Momentum Trend Trader
This e-book is not to distributed, copied or sold in whole or in part in any manner. It is for your personal use ONLY. Publisher: Momentum Trend Trader Author: Orville Saari Email:
[email protected] Website: www.momentumtrend.com
Copyright © 2003 Orville Saari All Rights Reserved
Risk Disclosure Trading whether its futures, forex, options, or stocks offer a large potential for return but can also a large potential risk and loss. The information in this e-book is not an offer or recommendation to buy or sell any trading vehicle. Samples shown are for illustrative, educational and informational purposes only and not a recommendation to buy or sell.
Copyright © 2003 Orville Saari All Rights Reserved
Introduction The purpose of this e-book is to introduce you to the Momentum Trend Indicator. To learn what it is based on. How to better understand how the indicator works so you better understand what is happening in the market and not just blindly following a Momentum line. How to set it up. Some trade set-ups. It is not a black box trading system. It is up to you the trader to decide where you enter and exit. Copyright © 2003 Orville Saari All Rights Reserved
The Momentum Trend Trader tells you bar by bar if momentum is there or not. Determining the Trend of the Market Determining important price levels in the market and how the market reacts to these levels.
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Why Momentum Markets are very hard to predict. It is very well known that even the experts are usually wrong. Most traders also make the error of using technical indicators to try and predict what the market will do next. You are asking quite a bit of your indicators if you expect them to tell you where price is going next. In this e-book you will look at momentum not as predicting which way price will go, but rather determining the direction of the momentum trend and going with the flow. As you study the charts using momentum you will see that when momentum is present the market will usually continue in that direction. As long as price and momentum agree you have an opportunity for a successful trade. Its like a car that has momentum, the more momentum the more you expect it to continue in that direction. It will take a stronger force in the opposite direction to stop it or slow it down. And it’s the same with the markets, the more momentum that there is present the more you expect the market to continue in that direction. Copyright © 2003 Orville Saari All Rights Reserved
But with markets we always have to be ready for the unexpected. So with the momentum indicator we are always looking for the direction of momentum and an opportunity to go with it.
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About Momentum The Momentum Indicator is based on two separate lengths of data. Using the difference between them to measure momentum. The difference between this indicator and most other momentum-based indicators is that most of them are based on shorter-term data and signals are often taken from divergence in price and the indicator. For example …… Price making a higher high while the momentum indicator makes a lower high. Or …… Price making a lower high while the momentum indicator makes a higher high. This can then be all reversed when price is making a lower low and the momentum indicator makes a higher low. Price makes a higher low and the momentum indicator makes a higher low.
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Another popular method is the use of the stochastics indicator and taking the crossover signals of the two lines once the indicator is in a over bought or over sold area. But what you will be looking at is pure momentum in one direction and looking for trade opportunities in that direction.
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How It All Started The whole idea for the Momentum Trend Trader started with my use of volume profiles. Volume profiles are created by using volume at price instead of volume per bar or time period. On the next page you will see an example of a volume profile. This is a sample of the charts I posted regularly to a website for traders. This was before it was as easily available as it is now. Now there are many software providers that can give you this type of chart. Each profile represents a days trading. Each blue bar shows the amount of volume at each price for the day. The blue bar with the most volume for the day is indicated by a red square. Your will find most days fall into this type of pattern with one price attracting a high amount of volume.
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The high volume price in each profile is an important reference point to watch and be aware of. This is where a lot of trade took place. Now you want to watch as the market develops further how it attracts the market or rejects it. The longer the time frame the better the chance the volume profile will take on this shape. In a very short time frame, or where the market is moving quickly there may not be a single price or price area that stands out as a high volume price. Copyright © 2003 Orville Saari All Rights Reserved
Because of the importance of this high volume price and how the market reacts to it as it moves forward I based the momentum indicator on this idea. But without the need for volume profile charts. As that would take some complicated software, something that is beyond my capabilities. Yet would closely resemble this idea. So when you move on to How It Works part you will better understand the visual of the triangles and why I am using them. They represent the profile of that block of data. It helps you understand what is really happening in the market. Is the market moving away from this area? Or being pulled back. If you have access to volume profile charts take a look at the high volume areas and how the market reacts to these areas. It will tell you a lot about what is happening in the market. You will be able to gauge force or momentum with each move.
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How it Works The Momentum Trend Indicator preferably uses longer-term data to make it more stable and used only to measure momentum. This longer-term approach takes care of the noise in the market yet lets you measure momentum and take advantage of price pull backs without putting in to question the momentum of the market. The graph below will give you a good visual to keep in mind to understand how the momentum indicator works.
The first triangle you see on the left is the base you use to use the momentum indicator. Now this base can vary especially if you are using it to determine momentum out of a trading range. Copyright © 2003 Orville Saari All Rights Reserved
The tip of the triangle would represent the average price for that time period. Since markets spend up to 80% of the time in a trading range the triangle is a good representation of what the market is doing. The blue portion of the triangle is shorter term moving average. The faster the blue triangle moves away from the larger triangle the more momentum there is. In the above graph the blue triangles represent momentum moving higher, the next with no momentum and the last one with momentum moving lower. Understand that the larger triangle is also dynamic and as the blue triangle moves higher or lower it will also pull the larger triangle in the same direction but with the larger data size it moves slower.
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How to Set it Up A basic indicator that most charting packages have that can be used to plot the Momentum Trend Indicator is the MACD. It works very well since we are using two moving averages to measure momentum between two blocks of data. One inside the other. The chart below shows the momentum line plotted on a 3-minute chart. The first input number being 39 and the second one 78. Now on the MACD the third box is used to specify the length of the moving average. In this box just enter 1; in this way it only plots one line, which is all we need for the momentum indicator.
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This is how it looks in the properties box on Trade Station …
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Now here is that 3-minute chart ……
Notice the red arrow is where the market momentum breaks below 0.00. From that point on momentum moves sharply lower, even on rallies that proved to be good selling opportunities. On some charting packages you may have to plot the momentum line in a separate box below your bar chart. It doesn’t matter either way. Now as to using 78 and 39 as your parameters, they will usually give you a pretty stable momentum line. But they are not written in stone and you want to experiment with them in different markets and different time frames. Copyright © 2003 Orville Saari All Rights Reserved
Also true when using tick charts for example a 77 tick bar chart. With something like this you may have to adjust the parameters to get a stable line. Another approach could be, say you are trading the S&P and the 1-minute chart is forming up nicely and the momentum line is stable. You could follow the momentum line on the 1-minute chart and take your buy and sell signals from the tick chart. You can also experiment with a number more or less then 39. As you go lower then 39, the 50% mark you will find the line gets unstable. Going higher like 60 or 75% will give you a more stable line but slower to respond to price moves.
