Trend Pattern Trades for Friday 1/17/14

AM Trend Pattern Trades

On Friday morning we saw 5 consecutive pattern trades with little to no adverse excursion.  The 1st trade was an exhaustion trading pattern which marked the bottom and had tick divergence going into the setup.  This trade was good for 2 ½ S&P points.

1/17/14 AM Pattern Trades
1/17/14 AM Pattern Trades

More Trend Pattern Trades

As the exhaustion trade was completing we saw the tick make a higher high which led to the setup of the next trade, the exhaustion trend trade.  You also notice that the software is also indicating a trend trade at this location.  This does not mean that because there are 2 arrows you should double what you normally trade or that this trade has any less risk because of the additional pattern.  It only means that the algorithm identified two patterns.  This exhaustion trend pattern trade had 5 ticks of risk or less as a stop loss, and had a profit of 3 ¼ S&P points.

A big ZoneTraderPro advantage is knowing where to get out of a trading pattern based on the blue counter trend zones.  The blue counter trend zone began to print at 10:03:42 EST and the market traded at that zone at 10:06:41 which gave you 3 minutes to place a target at or below 1837.25.  The reason this is important is that the statistics indicate that approximately 50% of the time the market will not trade through the blue counter trend zone.  So knowing this you can establish a trading plan that takes profit at a fixed amount or just short of the blue counter trend zone.

This sets up another trend pattern trade worth another 2 ¼ points which had no adverse excursion and a higher tick low at the entry point.

This trade then sets up an additional trend pattern trade worth 3 ½ points and only one tick of adverse excursion.  During the trade an interesting trading decision is going to have to be made so let’s analyze it.  After the market traded four ticks through the red intermediate zone there is a 4 tick selloff.

11714 Pattern Decision. Take Profit or Ride it Out?
11714 Pattern Decision. Take Profit or Ride it Out?

 

The 4 tick selloff is not what is concerning, it is the red dot which shows that a lower tick low has been made.  Normally it is a bad idea to stay in a trade with the tick filter has told you to get out.  At this point however good trading practice would have you moving your stop loss to breakeven, so this is a free trade.  The reason you would want to consider staying in the trade is because of the fact the market has traded 4 ticks through the red intermediate zone.  When this occurs, it is more likely that the market will trade to the blue counter trend zone, which it eventually does.  As noted in the paragraph above, the blue counter trend zone starts to print at 10:40 EST, and the market trades there 22 minutes later.

That lower tick low then sets up an exhaustion trading pattern with tick divergence at the market top, giving you 5 winning trades in an hour and a half worth a total of 13 ½ S&P points.

Trend Trading Pattern

Trend Trading Pattern

The ZoneTraderPro trend trading pattern is the basic trading pattern of the system. The theory behind the trend trading pattern is that when a trend is established the market will continue in the direction of that trend, following the pattern of profit taking and trend resumption.

ZoneTraderPro prints these areas of support and resistance in advance of the market trading at these zones. If you know where those zones are in advance, you can set limit orders at these zones.  The blue counter trend zones are defined in advance of the market trading there.  This is important because traders will want to place the target to take profit from the trade.  It is extremely important to note that 50% of the time the market approaches a blue countertrend zone, price does not trade through the zone and the market retraces at least 6 ticks.  Why give up 6 ticks of profit because you didn’t know the zone?

In the picture below, the three Trend trades are easily identified as the market moves from the blue counter trend zone back to the intermediate red zone. The blue countertrend zone is the typical area where the smart money will start to cover the bets they made when the trend initiated. At this point, the retail traders finally have a trading signal, but quickly find out they are the dumb money and weak hands, as the institutional traders cover their trades.

Trend Trading Pattern
Trend Trading Pattern

 

The ZoneTraderPro TICK Filter

ZoneTraderPro has the TICK filter built into the pattern.  In a long trading pattern, the TICK filter looks for higher-highs and higher-lows going into the trade.  The filter setting can be adjusted to allow for minor adjustments to the rule.  In the picture below we see two trend trades.  The first short trend trading pattern has lower TICK lows and lower TICK highs going into the trade.  The market trades into a second trend trading pattern.  There was a significantly lower tick low, but the tick high was exceeded by 50 ticks. It is important to look at the light blue counter trend zones.  If you were short from the 1424 hours exhaustion trading pattern you knew where 50% of the time, the market stops and begins a retracement.  The same thing happens at the second trend trade, which ends with an exhaustion calling the bottom, 1 tick short of the blue counter trend zone.

