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Walt,
I am Looking at the last few days action in the December Wheat.
Question, was Friday 10/17, the first day of a Pattern-1 Multiple Bar
Set? Its high was roughly equal to the center of Thursday's range, and
its low was lower than Thursday's. Monday was a large outside day up
which closed on its highs. If I am understanding you correctly, I
should consider Monday's action in WZ to be a completion of a Pattern-1
which means that there is a statistically strong chance that WZ will
Reverse on Tuesday.
Dennis
Walt Downs wrote:
>
> ****************************************************
> The Key Elements of Successful Short-term Trading
> By
> Walt Downs
> *****************************************************
>
> Section1 Contraction, Expansion, and Price Movement
>
> Market Contraction
>
> Market contraction is considered to be in effect when either of the
> following two
> situations occur:
> A.) . A trending indicator such as ADX displays a very low reading.
> This indicates
> that the current trend in the market has slowed, and that the average
> daily range
> has contracted as well. In essence the market is "building energy" for
> a substantial
> move.
>
> B). Implied (current) volatility of the underlying market varies in a
> signifigant
> fashion from the historical (average) volatility for that market over a
> long period
> of time. For example: Let's say the Historical volatility was 13.96,
> and suddenly,
> the implied volatility decreased to a number less than 50% of this, say
> 6.0 .
> Statistically, we can now expect the market to "expand" in order to
> bring itself
> back in line with its "natural" voloatility.
>
> Short-term Market Contraction and Expansion, Both in Volatility, and
> in Price.
>
> Very short term market expansion and contraction is also one of the key
> ingredients in
> short-term trading. Trading with this "ebb and flow", is what puts the
> trade in sync with
> the market. It allows the trader to trade when he has a statistical and
> psychological
> "edge". In order to adequately identify and trade this phenomenon, we
> will view the
> market in terms of a "framework", under which the flow of the market can
> be quantified
> and analysed. Once we understand the framework, we can statistically
> quantify and test
> short-term price movement.
>
> The Framework
>
> .The Taylor Theory of 3 Day Market Rythm.
>
> In the 1940's a grain trader named George Douglas Taylor, put forth the
> theory that the
> grain markets exhibited a 3 day market pattern. This consisted of a
> "Buy" day, a "Sell"
> day, and a third day in which the larger forces of the market
> "conspired" to create a day
> on which prices "faked" going in one direction, and then reversed
> sharply. The methods
> that he and others developed to take advantage of this phenomenon are
> irrelevant. What
> does matter, is that the trader be aware of this "market flow", and
> attempt to be in sync
> with it. This pattern can be viewed in all markets.
>
> Price Movement Within the 3 Day Market Rythm:
>
> Price movement within the 3 day market rythm can be defined almost to
> exclusion, to the
> following:
>
> Single Bar Action
>
> Expansion Bars -- A OHLC bar which is signifigantly larger than
> previous bars.
> When a bar of this type is present, and the Open and Close are at
> extremes of the
> bar, two statistical factors are now present:
> 1. There is an 85-90% chance that prices will trade higher the next
> day.
> 2. There is a less than 50% chance that prices will close higher than
> today's high. Now the trader has discovered a statistical "edge" in
> which
> he knows the market is likely to reverse direction the next day.
>
> Contraction Bars-- A OHLC bar which is signifigantly smaller than
> previous bars.
> When a bar of this type is present, one statistical factor is now
> present:
> 1. Brekaouts from the High or Low of this bar the next day, will tend
> to
> continue strongly in the direction of the breakout. Now the trader has
> discovered a statistical "edge" in which he knows that the market is
> likely
> to continue it's direction from specific points the next day.
>
> Multiple Bar Action
>
> Swing Bars -- In order for a market to trend higher or lower, it is a
> mathematical
> fact that a higher or lower bar must be established. Therefore when a
> trader sees
> any two OHLC bars that exhibit the following pattern, he knows that
> there is a
> distinct possiblity of the market continuing in a two day set which is
> statistically signifigant:
>
> Pattern1-- Today's bar has a High rouglhy equal to the center of the
> previous day's
> bar, and today's bar has a low which is lower than the previous day's
> Low. Now
> the trader knows there is a statistical likelyhood that if the next
> day's price action
> penetrates the High of today's bar, then the price will continue in the
> direction of
> the breakout.
>
> Pattern2 -- Today's bar has a Low rouglhy equal to the center of the
> previous day's
> bar, and today's bar has a High which is Higher than the previous day's
> High. Now
> the trader knows there is a statistical likelyhood that if the next
> day's price action
> penetrates the Low of today's bar, then the price will continue in the
> direction of
> the breakout.
>
> Completion of the Pattern -- If Pattern1 or Pattern2 is present, and
> today's Price
> action does indeed breakout, then on the next day of trading, the
> trader knows that
> statistically there is a strong chance that the market will reverse.
> Why this is so
> will become apparent when reading the following section on Floor
> Traders
> (Enemy/Friend number one for all OTF (off the floor) traders. ).