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Momentum Line on a Chart The first chart is a 3-minute chart with the regular momentum line with the parameters of the base being 78 and the other line being 39 bars.
In these examples you will look at pullbacks as opportunities to either buy or sell. These are examples only and not a recommendation to either buy or sell. What method or setup a trader uses to enter or exit a trade is totally at his or her discretion. On the above chart you see momentum is up and increasing as the market moves sideways to slightly down at around 11:18. This pullback would give a buy opportunity once price starts back up in the direction of the momentum line. Copyright © 2003 Orville Saari All Rights Reserved
The momentum line continued higher till about 12:48 and then starts to move back down. Now as we mentioned before when the momentum line is moving back toward the zero line it is not true momentum and this is a natural reaction once the market enters a trading range. But by studying a lot of charts you may notice that anytime the momentum line is moving sharply in any direction no matter which side of the zero line it is on it can be a good opportunity to take setups in that direction. Taking a look at the chart again. The market rallied around 3:03 and the momentum line continued sharply lower. Even though the momentum line was above zero it was a good opportunity to sell. Later we will look at this using price as a leader. It gives some great trading set ups. Next we will look at how to set up for multiple time frames.
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Multiple Time Frames If your using software like tradestation or something where you can plot multiple indicators its no problem. You can simply insert another indicator and say you want to know the momentum of a ten-minute time frame divide the 10-minute by 3 and multiply your 3minute chart settings by that number. Unless of course you want to use a different length momentum indicator for the 10-minute time frame. But in the case above you would multiply the settings by three and a third. You would have your short average at 130 and the longer term at 260 as shown below.
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The chart below is a 3-minute chart with the momentum indicator for the 3-minute time frame (red line) and for the ten-minute time frame (blue line).
On some types of charting software you may have to plot the indicator in a box below the chart and not be able to plot two separate length indicators as shown above.
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Below is an example of a 3-minute chart with the momentum indicator plotted below.
In a case like this to look at momentum for a longer term period you would just have to either create a second chart or toggle back and forth between time frames. When it comes to trading using different time frames you can come up various trading ideas. One popular way is to only take shorter-term signals in the direction of the longer-term momentum.
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Reading Momentum On this next chart we take a look at how to read momentum.
At triangle (1) you see momentum start to increase to the downside. Triangle (2) and momentum increases further. Triangle (3) sees further increase but momentum is beginning to slow. Triangle (4), and the momentum line is now moving higher. But that is where you have to be careful. The line is moving higher but the line is based on the difference between the data of the blue triangle and the larger red and blue triangle. It doesn’t take as much force to move price back to the longer-term norm. Copyright © 2003 Orville Saari All Rights Reserved
To get true momentum to the upside you may in this case be able to use the data in triangle 2 and 3 as a base and measure momentum from it. This is where using a longer time frame can be used. Even though in this case the market dropped down to triangle 3, triangle 4 could be a good opportunity if the longer-term time frame momentum is still positive True momentum is when the line is moving away from the zero line. When the momentum line is moving back toward the zero line it is more risky since the line will move toward the zero line even in a sideways market. This is something that has to be understood when using an indicator like stochastic that is plotted on a 0 to 100 scale. Lets take a look at that next.
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Looking at Stochastics This next chart will explain a lot about how stochastics works and what you have to watch for.
The small sideways action indicated by the red arrow shows how the stochastic indicator is pulled up to the 50 area. This type of up turn in the stochastic indicator can give many false signals, as there is no real turn up in momentum. All it takes is sideways action to pull it up to the 50 area as this area is the balance point as the zero line is with the momentum indicator. Looking at the chart from 3:03 and on the momentum indicator has turned back up and the pullbacks after 3:03 provide buying opportunities. The stochastic indicator is already in an over bought position giving you no opportunity to buy. Copyright © 2003 Orville Saari All Rights Reserved
Now that is not to say that the stochastic indicator does not work but when you understand how it works you are better prepared as when to take any signals it gives. One way would be to use it in the way you looked at using the upturn in the shorter-term momentum line as a signal when the longer-term momentum is also moving higher. The market is always looking for a price area where two-sided trade can take place. An imbalance on either the buy or sell side causes the market to trend. So true momentum is when the momentum is moving away from the zero line. When it is moving toward the zero line it is usually doing so cause the market is moving back into balance. You can see this by simply plotting a moving average on a bar chart. There are times when the market is moving away from the moving average but eventually it pulls back to the moving average, and can do so by just moving sideways in a trading range. Keeping that in mind when you look at any chart where the momentum indicator is in relation to the zero line will give you a good idea what is happening in the market and what market condition you are dealing with. Copyright © 2003 Orville Saari All Rights Reserved
Stochastics with Longer Term Momentum Now lets get back to using stochastics in conjunction with longer-term momentum. The chart below looks at stochastics along with a longer-term momentum line (blue line).
The points on the chart indicated by the red arrows are situations where the stochastics where oversold and turned up. In these cases the stochastics is a shorter-term indicator and these where profitable opportunities because the longer-term momentum (blue line) is increasing despite the short-term setbacks indicated by the oversold stochastics.
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You can see how just blindly following every up and down turn in the stochastic indicator would result in to many false signals. There are many other shorter-term indicators like stochastics or commodity channel index that could be used to signal trades in the direction of the longerterm momentum.
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Measuring Momentum from a Trading Range This can be used from any trading range or in the case you seen earlier with the example of the blue triangle blocks as the market moved lower, then turned back up toward the zero line. By using the range created by the blue triangle’s 2 and 3 you can once again measure momentum as it moves out of the range and above the zero line. You can measure the momentum from the range by counting the bars in that range and using that as your base and half of that amount as your first or fast moving average.
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The larger the range the more stable the momentum line will be. If you are looking at a 3-minute chart and the range is small you can always switch to a 1 or 2 minute chart to increase the amount of data for the momentum line.
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Simple but Explosive Setup There are many different patterns and indicators you can use for entry setups. A shorter-term stochastics against a longer-term momentum as you seen earlier could be one. Or you could use the simple break of a trend line in the direction of the momentum indicator. But here you will see a simple entry method that has some very interesting results. Now this setup breaks all the rules that where mentioned earlier about which side of the zero line the momentum indicator is on, but the setups are based first and foremost on the fact that price is making a new high or new low. You then want the momentum line to move in your favor the faster it is moving the better. The chart on the next page shows you a buy setup. The market makes a new high, and then pulls back. All the while the momentum indicator continues to move higher.
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A sell setup would be the reverse,
Of course the most potential comes from the first signal after momentum has made a turn. The faster the momentum line is moving the better.
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But as you can see from the above charts the market also gave some other very good signals after the initial one. Plot the momentum indicator on some past charts and you will see the potential this one little simple setup has.