Trend Trading Pattern with TICK Filter
Trend Trading Pattern with TICK Filter

 

TICK Filter Divergence

It is very easy to see TICK divergence at the blue counter trend zones.  This develops an excellent out of the box trading pattern.  In the picture below, the S&P is making a higher high, but the TICK is divergent.  When the TICK fails to make a higher high a low risk trade can be taken.  The trend trade long trend trade would be avoided because of the trading filter.

TICK Filter Divergence
TICK Filter Divergence

 

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.

New ZoneTraderPro Trend Trade Pattern

Trend Trade Pattern

In the coming days the NinjaTrader version of ZoneTraderPro will be updated to include the trend trade pattern.  The update is free to all registered users.

The update will feature a new pattern to the Ninja version.  The new pattern is the eSignal version of the trend trade, but with a filter.  The pattern for the trend trade is simple.  First the market will trade at a blue countertrend zone (where you see -554 TICK value) and then market price will retrace to the intermediate zone (at the 293 TICK value).

NinjaTrader Trend Trade
NinjaTrader Trend Trade

Pattern Filter

There will be a filter built into the trade also.  The filter will look at the TICK numbers and will have an initial value set to zero.  A setting of zero will mean that as in the case of this short trade shown above, there must be a lower low at the blue counter trend zone, and a lower high when the price reaches the intermediate zone for the trade.  Setting the filter to a higher value will loosen that requirement by the number input.  If you want to allow the TICK value to be exceeded by 50 the variable Tick Filter would be set at 50.  You also have the option of completely disabling the trend trade pattern by setting the enabled value to false.

Trend Trade Indicator
Trend Trade Indicator

The current version of the software identifies the pattern directly following an exhaustion trade as a trend trade.  This will be changed, and now be called the Exhaust Trend pattern.

Two patterns – Same Trade

It is possible to have two patterns appear on a chart, especially following an exhaustion.  It does not mean that there is greater odds if there are two signals, it just means that two patterns formed.

Here we see a being indicated

.

reversal trade pattern and a trend trade pattern
Reversal trade pattern and a trend trade pattern

 

 

Day Trading Pattern – The Trend Trade

The Trend Day Trading Pattern

The trend day trading pattern occurs following an exhaustion trade.  The market must first form an exhaustion trade.  The exhaustion trade sometimes has additional risk if it is a test of a high or low. The trend trade is looking to take advantage of the new trend.  You may have not taken the exhaustion trade due to the risk, or exited the exhaustion trade for a profit.  The definition of the pattern is that after trading at the blue countertrend zone, the market then trades at intermediate support resistance.  This was the original description of the eSignal trend trade.  The difference between the Ninja version and the eSignal version is the additional filter of the exhaustion trade.  The “out of the box” trade will be a trend trade with all of the filters except the preceding exhaustion trade.

ZoneTraderPro Trend Trade
ZoneTraderPro Trend Trade

In this trade we use the tick filters again in the setup.  We have a lower low $TICK of -308 and a lower higher $TICK of 55 at the zone.  There was just 2 ticks of adverse excursion, and a total risk of 6 ticks.  Notice that the trade that followed was an out of the box trend trade that probably would have been passed on.  This was because as the price was approaching the zone, there tick filter was hit with a 311.  That is unfortunate, because the market had made a lower low of -451 going into the trade.

Bond Market with ZoneTraderPro
Bond Market with ZoneTraderPro

Notice how the above picture of the bond market is just as responsive to ZoneTraderPro.  The bonds were trading at intermediate support when the Trend Day Trading pattern formed.  The bonds fell which should be bullish for the ES.  It was not. The ES traded sideways at their intermediate support then fell to the target zone.  ZoneTraderPro painted the target 2 minutes before price actually traded at the price.

The ES out of the box trade then occurs as the bonds trade at countertrend support, and we get another 3 point trade.