Additional Signals for Change
As we once again return to our regularly scheduled programming, we find ourselves now focusing on the
differences which exist between
continuation and
change. For everyone following along, these differences exist irrespective of resolution level (Forest, Tree, Limb, etc). However, whether or not these differences apply to the trader, results from the
specific resolution level traded. By example, one signal for change (an FTT) may not apply to a Forest Level Trader who looks specifically for RTL changes. This does not mean the FTT did not exist. It simply means this particular type of trader seeks only a breach of the RTL to initiate their exit.
In other words, we will discuss several 'signals for change' in the subsequent paragraphs, but they might not apply to all traders. However, what
everyone can do is attempt to understand these various signals in an effort to add clarity to their own monitoring process. The more areas which appear 'clear' on the charts throughout the day, the greater the comfort level for each individual trader.
Left Trend Line Bounce
On occasion, Price head straight up to the Left Trend Line and either creates a Volatility Expansion before heading back to the Right Trend Line, or, Price bounces right back into the channel. In either case, we occasionally never see an FTT form. (See Attached) As a result, some traders often wonder how they can know change had taken place.
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=1626219>
The answer appears most often on the YM Chart. To anticipate this type of change, we begin to watch the YM as ES Price approaches the left Trend Line. For this reason, we always want to
make sure we annotate the YM Chart
first. Doing so insures the fact that, when we need the information from the YM, we have already laid the ground work for quickly obtaining the required information. One simply needs to 'see' a signal for change on the YM in order to anticipate the lagging change on the ES. The same skill set used to distinguish
change on the ES applies directly to the YM. What is more, we can use this change signal from the YM as our trigger to initiate a reverse (or entry0 on the ES.
Flaws and Formations
While we do not often see a Left Trend Line Bounce carry through to a BO of the current channel (although it does happen now and then), we can now 'see' this phenomenon as a signal for change. With both an FTT and a LTL Bounce, we have both directional and Pace changes taking place.
Flaws and Formations also provide signals for change. Although these changes do not last nearly as long as an FTT or a LTL bounce, Flaws do provide short term changes in both direction and pace. With formations, we can have either Direction and Pace changes, or simply Pace changes. Either we, this temporary interruption in Money Velocity does often provide opportunity.
Flaws themselves result from temporary changes in Market Sentiment. As such, one can (First by accident; then by design) trade through these 'signals for change' under certain circumstances.
1. Appropriate Volatility must exist within the market itself.
2. The trader must have a working knowledge of the tool set required.
3. The trader must be trading successfully on the required resolution level.
While STR / SQU does often signal 'change' during times of trading through flaws, both the DOM and OTR Charts provide much more laser-like information with respect to where one needs to "carve the turns" while trading
through flaws. As a result, I recommend applying one's focus to the broader picture unless one has developed the required skills mentioned above. Trading through an HVS provides loads of profit when done correctly. However, doing so provides an equal amount of frustration and loss when performed incorrectly- or at the inappropriate time.
Formations, on the other hand, provide an excellent opportunity for traders of all skill levels to profit. With formations, we see the market 'pause' momentarily to allow all traders to remain on the 'right side of the market.' Again, using YM as a trigger for
change combined with PRV provides a
very powerful 'one, two punch' for
knowing when to enter, reverse or hold after a formation. In addition, Lateral formations provide multiple opportunities for trading off DOM walls, back and forth, within a very specific range. Pennants require no additional input - other than ES PRV and YM. While the formations do not always provide
directional change, they do provide an opportunity for the trader to gather their thoughts, regroup if necessary and place themselves back on the right side of the market. For this reason, formations hold a very influential place with the methodology discussed here.
RTL Changes
We all look for the BO of an RTL on increasing Volume as a confirmation or signal for change. However, additional changes along the RTL also represent other types of change. These changes may or may not provide directional change (depending on one's resolution level).
An FBO provides a signal for change. For those trading at finer resolutions, the FBO provides a signal for reversing. Other traders see the FBO as simply a reason to hold. Both viewpoints work depending on how far down the rabbit hole one trades. In addition, a breach of an RTL on
decreasing volume also provides a signal for change. Although not directional in nature, this signal for change indicates
slowing pace in the market. Slowing pace can often mean increased risk - especially when combined with Time of Day. Again, the YM provides clues to these phenomenon - often well in advance of anything materializing on the ES.
I'll try to post more in the coming days with respect to increased details on these topics, but hopefully, I've provided enough examples to get people started.
Good trading all.
- Spydertrader