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The Right Time Frame One of the most important things to consider when trading is the time frame. Each market is different. Markets like the stock indices can be traded using short time frames like 1, 2, and 3-minute charts. Markets that are less active you may have to use a minimum 30-minute chart. You want to pick a time frame that allows the market to flow in an orderly manner. Take the stock indices for instance. On active days the 1-minute chart will form up nicely, on other days you may have to go with a 2, 3, or maybe even a 5minute chart. Either that or increase the length of the momentum indicator. The chart on the next page shows you a market where the momentum is orderly and the time frame gives a good flow to the market.
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(You can see how that simple setup you just looked at signaled some very good trades on both the down and up turn on this chart.)
Notice the pullbacks don’t affect the momentum line but signal good trade opportunities. The chart also shows trading beginning at around 1:40 which is after the lunch hour. In most markets time of day is also an important factor to consider when trading.
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This next chart shows a market where the flow is not as smooth.
This shows the S&P chart during the lunch hour. Normally a quieter time and it shows on the chart. The momentum line is jerked around with nearly every move in price.
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After that rally after 2:06 the market starts to form up again as shown by the chart below.
(The simple setup signaled another good trade when the market made a new low at 2:31 then rallied but momentum continued to move sharply lower.)
Most of the rallies provided great trading opportunities down till the momentum line turned back up. So you can see how pick the rite time frame for each market is very important. And with 24-hour markets like the stock index’s and forex that time frame can change depending on the time of day or night.
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Some Charts Here are some charts using that simple setup…
The first two blue arrows signal situations where the market makes a new high followed by a pullback. At the same time momentum is moving sharply higher, and has even crossed the zero line. The third blue arrow points to a situation where the market makes a new low and starts the momentum line to move lower. Then it rallies but as you can see momentum also flattened out and then turned back up. Had this momentum continued down on this rally we would have had a possible sell signal.
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The signals on this one are pretty straightforward. At the red arrow the market has made a new low then rallied as momentum moves lower. The first blue arrow is questionable, it made a new high then a pullback but momentum is just beginning to move up. The second blue arrow is clear. A new high a pullback and momentum moving sharply higher.
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Some More Charts The blue arrow points to another classic situation where the market makes a new low then rallies before it resumes back down. At the same time momentum continued lower and moved below the zero line. The first red arrow shows the market making a new high compared to a few bars earlier. Momentum also starts to move higher but resumes back down on the pullback. So you know there will be no buy signal here.
The market action at the second red arrow almost mirrors that of the first red arrow. A new high from the previous few bars and a momentum line that has turned up. But once the market turns back down it also drags the momentum line down. Copyright © 2003 Orville Saari All Rights Reserved
The second blue arrow points to a new low. This is followed by a rally and at this point the momentum line is moving sideways so this situation is not quite so clear. You can see how on the chart above the momentum line has become very sensitive to each swing in the market. When this is happening it is hard to get a clear signal and maybe wise to stay out of this time frame using the simple strategy you been looking at.
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Now lets look at this same time period with a different time frame. Below is a chart of the same time period but this time it is a 2-minute chart instead of a 1-minute chart. Notice once the market breaks lower the momentum line moves consistently lower. You still get a sell signal at the first blue arrow. The first red arrow where on the 1-minute chart we got a new high and turn up in momentum, this time it is a clear sell signal. Though the market rallied momentum continued lower. The same can be said for the market at that second red arrow.
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At the second blue arrow on the 1-minute chart there was not a clear signal. But on this 2-minute chart you can see the market rallied from this new low but momentum continued lower, signaling another possible sell opportunity. Its not till after 11:02 that the momentum line turns up. Of course the further the trend is along the more chance there is of a pullback. You can see from these 2 charts that choosing a time frame where you get a good flow and a smooth trend line is ideal. A good reason to watch the market in different time frames. A time frame with a momentum line that is following every turn in the market should probably be avoided, at least with the above strategy.
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Determining the Trend The first thing we will look at is a couple ways to determine the trend. An up trend consists of higher highs and higher lows and a downtrend consists of lower lows and lower highs. A high is determined by a bar that has a bar before it and after it that has a lower high. A low is determined by a bar that has a bar with a higher low before and after it. But because of the noise in the markets that will often cause a high or low to be broken by a small amount. So to qualify a high or low for purposes of determining a trend you are probably safer to have two lower highs before and after your high. And two higher lows before and after a low bar.
Another way to qualify a high or a low for determining trend is using a moving average. A new high or low can only be made if a bar closes above the moving average for a new high and below for a new low. You may then have a bar with a high higher then the previous two highs but if it does not close over the moving average it does not qualify as a new high. The reverse for a new low, you could have a low that is lower then the two previous lows but if it doesn’t close below the moving average line it would not qualify.
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The chart below shows the trend with the highs and lows determined by a 9 bar moving average.
Next we will look at changes in trend and how to combine that with momentum.
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Trend Change and Momentum When the market is in a downtrend we are looking for a higher high as a possible change in trend. The opposite is true in an up trend we are looking for a lower low as a possible change in trend to the downside. When the market makes a new high or low you know there has to be momentum to some degree. It may not show on the momentum indicator that you are using so what you can do is apply a indicator length that will show a degree of momentum in the direction of the new high or low. Or a lower time frame. If there is not much momentum on this break to a new high or low you will have to use a indicator that is based on a small amount of data. But this shorter momentum indicator will be very vulnerable to any pullback in market direction, and if the momentum indicator pulls back with the market that signals the break to the new high or low has failed.
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The chart below has a 39/78 (red line) and a 27/54 (blue line) momentum indicators. After 2:01 you can see the market made a lower low, then rallied for 3 bars. At this point the blue line has already begun to turn down and the red line is flattening out signaling a possible trend change. When the market does turn down the momentum lines turn down sharply and the downtrend has begun.
You can see how the shorter-term indicator along with the trend change in price gave you the opportunity to sell the market earlier.
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Here is another example, this time using multiple time frames. The red trend lines show the market making lower lows. When it rallies from these lows the red momentum line continues to move lower signaling momentum in the same direction as the new low. The blue line that is from the 10-minute time frame has started to flatten out but is still moving higher. That signals you still have to be very careful and monitor your trade closely till that longer-term blue line starts to move down.
But here again you can see how the lower time frame can give you a jump on the trend change.
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The chart below shows once again the regular 39/78 momentum indicator in red and a longer-term indicator in blue. The red trend line marked A shows a change in trend with higher highs and a momentum indicator that has turned up. The longer-term blue line continues lower so you have to be on alert if you had bought this market. The trend line at B shows a possible trend change to back down as it makes a lower low. The red momentum line continued higher at this point and this is a situation where you may want to go to a shorter momentum line or shorter time frame to measure momentum at this new lower low.
