I have received several requests for a video of a realtime trading example. The following video is an example of a TICK Divergence / Exhaustion realtime trading example, followed by a reversal trading example. The video illustrates how the zones and patterns develop.
There is no sound to the video. It is commented with captions to illustrate the important events as they occur, so it is not necessary to describe what you will see here. The two examples run about 24 minutes total.
There is also a TICK Divergence / Exhaustion trade that occurs shortly before the video starts. I point this out to emphasize trade management techniques that are commented on here on the blog. The market had come up and exactly touched the blue counter trend zone. Then you had fours ticks of favorable excursion, before the market reversed and traded at the theoretical stop price. You can read about Trade Management here.
Pattern Trades 12/05/13 – 7 Winners Worth 22 S&P Points in an Hour
The morning started out with a very nice series of pattern trades. The market opened and traded to a bullish countertrend resistance. This would normally setup a long trend trade, but that trade was destined to fail and the chart told you. The TICK could only reach a -22 as a high. It traded for about 4 minutes at this zone, and over 15,000 contracts were bought on market orders. Nobody was buying at the NYSE and somebody was selling every ES contract that they could. Additionally the dollar was bearish towards trades. The market traded through the intermediate support and that setup a perfect reversal trading pattern.
Reversal Pattern Trade
With the 15,000 contracts sold at 1790 providing resistance, the market trades to the intermediate resistance zone, there was a lower low tick at -696, and a lower high at -177 as the market reaches intermediate resistance. The dollar is still bearish. Now the people holding losing contracts that they bought at 1790, see this retracement as an excellent opportunity to cut losses and get out. ZoneTraderPro users see this as a perfectly setup trade that yielded a possible 3.75 points.
Exhaustion Trading Pattern
Price next trades into an exhaustion trading pattern, that has 4 ticks of adverse excursion, but only 83 contracts traded at 1785.00, meaning that if you used NinjaTrader’s Sim Stop feature, that trade would likely have not been stopped out. This trade had a divergent TICK low.
Exhaustion Trend and Trend Patterns
An Exhaustion Trend Pattern that has a higher tick high and a higher tick low, and the dollar has turned bullish. This trade was good for 2.5 points. The exit from this trade illustrates the need for ZoneTraderPro. The blue countertrend zone sat at 1788.75. The statistics say that 50% of the time thee market will not go through this zone, so if you placed your target at 1788.5 you had the proper target to exit.
Next there is a trend trade pattern with all the same setup as the previous trade. Again the market traded 1 tick short of the blue counter trend zone. If you did not exit using ZoneTraderPro charts and strategies, you just gave up 3 S&P points of profit on each of these trades. This leads to another trend trade worth an additional 3.75 points.
Market Tops with Divergent Exhaustion Trading Pattern
What follows is another 3 winning trades with the exhaustion trading pattern marking the top with a divergent TICK high. When this series of trades finishes with a trend trade that is almost 5 points, less than 1 hour after the open, there as been 7 outstanding winning trades which yielded a staggering 22 S&P points, with two losing patterns totaling 2.5 S&P points. This all occurred in the 1st hour.
The ZoneTraderPro Reversal trading pattern is a low risk high reward trade. In a typical reversal a trend trade will trade to the opposing intermediate zone and the market will reverse.
The example below is the perfect setup into a reversal trade. The TICK strategy and the web site statistics from the web site will make the trade setup a low risk trade. The TICK strategy for this trade starts at the blue counter trend zone that has a TICK of -401.
The next important point of this setup comes from the web site statistics. If there is a 4 tick adverse excursion from a failed trend trade, there is less than a 9% chance the trend trade will succeed. Five ticks have less than a 6% chance, and 6 ticks or more have less than a 4% chance of success. In this example the trend trade has 4 ticks of adverse excursion and the TICK is making a higher high at 403.
The market trades to the green intermediate support zone, where the Reversal trade is indicated, the risk is 4 ticks, and the statistics indicate that in about 9% of the time, this stop will be hit. The stop was only 4 ticks. The TICK has made a higher low of -343. The green background indicates the Euro-dollar classification system became bullish for stocks.
Another very common pattern, and very profitable pattern, is the reversal trade that follows an Exhaustion pattern. Because an Exhaustion pattern normally marks a market top or market bottom, this trade is a test of the top or bottom.
In the eSignal example below, we first have the Exhaustion pattern marking the high. Any Trend trade that follows an Exhaustion trade is, by definition, a High Risk Trend trade (a high risk trend is automatically filtered in the NinjaTrader version), and that is identified on the chart below. The high risk trend trade has 5 ticks of adverse excursion. Your stop would have been 4-5 ticks away, and your profit target over 2 points away. Then a third short trade is good for an additional 2 points of profit. In all 3 of these trades you had no adverse excursion.
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.
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.
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.
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?
What follows is a bottoming pattern and ZoneTraderPro again calls a bottom with an Exhaustion Trade.
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.
As the name would suggest this trade is looking to take advantage of market reversals. The reversal pattern will trade to a blue countertrend zone and then trade through the opposite intermediate zone, setting up the day trading pattern. In the example below we first see the ZoneTraderPro Exhaustion day trading pattern. When the market reaches the intermediate support zone, we see a $TICK filter dot indicating the sellers are coming in. The low $TICK is almost 300 more than the previous low. The market then trades 6 ticks through the green intermediate support zone.
Very Important – The adverse excursion of 6 ticks is calculated from the top of the support zone. The opposite is true for a resistance zone.
The stop is a very small 4-5 ticks. It is important to understand how this is calculated. On the Statistics page of the website there is a very important table. MAE is the Maximum Adverse Excursion. When the MAE is 4-5 the statistics indicate there is a 8.4% chance that the market will trade to where the blue line is drawn on the chart. When there is a 6 tick adverse excursion the number is down to 3.6%.
This is what make the Reversal trade a ZoneTraderPro favorite. This trade occurred at 1420 Hours EST, which is late in the day for the bond market. The bond market has smaller moves in the afternoon, absent of news. But exactly as the ES makes a reversal day trading pattern, the bond market is trading at blue countertrend support.
With the bond market trading at support, that would favor the short ES trade. With all of the filters in place, this is a great trade with little risk.