There was an interesting pattern that occurred on December 2 at 1252 p.m. which illustrates why it is important to understand tick divergence, volume analysis, and the ZoneTraderPro theory.
We first see the market trading heavily within a one point range with the top at 1805.50 which develops into a trend trade which failed. The market traded between the red and green support and resistance zones, which is indicative of an accumulation or distribution pattern and this pattern is described in the trading manual.
Next we see heavy volume at the blue counter trend zone at a price of 1807. There were 9,000 contracts that were bought on market orders at this price level. There was no Tick divergence here as the market traded higher on a higher tick.
The market then traded to the pink strong trend resistance area and touched it exactly. Again there was a tremendous amount of contract volume at that resistance zone. There were 25,000 contracts bought on a market order at this resistance zone. It is important to note that once the tick made its high at 1221 p.m. it began to fall steadily in break the upward trend line. When the tick first reached strong trend resistance it had a value of 536. However when the tick reached and touched strong trend resistance its value was only 13 and this illustrated a strong Tick divergence.
By looking at the tick on the lower indicator on the ZoneTraderPro chart you can see the tick had entered a bearish trend channel leading into the selloff. What is also very important to look at is the number of contracts that were traded at both the blue counter trend resistance zone and at the pink strong trend resistance zone. This is the reason why you get a six-point trade from the divergence. So much of the dumb money had bought contracts while the tick was selling off that the stops were hit on the way down.
Taking a trade at the strong trend resistance zone can be justified due to the high volume of contracts bought on market orders and the divergence in the tick if a tight stop is used. Nothing larger than a six ticks stop can be justified here because of the large amount of contracts that it also been sold on a market order.
One of the advantages of ZoneTraderPro is its powerful and useful filter strategies involving the TICK. The ES Trading Filter TICK filter strategy simply says that we are going to look for a higher tick high and a higher tick low when going into along trade, and vice versa for a short trade. ZoneTraderPro displays the TICK in real time along the bottom of the chart, and it displays the highs and the lows above the currently traded price. Additionally ZoneTraderPro has an indicator settings that allows a red dot to be painted onto the chart at the exact location when a higher high or a lower low has been made. This setting has a default of 100 meaning that the previous value can be exceeded by 100 before the dot is painted. The advantages to using this TICK filter also demonstrate when there is a divergence in the tick to create a tradable pattern. Let’s look at the following chart from 10 /25/13. On the left-hand side of the chart we see if successful exhaustion trade followed by a successful exhaustion trend trade. At the conclusion of the exhaustion trend trade there is a high tick of 541 and the red dot indicator indicating that the previous five 324 was exceeded. The price then drops 11 ticks stopping at a blue counter trend zone. At the blue counter trend zone we see a tick divergence of -396 which is a higher tick low.
The reversal trade is then indicated, however all of the ZoneTraderPro filters are advising against the trade. The background is green indicating the euro is bullish for stocks. There was a higher tick high and a higher tick low going into the trade. The market trades through the reversal and again to a blue counter trend zone making a lower tick high of 399. Again we see tick divergence and an unfavorable euro position at this high. When the reversal is indicated the fact that the tick could not make a higher high going into the trade would create a filter condition which would negate the trade, even though the background is now green.
Trading TICK Divergence
As the market traded to each of the blue counter trend zones that provided a low risk trading opportunity to trade the TICK divergence using the ES Trading Filter and the blue counter trend zones. The tick and the euro were both favorable to the outcome of the trades.