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You have the longer-term blue line momentum already in your favor to the downside. This was a great setup as when the market turned back down it pulled the red momentum line down with it. Now once again both price trend and momentum where moving together to the downside. A trend change in price backed by momentum is a simple yet powerful setup to taking the most profit possible out of a trend.
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Section II New Approach I was looking over a book at a local bookstore and noticed a chart that gave me an idea that I thought would better show how the “Momentum Trend Trader” works. This new approach will give you a much better picture as to what is happening in the market and also should signal a lot more trading opportunities. As you read earlier this whole idea started from the volume profile chart.
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On the volume profiles below each profile represents one days trading. This happens to be a chart of the cocoa market. Notice here how important the high volume price is to the next day’s profile. The high volume price on the 17th contains the high on the 18th.
On the 7th you have the high volume price and also high volume near the high. These 2 high volume areas contain the range for the 10th.
Notice how the high volume price on the 6th supports the market and is only a couple prices away from being the low for the 7th
The high volume price of the preceding time period is always a great reference point in the market as we move forward. Copyright © 2003 Orville Saari All Rights Reserved
The chart below is a little different. It shows both time and volume. The green bars represent time spent at the price and the blue bars the amount of volume traded at that price during the day. The profiles of either time or volume are pretty much the same. They create almost the same profile shape with the high volume price also the price where the market spent most of its time.
Since both time and volume are so closely related this allows us to use time to key off this important high volume area as the market develops.
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The next chart is a profile chart but the profile is based on time. Each profile represents a 30-minute time period. Each minute that a price is traded at adds to the profile. For instance, say out of the 30minute period a price is hit at 10 different interval minutes that would give it a value of 10 in the profile. If another price was hit say at 15 different minute intervals it would have a value of 15. Another way is to build a profile using ticks. That means each time a trade is made at a certain price it is added to the profile. That would differ from volume because some times a trade may represent 10 contracts and another trade mite be 100 contracts.
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Even though each profile represents 30 minutes of trading they still develop in the same way as does the profile for a day. If you didn’t know you would not be able to tell whether the profiles above represented a full days trading or 30 minutes worth of trading. Notice again how important the high volume prices either act as support or resistance as the market moves forward.
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This next chart is a 10-minute profile of the Emini S&P. Once again you can see how the profiles develop very similar to a daily profile even though in this case each profile only represents 10 minutes of trading. Of course this market is very liquid with a lot of trading going on. In a thinly traded market you probably couldn’t use a 10-minute profile chart. On some thinly traded markets you may go a 10-minute period or even longer without even recording a trade.
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Even though it is only a 10-minute profile it is easy to see how important those high time profile bars act as support and resistance points as the market moves forward. Since the market uses this pattern over and over again this is a great reference point to key off of to determine the strength of a move and momentum. Since we are looking at profiles we will look at one more on the next page. A profile with a 1-minute time frame.
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This next chart is a 1-minute profile based on tick volume. In an active market like the emini S&P even the 1-minute chart creates a profile similar to longerterm time frames.
You can see from this chart that even in the 1-minute time frame that the high volume price in each profile is an important price. It often becomes the support or resistance area for the next bar. Next we will look at how to read this information from a simple bar chart to determine the trend, momentum and the important price levels.
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New Way To Look At It This new simple way to look at it should make it easier to see the strength of a move and the momentum behind it. A quick look at those triangles again.
The red would represent the whole triangle and the blue the latest half. So on the charts we will be looking at the red line will be the longer term and the blue line the short term. We use half here but you could try and experiment with some other ratio. On these next charts we will use a simple moving average. A simple moving average gives the same weight to all the prices, compared to an exponential moving average that will give more weight to the latest bars. Copyright © 2003 Orville Saari All Rights Reserved
The price used for each bar was the mid price, high plus low divided by two. If you can’t do this on your software using the closing price should be very close. The reason we use the mid point price is that if you look at the profiles regardless of the time frame the high volume price is usually near the middle of the range of the bar. So if the longer-term average is 54 and we are using a 2-minute chart we will be taking the mid price of the last 54 bars and creating the simple average with that. This average will act as the high volume, or in our case the high time price for the last 102 minutes. The shorter 27 bar time frame will be in blue.
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The first chart we look at is a 2-minute emini S&P with a 27 and 54 average. The difference or distance between the lines is the momentum. As the market moves down from 11:32 to 12:32 the lines are moving further apart creating momentum to the down side. The red line would be like the zero line on the momentum indicator.
After 12:30 the blue line starts to turn up heading toward the red longer-term line. The market has also made a new high compared to the high made just before 12:32. Then just before 1:02 the market pulls back but momentum continues to move higher as the blue line continues to move closer to the red line despite the pullback. Copyright © 2003 Orville Saari All Rights Reserved
Now if you where to enter a trade here as the market turns back up at 1:02 you would want to see it quickly move up and break the previous high of 1145. If it is unable to break this high the up trend could be in trouble. Momentum is moving up but still below the zero line. The other thing you can take note of is that the pullback just before 1:02 touches that blue line. That is like touching that high time price of the 27 bar time period. Remember how often that high volume price was either a support or resistance area for the next bar.
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We will look at the same chart but move further on down. We see momentum move to the plus side after 1:02 and the market makes a new high just before 1:32 then a pull back till about 2:02. You can see by the distance between the two lines that momentum is on the plus side and holding and near 2:02 turns slightly down. Here we see the advantage of using this method over just plotting the momentum indicator.
Looking at the lines you can see the market is still moving higher. At 2:02 and just before price as dipped just below the blue average line but that longer term red line at this point is still holding the market. Copyright © 2003 Orville Saari All Rights Reserved
Again we would be looking to see if this longer-term high time price will either show support or resistance in the market. You could have once again looked to buy this market when it resumed back up. Just after 2:32 we see another pull back as the market touches that blue line. At this point even though there has been a pull back in price you can see that momentum has increased as the distance between the lines is increasing. Another possible buying opportunity as the price resumes its move back up.
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Now here is that same chart but using 15 as the short-term average and 30 as the longer-term average. As you can see it reacts a lot quicker to price moves. This would give you a lot more trade opportunities but you have to be careful not to over trade. It is also important to always know the trend of the market. Ask the questions. Is the market making higher highs? Higher lows? Or has the market turned down and making lower lows and lower highs.
