

Here we see three successful consecutive trades with starts with the exhaustion trading pattern.  After the exhaustion, we have an exhaustion trend trading pattern and a trend trading pattern.  In those series of trades we see lower TICK lows and lower TICK highs.

What is the most important feature for users of ZoneTraderPro is the ability to use the zones and the statistics behind the zones.  All three trades end at the blue counter trend zone.  The statistics indicate that 50% of the time the market will not trade into the blue zone. So if the target was set one tick short of the blue zone, there would have been three successful trades.  If the profit target had been set lower, you lost at least 6 ticks and were not able to re-enter the trade and take its’ full profit.

Exhaustion Trade and ZoneTraderPro Theory
Exhaustion Trade and ZoneTraderPro Theory

Pattern Trading and a Typical Day

What is a “Typical” Pattern Trading Day?

On Wednesday I had a trader send me an email and ask me questions about ZoneTraderPro.  In response to his email I sent him back a couple of pictures from Wednesday afternoon which illustrates pattern trading that ZoneTraderPro identifies.

Typical trading day 10/09/13
Typical trading day 10/09/13

In the first picture from Wednesday afternoon there were 10 trades of which at least eight made a minimum of a point half.  The remaining two trades did not stop out for losses.  The trader wrote back and asked if this was a typical day.  My response was that it was neither typical or atypical.  The purpose of ZoneTraderPro is to identify constantly repeating patterns based on statistical analysis and plot pattern trades on the chart.  In addition to plotting pattern trading ZoneTraderPro then predicts where the market should trade at in advance of the market trading there.  We see some excellent trades on this afternoon. First we have a nice reversal followed by an exhaustion topping pattern with excellent tick divergence at the trading zone.  We then see another exhaustion trade marking the bottom which has a significantly higher low tick .  Starting at about 245 p.m. we see a series of three trades with the exhaustion trend trade and the reversal trading pattern excellent examples of a perfect trade.

In the second chart we see two excellent exhaustion trades.  The first exhaustion trade is good for almost 10 points and it marks of a bottom at one p.m. At the location of the trade we again see a significantly higher tick low and it is immediately followed by a red tick filter dot to the upside.  The trade is then immediately followed by a four point exhaustion short trade and then exhaustion trend trade.  Prior to the exhaustion trades we see the purpose and the strength of the tick filter.  Right as the market was trading at the price trigger the tick filter indicated that we should not be in this trade, first warning us about a trend short trade and then warning us about a reversal long trade.  In each instance the warning not to take the trade was correct.

So to answer the traders question about whether this is a typical day, it is typical in that ZoneTraderPro is identifying the patterns in a typical day. What is atypical is simply the number of patterns which produced excellent results in a three hour period. It also illustrated the need for a trading plan to avoid needless losses.

Exhaustion Pattern Trade – 10 Year Bonds 9/23/13

Exhaustion Pattern Trade

The Exhaustion pattern trade is meant to call a market top and a market bottom.  The trade following is your opportunity to buy in at the test of the low.  It is even more powerful when combined with the ZoneTraderPro filters.  The trade is further confirmed with a chart of the 10 year bonds with ZoneTraderPro applied.

9/23/13 ES Exhaustion Trade Pattern
9/23/13 ES Exhaustion Trade Pattern

This Exhaustion pattern trade is setup very nicely by a TICK divergence of 200.  The previous low was -627 and at the area of the trade is was only -428.  Additionally the Euro trade filter was moving in the favor of the trade.  The risk on this trade was 4 ticks, and the market never moved against the trade.  The maximum favorable excursion was 4.5 points.

The trade also illustrates the use of the TICK filter and the trend trade.  There was a trend trade which immediately followed the exhaustion trade pattern.  However as the market price dropped to the entry point the TICK low was 78 lower than the previous low, thus the trade was filtered out.  You can set this filter to a higher number than the default zero, once you become familiar with the filter and the patterns.

Bond Chart Trade Pattern

The bond charts had setup perfectly to confirm this trade.  As you can see from the chart, the bonds touch resistance just as the long ES exhaustion trade pattern is being indicated.  Notice how the Bonds price is very accurately contained in the support and resistance of the software after the trade.  These setups occur every day, but without ZoneTraderPro you do not know what these price levels of support and resistance are.