>
> Summary: The above information dictates 90% of all short-term market
> action. By
> aligning himself with these patterns, the trader gives himself the
> needed statistical edge
> in trading a market.
>
> Section 1 tought us what type of "price action" to expect, but the
> picture is not
> complete unless the trader understands who he is primarily trading
> against, how
> they think, and, more importanlty, how they trade. These traders can be
> our best
> allies or our worst nightmares, and it behooves us to understand them
> well.
>
> Section2 Talking the Talk ain't the same as Walking the Walk
>
> Floor Traders, How They Think, and How they Trade
>
> Floor Traders exist for the sole purpose of adding liquidity to the
> market place. Without
> them, sufficient trading volume could not be found in order to enter and
> exit positions
> quickly. Floor traders make their money by trading to points of
> short-term resistence or
> support, running the stops placed here by unwitting traders, and then
> reversing the
> market. They would deny this if you asked them, but that is how they
> make their living.
> Therefore, it is important that we understand when the "Floor" is for
> us, and when the
> "Floor" is against us. Remember also that floor traders are human. There
> are times when
> they make mistakes, and times when they panic. It is our job as OTF
> traders to take
> advantage of them in any way possible. remember also that you are not
> trading against
> the best traders here. That is because extremely successful Floor
> Traders usually don't
> stay on the floor long! They move to upstairs offices, or begin trading
> as representative
> brokers for larger firms. So the floor in general CAN be handled.
>
> How the Majority of Floor Traders Trade
>
> Did you know that most exchanges don't allow computers in the "pit" ?
> How then, does
> the average Floor Trader know where the support and resistence areas
> are, and how does
> he trade against them or with them in general. The answer for most Floor
> Traders is the
> use of a somewhat mechanical framework reffered to as the "Pivot". What
> follows is the
> formula for calcualting the "Pivot" and it's resulting areas of support
> and resistence, and
> how Floor Traders use it to trade:
>
> Formula for Pivot and Associated Sup/Res Levels
> P = Pivot
> NH = Next High
> HH = Highest High
> NL = Next Low
> LL = Lowest Low
> O = Open
> H = High
> L = Low
> C = Close
>
> P = (H + L + C) /3
> NH = (2*P) - L
> NL = (2*P) - H
> LL = P - (NH - NL)
> HH = (P - NL) + NH
>
> Extended formula for recalculating the Pivot snd Sup/Res levels after
> trading has been
> going on for a few minutes:
>
> Recalculate Pivot by using the formula: P = (H + L + C + Today's
> Open)/4 Then,
> recalculate the sup/res levels using the new Pivot number, and the H,L,
> and C, as stated in
> the above formula.
>
> How Floor Traders Trade the Pivot in General
>
> The Pivot is the average price that the market has traded at. IF
>
> Market in Uptrend, and Price > Pivot THEN the Floor BUYS.
> Market in Downtrend and Price < Pivot THEN the Floor SELLS
> Market trading in Range THEN the Floor SELLS the NH and BUYS the LL.
> Market trades above HH, THEN the Floor BUYS
> Market trades below LL, THEN the Floor SELLS
>
> In making sure that you keep the "big" (For an ST Trader ) picture in
> mind, it is often a
> good idea to calculate the Pivot numbers for 1 weekly OHLC bar as well.
>
> In section 1 and section 2 we learned the basics of short-term market
> rythm, short-
> term price movement, and and the general who and how of our competitors.
> Now we
> will learn about a few applications of very simple and very powerful
> indicators to
> aid in our trading:
>
> Section3 Indicators
>
> The use of Historical vs. Implied volatility.
>
> As stated earlier, this concept entails trading when the tmarket
> exhibits a strong statistical
> possibility of major movement. When the implied volatility is less than
> half the historical
> volatility, a major breakout may be due.
>
> Historical Volatility almost always defined as : The Average volatiity
> of a market over a
> 100 day period.
>
> Implied (current) volatility most popularly defined as : 4 days, 6 days
> or 10 days.
>
> So, the calculations are usually based on the difference 100 to 4, 100
> to 6, or 100 to 10.
> formulas for the calculations of these ratios are readilly available
> from many sources.
>
> ADX
>
> ADX is an indicator designed to measure average market movement. When
> this indicator
> declines to very low levels (Less than about say 16) then statistically,
> the market is due to
> break out. The most popular calculation for ADX periods is 14, but I
> have used 9 days
> with some success as well.
>
> If you have a market that is displaying BOTH low ADX AND Low volatility,
> it is usually
> SHOWTIME. : )
>
> Out of all the stuff I have studied and looked at over the years,
> this small group, is the most consistent in producing profitable
> trading results.
>
> If you are into cycles or Gann or Fibonacci retracements, then feel free
> to add them
> to the above market theories as "confirming" indicators, however, if
> some "guru" is
> telling you that you don't need to look at this stuff for short-term
> trading, and that
> all you need is a "magical" date or retracement value, PLEASE, don't
> change a
> thing, I WANT you in the market just the way you are ; ).
>
> Walt Downs
> CIS Trading
> http://www.cistrader.com
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