On this chart the signals at 12:32 was pretty much the same. The pullback to 2:02 is not as clear as price lingers around the high time price of both the red and blue line. From that point trend direction is unclear till you get either a higher high or a higher low. Copyright © 2003 Orville Saari All Rights Reserved
The signal at 2:32 is pretty much the same as the market touches that high time red price with increasing volume then resumes its way up. The advantage with the shorter averages on this chart would have been catching the downturns when the market made new lows at both 11:32 and 3:32. Momentum had turned down and price had moved below the high time area of both the red and blue lines. With the shorter time frames you have to be more on top of things. You can see that by looking at the markets in the manner we have shown that you will have many more opportunities to trade and also a better understanding of how the market is trading. You will always know on which side of that important high time price the market is trading at and from the profile charts you can see how important that price area is when it comes to support and resistance for the next price bar. When momentum is moving up but below that zero line you can see how you want to be on alert and see the market making higher highs. Other wise that high time price of the longer-term time frame could stop the market from moving higher. When momentum is moving down from above the zero line it works the same just in reverse. Copyright © 2003 Orville Saari All Rights Reserved
A Look at Stocks Here we see a few daily stock charts using a 27/54 time length. You can see it creates the same types of opportunities as it does with the shorter time frames. Late September beginning of October the market pulled back to the 27 line with momentum increasing. Then turned up from that line resuming the up trend. A similar pull back near the end of October. Then a resumption of the trend. Notice the area from mid November and mid December. The market is moving sideways with the lines converging. You see a new low mid November but then heads back up to make a new high early December. Then sideways to down till mid December. You want to see both momentum and trend in your favor. And as we seen from the profiles it is nice to see the market rejected at the high time prices. Like we see the beginning and mid October.
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Late January and early February we see price come down and touch the longer-term line only to rally again. Momentum was also in our favor. But as you can see around mid February the market fails to make a new high and heads back down and is pulling momentum back down with it. Had we gone long earlier this would put us on alert that the market is failing and we may want to exit this trade when the longer-term line fails or maybe even sooner.
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Here are a couple more daily charts. A good signal in mid October. The market had been in a trading range then made a new high. From there it pulled back to the lines that acted as support. At this point momentum was also moving higher even though the market had pulled back. The market turns back up and creates a new high confirming an up trend.
Mid December the market pulls back again and finds support at the short-term high time line. From there the up trend is confirmed once again as the market makes higher highs and higher lows late December and early January.
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This next ebay chart shows a great buy signal. Mid December the market makes a new high then pulls back as momentum turns up. Finds support above the long-term high time line and from there resumes its way up making a new high.
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Weekly Stock Chart An IBM weekly chart with 27/54 average high time lines. As you can see with the weekly chart below that you are looking for the same price trend and momentum patterns. For an up trend you want higher highs and momentum in your favor.
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With Forex Charts The signal arrows where placed on this USEUR 4HR chart using momentum from a 39/78 ratio. The lines on this chart are 27/54 but you can see how they confirm the signals and you can probably see even more opportunities.
Charts courtesy of MetaTrader
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Forex markets like to trend and here is a continuation of that last chart starting from the last up arrow,
Chart courtesy of MetaTrader
You can see all the opportunities during this up trend as momentum held to the upside on the pullbacks. And the price pullbacks stopped either at the short or long-term high time price. Then resumed the up trend.
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5 Minute Forex The chart below is 5-minute USEUR. From this chart you can see that when the market is in a trading range like in the first part of the chart the highs and lows are not contained by the high time average lines. We see a new high on Jan 27 after 7:10 but on the pullback the market breaks through the lines. We get a new high again on Jan 27 after 9:50. This time the pull back is stopped at the short-term blue line and momentum is increasing. From here the market starts a nice move higher. That is kind of an ideal setup. The market makes a new high then the pullback creates a higher low and finds support at the short-term high time line.
Charts courtesy of MetaTrader
From that point there are a few more opportunities as the market pulls back yet momentum is increasing then the trend resumes and makes new highs.
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Trading the Trend Throughout the examples we have been looking at trades using a simple set up. For buy opportunities we have been looking first at the market making a higher high then a pull back. To keep the trend intact we want the low of the pull back to be a higher low. We prefer to see momentum increasing or at least holding. We also like to see the low hold above or at the high time lines. If it holds at the shorter-term line it indicates the market is even more bullish. The reverse of all this would be true for sell set-ups. But with all that said these where only shown for purpose of demonstration. There are many different ways to enter the market. Nothing says you have to wait for a pull back before you can enter a trade. You could have a method of entering a trade after a breakout if the market is telling you the trend is under way. You have to trade at a level and time frame you feel comfortable with. If you have any questions about this method you can send them to:
[email protected] Copyright © 2003 Orville Saari All Rights Reserved
Day Trading Trend Change In day trading you are often looking for opportunities that give you a quick profit and yet give you the possibility of having the market go your way in a big way. The opportunities that offer you the biggest profit potential come when you can enter a trade as close as possible to the beginning of a trend. Whether that is at a break out or change in trend. To catch these quick changes in trend we will go to a shorter-term 13/27 momentum line. Understand that once it catches a turn this shorterterm momentum line can quickly run out of steam if the market doesn’t move quickly in your favor. Once in you may want to look at longer-term momentum or just take quick trades. The market we will look at is the emini S&P. The best trending times for this market for day trading are in the morning and afternoon. Often the action around lunch hour results in many false breakouts resulting in a trading range. Those are times you may want to avoid unless you are using a different strategy.
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On the day trading chart below the blue line (13 bar) is the support and resistance line and the red line is the 13/27 momentum line. On these charts we are mainly looking at the first set up after a change in trend. For these setups we are using a shorter-term support resistance line so you should look to see the market move quickly in your favor and then be confirmed by a longer-term support resistance line.
The market breaks down from the trading range then pulls back at 2:01, it does not quite reach the blue line which indicates selling and momentum is down and stronger then normal. The next couple arrows show how the blue resistance line holds the market, this is what you like to see with the market moving in your favor. With the market contained under this shorterterm blue line tells us the down move is fairly strong. Copyright © 2004 Orville Saari All Rights Reserved
That and it continues to make new lows confirming the downtrend. We have a possible trend change when the market rallies above the blue line after 2:46 then pulls back to just below the blue line. At 3:01 the market resumes its trend up and momentum is moving higher. The fact that the market dropped a bit below the blue line compared to the earlier break from the trading range where the market didn't reach the blue line, shows there was not quite as much strength in this move as the earlier one. This proved to be true as the market moved higher but not as quickly as the earlier move. Notice even though the blue line failed at times the market was able to continue to make new highs.
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This next chart shows market action that is not as clear. When you have the price bars continually crossing the blue line chances are you have a trading range market or one with not to much trending potential. That is trading in the shorter time frame like a 1-minute chart. At the same time on a 10-minute chart there may signal a great trade.
The blue arrow indicates one possible set up as the market finds support at the blue line while it is moving higher as is the red momentum line. From that blue arrow the market makes a new high very quickly. That is what you like to see as it puts you in a positive position immediately. Copyright © 2004 Orville Saari All Rights Reserved
The market continues up above the blue line till about 11:16. After that it trades along the line for the next 15 minutes. After trading that long along the blue line using the short time frame it’s hard to guess which way the market will go next. At that point where you exit the trade can make a big difference in the bottom line. Do you take your profit now or wait for it to go higher, or place a stop and wait till you lose more of your profits. You had another setup with the trend just after 11:01; the market pulls back a couple bars then quickly resumes its trend again making a new high.