9/23/13 Bond Chart Trade Pattern
9/23/13 Bond Chart Trade Pattern

 

7 Perfect Pattern Trades in One Afternoon

7 Perfect Pattern Trades in One Afternoon – 19.75 SP Points

This chart developed on 9/06/13 in the afternoon starting just after 2:00 PM EST. The maximum favorable excursion was 19.75 points for 7 different pattern trades!!!  The total adverse excursion was just 4 ticks, with no losing trades.

7 Perfect Trades for 19.75 S&P Points
7 Perfect Trades for 19.75 S&P Points

What is a Perfect Pattern Trade?

A perfect pattern trade is when the market is performing logically and forming tradable patterns.  The first hour of patterns involves 4 short trades shown below.

4 Perfect Short Trades
4 Perfect Short Trades

The short trades start with an exhaustion pattern that marks a top as it is intended to do.  You will also note TICK divergence.  The previous high TICK was 782 and the divergent high was only 470, with price trading 4 ticks higher.  The exhaustion trade has no adverse excursion and is good for 2.75 points.

The next trade is both a Reversal and Exhaust Trend pattern.  We have a lower low TICK of -471 and a lower high of just 446.  In addition the was a Euro Divergence signal.  That trade was good for 2.25 points.

The next trade is a trend trade, with a lower tick low of -477 and a lower tick high of 374.  Again we see Euro Divergence also and a trade good for 2.25 points.

The next trade is also a trend trade, with a lower tick low of -719 and a lower tick high of 336.  Again we see Euro Divergence also and a trade good for 4.25 points.

There is something very important to note with ALL of the trades.  That is the importance of having a trading plan and using the statistics.  The important chart is shown below.

ZoneTraderPro Statistics
ZoneTraderPro Statistics

This chart is telling me that when I have an (eSignal) countertrend trade (which occurs when the market trades a blue countertrend zone) there is a 50.1% there will not be adverse excursion. So what does that mean here? It means that if you set a target at or below the blue countertrend zone there is only a 50% chance that you get filled. The other 50% of the time the market retraces and you lose at least 6 ticks that you just earned.  Only 1 of the 7 trades exceeded the blue zone.  It is easy to get into a pattern trade, but do you use the power of the pattern to exit?

Countertrend zone
Countertrend zone Excursions

 

What follows is a bottoming pattern and ZoneTraderPro again calls a bottom with an Exhaustion Trade.

90613 3 Pattern Trades
90613 3 Pattern Trades

First we start with an Exhaustion pattern trade that is again has a higher low TICK divergence of -842.  This trade is good for 2.5 points.

The next trade is an Exhaust Trend pattern trade that has a higher tick high of 328 and a higher TICK low of -500, which is exactly what you like to see.  This trade is good for 2.25 points. Notice that after you would exit the trade that a trend trade pattern does not form at support, because the tick filter (the little red dot) keeps you out of the trade and is a signal the market is going lower.

The market going lower sets up the last reversal/trend pattern trade worth 3.75 points.  We have a lower tick low of -806 and a lower TICK high of 303.

Day Trading Pattern – Exhaustion

The Exhaustion Day Trading Pattern

The exhaustion day trading pattern is a topping pattern. The exhaustion pattern occurs when the markets reverses from a minor support resistance zone.  When price trades to the previous high/low the exhaustion arrow will signal a trade.  In the example below, you see an exhaustion trade which is a test of a high, followed by a trend trade.  This test of a high has a higher risk.

Exhaustion Trade Filters
Exhaustion Trade Filters

The reason that there is higher risk is that the market can trade to the blue countertrend zone as shown below.  This is an example of an exhaustion trade with a better risk reward ratio, with the risk being 5-6 ticks.

The risk on the 1st trade was much higher at around 9-10 ticks.  This is the only ZoneTraderPro pattern where the trading signal will move.  About 30% of the exhaustion day trading patterns are a test of a high.  The remaining 70% trade higher to run any stops that were placed just above the previous high.

What are some of the reasons that you would want to consider making the first trade with higher risk?  There are several reason why this trade works, and they all have to do with the ZoneTraderPro filters.

Exhaustion Trade Filters
Exhaustion Trade Filters

In looking at the above trade, notice that the background on the chart is red.  The red background signifies that the Euro futures are trading bearishly. The next filter is the tick filter.  Notice the red dot at the -406.  The red dot signifies that the $TICK is at least 100 greater than the previous low $TICK. The $TICK at the test of the high is 673 which is a lower $TICK high than the previous 833. So going into the trade there are more sellers and less buyers on the $TICK.  Lastly the Euro divergence indicator is marking on the chart.