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This next chart is the type of action you like to see. See how the action on this chart is different then the previous one. Until about 11:30 the price bars hardly touch the blue support and resistance line. The arrows show the trend change setups but as you can see the blue line gave many other opportunities during the trend as well. During the trend each time the market came back and found support at the blue line it then resumed the trend and made a new high.
Notice between 10:36 and 10:46 the market pulls back, finds support before it reaches the blue line then heads back up. This certainly would have been late to buy after such a long move up. Copyright © 2003 Orville Saari All Rights Reserved
But this time the market failed to make a new high, and started moving sideways. Another opportunity to use your money management and trade exit skills. Do you place your stop below the low and wait for the market to take it out or get out now at possible break-even or a small loss. Remember break-even or a small loss and it feels like you get another free shot at the market. There will always be another set up. Really depends on your trading style, what suits you and how much you want to risk. After 11:30 once the price bars start crisscrossing the blue line direction is not as clear. At least not in this time frame. In a longer-term time frame this could be a good signal.
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The setups on the chart below saw the market first trade above the blue line, break down below it, then rally and have the blue line act as a resistance line. In both cases the market resumes its move down with both the blue and red lines moving lower. Even when the market rallied to test the blue line both the blue resistance line and the red momentum line continued lower.
This was another afternoon where the market trended well and a lot of good opportunities when the market spends most of its time either above or below the blue line. If the market trades around the line with most the bars touching the line chances are that the market is more in a trading range. Copyright © 2003 Orville Saari All Rights Reserved
You don’t have to limit yourself, if the market is not trading in the manner you like switch to a different time frame. For day trading look at different time frames, 1, 2, 3 and 5-minute charts. Pick the time frame that is trending the best.
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Here is another example of a market in a trading range highlighted in yellow. In this area I would guess 80% of the bars touch the blue line. Once it breaks out of this range you have the reverse, 80% of the bars don’t touch the blue line. Makes it easy to see when the market is really trending.
If you go back and look at the other charts in this book you will find the same, the best opportunities are when the market is spending 80% of its time away from the blue line. And that goes for any time frame that you might be trading, from 1-minute to weekly charts.
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Here is another great example. I would say on this chart about 80% of the bars don’t touch the blue line. And the trend change setups are all great. After a set up the market quickly makes a new high or low and continues in that direction.
And that’s what you want to see after a set up. After a buy set up you want to see the market make a new high. If the blue support line held and momentum is up and it can’t make a new high it should put you alert that something is wrong or something has changed. Nothing is written in stone, some news release or longer-term resistance could change things in a hurry. The price trend must confirm what you expect.
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Extremes We have looked at the control price which is a price area considered to be fair value as the market stayed in that area creating the most volume for that period of time. On the other ends of the scale are the extreme prices. At the top of the profile these are prices where the market did not stay long. The price was too high to attract buyers and such a good opportunity to sellers that they quickly drove the market back down. At the bottom end the opportunity for buyers is there and they quickly overwhelm any selling activity driving the price back up. So the extremes are areas where only one side is really in control of the market. This is another way that the total sum of the actions of traders leaves its footprint. This happens in all time frames from 1-minute charts to longer term daily and weekly charts. The longer the term the more stable and meaningful are the reference points created by the market. An extreme made on the 1-minute chart may not last very long. One made on a daily chart may last for weeks or even months. Copyright © 2004 Orville Saari All Rights Reserved
What we are interested in is finding these extremes and then using them to monitor future market activity. If the market again approaches these areas and the area holds nothing has changed. But if the market is able to break through this area there has been a change in market sentiment. How do you determine market extremes? Either by a test or by time. When the market makes a new high then makes another attempt at this price area but fails that confirms an extreme high. The seller is in control in that price area. Another example would be when price makes a new low a quickly moves away from this area and doesn’t visit that area for a period of time. The longer it stays away from the area the stronger the reference point is. The chart below shows two examples of this.
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The first green box near the top of the chart is an example of a test. The market made a high then was tested and moved away from this area. This would indicate that the seller is here and for price to move higher there needs to be a change in market sentiment. The second green box is an example of the market making a low and then quickly moving away from that area without a test. But as time moves on it confirms this was a market extreme where the buyer was in control. Price did not visit this area again till much later in the day. You can find these reference points on charts of any time frame. These are very useful as the market moves forward and you monitor market action. Now lets take a look how these reference points can be used in your trading. Lets take a look at the trade that took place at that last red arrow. Just after 2:48 the market came down and touched that buying extreme that was created earlier in the day just after 11:00. This area gave support to the market at it rallied back up to the blue line. At this point the blue line indicates the market is in trend mode and the blue line is acting as resistance. We get our sell signal as the market turns back down. Copyright © 2004 Orville Saari All Rights Reserved
Here is that chart again so you don’t have to keep going back and forth.
Now that we would be in a trade at this point you want to see the market break through the buying extreme which would indicate a change in sentiment which would confirm your trade is on the right side of the market. In this case it hesitates for a bit but then breaks through and quickly moves much lower. Entering a trade like this often the ideal point to enter a protective stop would be just above the rally high at the red arrow. Now this is one way you could also use these reference points to cut the risk amount in your trade. Had the market not been able to break through this buying extreme it would have been a signal to you that your trade may be in trouble. Copyright © 2004 Orville Saari All Rights Reserved
If that were the case there would be no need for you to wait until your stop is taken out to get of the trade. You could get out much sooner cutting your risk, which you could apply to your next trade. Should the market resume back down you can always get back in. Here are some more examples. They are taken from the forex markets but the principles are the same.
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The market makes a low on this chart early August 1st but quickly snaps back up. What qualifies this as an extreme is that the market then trades above this price area for days to come. The larger red box projects this area forward. August 13th the market comes down to this level and finds support for the next couple days. On August 15th the market breaks through this extreme. Sentiment as certainly changed, the buyer is no longer considering this area a deal like it was earlier.
Then the market rallies up to the red arrow. The trend is down as the rally fails. Momentum is also down and increasing to the down side. Even the blue shortest-term control line is rejecting the market. Copyright © 2004 Orville Saari All Rights Reserved
The market doesn’t even come close to reaching the red control line. The red boxed off area that was support has now turned into resistance. The smaller red box at the top of the range would have been a reference point for a break to the upside. On this next chart we have an extreme at the left side of the top red box. From there the market moved lower creating another extreme highlighted by the lower red box.
From that point we have both trend and momentum turn up. We have a pullback at the first red arrow and the market holds above the blue control line turns back up. Had you bought at this point now you Copyright © 2004 Orville Saari All Rights Reserved
would be monitoring the market as to how it will react as it approaches that extreme area. If it fails to go through that area you know your trade is in trouble as the seller is still there. The market enters this area just before the second red arrow and we witness a slight pullback. But once again the blue control line rejects the market and momentum is still up. The market once again turns back up. This is the second attempt at this extreme area and since we have bought this market we want to see price move right through this area. On this second attempt the markets moves quickly through this area confirming there is a change in the market and we are on the rite side of the trade. Now a look at extremes in a trading range. The red boxes mark the extremes of this trading range. Sometimes the break through an extreme will be the best opportunity to get into the market. As you can see by this example there never really was a pullback till the market moved much higher. Had you entered a trade on this breakout you would have to closely monitor how the market now acts at this extreme. In this case momentum is up. You also want to see the shorter-term blue control line reject this market to keep the trend intact. In this case you can also see how sentiment has changed. Copyright © 2004 Orville Saari All Rights Reserved
The upper red boxed off area that was once dominated by sellers is now giving support to this market. When working with extremes you have to be careful with short-term extremes as they wont hold the weight of a longer-term extreme. With the shorter-term extreme you may want to also have the longer-term trend in your favor.
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This next chart shows extremes on a 15-minute chart.
Both of the buying extremes held the market for quite a while. Once they where broken the market sentiment had changed and the market moved much lower. Now we will look at first the green, then the blue boxed off area on a 5-minute chart.
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Here is a 5-minute chart showing those same two lower extreme areas designated by the red boxes.
You can see how at the first red arrow the buying extreme gave support to the market. But from there the rally fails and the market moves quickly through the support area. The buying extreme area at the second red arrow held the market twice before it failed. But during this time momentum held to that downside. Once the market did break through this extreme it moved sharply lower. Then rallied back up to where the buying extreme was and became a new selling extreme. Copyright © 2004 Orville Saari All Rights Reserved
Here is a closer look at that same action. The lowest red box is a new buying extreme created by the market at the second red arrow. You can see the action at the first solid red arrow now creates a selling extreme in an area that was at one time a buying extreme.
At the second solid red arrow we have witnessed a trend change back to down, the rally fails, the blue control line is rejecting the market action and momentum is down. A sell here is confirmed when the market moves through the buying extreme area telling us that sentiment has once again changed to the down side. Copyright © 2004 Orville Saari All Rights Reserved
You can see that monitoring market action at the extremes is very important in determining who is in control of the market, the buyers or the sellers.
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Tick Tick simply tells you the difference between the numbers of stocks on the New York Stock Exchange that made there last trade on either an up tick or down tick from the previous trade. You can also get tick readings for other markets such as the Nasdaq. For example if on 400 stocks the last trade was made on an up tick and on 200 stocks it was made on a down tick the tick would register +200. Tick works great as a sentiment indicator. It gives you a good idea as to the amount of buying and selling pressure in the market at any given moment. When tick stays mostly on the positive side we can assume that the market overall is bullish and when it is mostly on the negative side we can assume the market is mainly bearish. When tick reaches an extreme like + or - 800 or a 1000 it could signal a possible turn in the market. Here again you have to be careful as on a day that is very bullish this may just result in a temporary pause in the market before it resumes its trend. Here is one way to determine how bullish or bearish the market is. Take a 10 or 15-minute tick chart and look at it using the principles of the market profile. The higher that control price is on the day the more bullish it is. The next couple charts will give you a better idea as to how that works. Copyright © 2004 Orville Saari All Rights Reserved
Copyright © 2004 Orville Saari All Rights Reserved
The blue line on the tick chart represents the control price for the 15-minute time period for each day. The higher the control price the more bullish the day is. This is confirmed by looking at the 15-minute bar chart of the mini dow. The 25th was a very bullish day. An extreme to the downside on the tick chart this day was anything that dipped below the 0 line which is highlighted in red. Extreme readings in tick will be different from day to day depending on the type of day we are having. Bullish, bearish, or neutral. What is an extreme reading to the downside today might not be tomorrow. With a charting program that has profile software it makes it a lot easier to see how the day is developing and you could use a shorter time frame to build the profile.
Tick and Divergences The tick is determined by using the actual stock market so divergences between tick and the futures price can lead to some interesting trade setups. A common divergence is when price makes a higher high and the tick makes a lower high. But another interesting divergence is when the tick makes a higher high or lower low and the futures market doesn’t. Copyright © 2004 Orville Saari All Rights Reserved
That can make for an interesting set up but once in a trade you want to see the market you are trading and the tick to be moving in the same direction. As your trade progresses and if the market is very bullish you may get a record high tick on a breakout then tick begin to fail as the market itself moves higher. Looking at the next two charts you can see a trade setup between 15:15 and 15:30. The market has just made a new high and has pulled back to the blue line. You will see three bars there that trade rite around the blue line. While at the same time momentum continues to move higher. Now if you look at the next chart showing you the tick you will see that tick went lower then it did at 15:15 even though price didn’t. Had you entered a trade here when price resumes its upward trend you want to see the market make a higher high and tick to also follow. You get both as the market moves higher and tick makes a new high. When the market makes a new high just after 15:30 you also get a new high on the tick. The market makes another new high at 15:45 but tick fails to, a signal to either take some profits or at least to move your stop up to protect them. Copyright © 2004 Orville Saari All Rights Reserved
Copyright © 2004 Orville Saari All Rights Reserved
Big Swings in Tick Another thing to keep an eye out for is a big swing in tick. Especially when tick reaches the extremes of the tick profile. Looking again at the last couple charts you can see wild swings in tick just after 14:00, just before 15:15 and the high made at 15:45. On the mini dow chart these all turned out to be important turning points for the day. The important thing to be aware of again is the trend of the market. If you have an up day big swings in the direction of the trend may be ok to take but swings in the opposite direction may really hurt you. But these could be good points to take profits if you’re trading short term. On days where the market is in a trading range you should be on alert for big swings in tick on both extremes. The next couple charts shows some big swings in tick that lead to some important turning points in the market. These where swings of about 800 ticks in a matter of minutes, three of them in 3 minutes, and one took 4 minutes. Copyright © 2004 Orville Saari All Rights Reserved
The one at number 3 ends up being of shorter term but is an important reference point for the one at 4 where the market begins an extended move up. Copyright © 2004 Orville Saari All Rights Reserved
On this next chart we will look at an extreme that was created at the same time as we had a strong reversal in the tick. The blue horizontal box indicates the area of the selling extreme, at the same time there was a strong reversal in the tick at the red box marked #2.
A strong reversal in the tick at the red-boxed area #4 started the market move back up. In the red-circled area the market stops and pulls back when it hits the blue boxed extreme level. Even when the market pulls back and moves sideways for 4 bars the blue line continues higher with momentum increasing to the upside. The market is now at an important reference point, the question now is can it carry through this point. Copyright © 2004 Orville Saari All Rights Reserved
We get our answer quickly as on the second attempt the market quickly moves through this high. At the same time it also takes out the previous extreme indicated by the green box. This green box extreme was also was also confirmed by a big swing in tick to the down side at point 1. Looking at the area circled in blue you can see that the green-boxed area extreme now acts as support. Momentum is still to the upside. The blue line is rising and acting as support for the market. Another excellent buy opportunity. The big swings in tick at the extremes of the tick profile can signal the trader some very important reference points as they are happening. The next couple charts show another situation where you could have used the big swing in tick to lock in your profits. As the tick chart shows there was a big swing in the tick around 14:30. Tick dips below –800 then a swing up of over 1,000 ticks within 4 minutes. On the bar chart the horizontal blue line could have been a common place for a stop. Waiting for this stop to be taken out would have taken awhile and you would have made even less on your trade. Copyright © 2004 Orville Saari All Rights Reserved
Of course if you are looking longer term then you may want to hold the trade.
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These next 2 charts show more big swings in tick that proved to be important points on the 2-minute chart.
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Looking at the past few charts shows how important the big swings in tick can be when you are trading short term. You want to see tick go to one of the extremes then reverse by 800 to 1,000 ticks. Looking at the chart on the previous page you can see how the big tick reversal at 15:30 would of allowed you to lock in profits before the sharp rally began. These tick reversals can be very important especially if you are trading the 1 and 2 minute charts and trading from a short-term perspective. This will often allow you to lock in profits, giving you an opportunity to take advantage of the next setup. When you bring in other information like momentum or the trend of the trin you could even use shorter swings in the tick when they are in the direction of the trend. Even a 400 or 600 swing in the tick could be a good opportunity to go with the trend.
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Trin Trin is a little more complicated then tick. Also known as the Short Term Trading Index it was developed by Richard Arms. Trin is calculated using the ratio or advancing stocks over declining stocks divided by the ratio of volume of advancing stocks over volume for declining stocks. The formula being: Advancing Stocks/Declining Stocks Advancing Volume/Declining Volume Lets look at an example and say there where 1000 stocks advancing and 1000 declining and volume on advancing stocks being 5000 and volume on declining stocks being 5000 1000 / 1000 1 =1 5000 / 5000 1 A ratio of 1 indicates a balanced market. The ratio of volume is the same as the ratio of advancing and declining stocks. Now lets look at it when volume is heavier in the declining stocks: 1000 / 1000 1 3000 / 5000 .6
=1.66
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Ratio’s over 1 indicates a selling imbalance. In this case advancing and declining stocks where equal but volume was heavier in the decliners. 1200 / 800 5000 / 2000
1.5 2.5
= .6
Ratio under 1 indicates a buying imbalance. Advancing stocks out numbered decliners and volume was also heavier in advancing stocks. 900 / 1100 4000 / 3000
.82 1.33
=. 62
In the above case decliners out numbered advancers but volume is heavier in the advancing stocks so we end up with a bullish ratio. When it comes to trin we will be looking at the ratio and the trend of the ratio. If the ratio is 1 it means the market is balanced and volume is coming in equally to advancing stocks and declining stocks. For the market to be bullish we would like to see the ratio at about .80 or lower. For the market to be bearish we want to see the ratio to be 1.20 or higher. Then as the day moves along we watch the trend of the ratio on a 2-minute chart just like we do the tick and the Emini. Copyright © 2004 Orville Saari All Rights Reserved
Most charting services will chart the trin like shown in the chart below. If the trend is down that means it is bullish and if the trend is up the market is bearish.
There is software that will scale it the other way around so that it will be visually correct. When it is trending up the market is bullish and when it is trending down the market is bearish. Make sure you know what scale you are dealing with before you use trin. In the samples we will look at we will use the method shown on the chart above. It usually takes the first 30 minutes for the market to settle down so lets say the reading after the first 30 minutes is .80. That would tell us that the market is bullish according to volume as money is flowing into the advancing issues. Copyright © 2004 Orville Saari All Rights Reserved
From that point on we look at the number but also the trend of the trin. If the trin continues to hold at .80 that means that volume is still imbalanced to the buy side. If the trend of the trin starts to move lower that would mean the volume is increasing in the advancing stocks making conditions even more bullish. When the trend of the trin starts to move up in the market it indicates that there has been a change in the ratio. But that is where it starts to get tricky. The further the market gets from that balanced 1 ratio the more volatile the ratio of the trin will get. As an example lets say the market has been very bullish and trin has trended down to a ratio of .60 by 11 in the morning. From 11 on to noontime volume is still bullish but during this time it is coming in at a ratio of .80. This would cause the trin trend to move up toward the .80 level. Trin is trending up but it is still bullish. For trin to turn bearish from the .60 level you would want to see it move up sharply to give you confidence that selling is strong. The further you get away from the 1 ratio the more you have to be careful about following the trin trend in the opposite direction as that is where the trend can really fool you. Copyright © 2004 Orville Saari All Rights Reserved
And that’s using trin for day trading short term with for example 1, 2, or 3-minute charts. Not to be confused with traders that use the extreme readings as an overbought or oversold indicator. Another important use of trin is to confirm a trade. Once you buy you want to see the trin either hold or move lower confirming your trade. On a sell you want to see trin hold or move higher. For example you get a sell signal and trin is at 1.20. Once in the trade the market moves lower and trin remains at 1.20. In this case even though the trin trend is moving sideways the market is still bearish. For trin to remain at 1.20 the volume in the market still has to be coming in at that ratio to the downside for trin to remain at that level. Even after you entered your trade trin increases to 1.30 this was would signal the market is getting even more bearish. The other thing you have to keep an eye on is where the market is in relation to yesterdays close. Since trin is calculated using advancing and declining issues this figure can seesaw back and forth if the day is trading near the previous days close. This price action can really affect the trin numbers and you should wait for a clear direction before using trin.
Copyright © 2004 Orville Saari All Rights Reserved
If the market is trading a good distance above yesterdays you can use trin as a gauge for how traders are responding to the higher prices. If trin is not bullish or even bearish that could be a very good indication that traders are not comfortable with the higher prices and a correction is in order. Just the reverse would be true if the market is trading much lower. The market needs volume in the direction it is going for it to continue. Using a longer-term time frame like a 15 or 30-minute chart can give you a good handle on what is happening for the day and which side of the market you should be looking to make trades on. The emini markets like the S&P, Nasdaq, and Dow usually trend the best in the morning and afternoon. Looking at a 30-minute trend chart can often signal which side of the market you should be looking to trade from for the afternoon trends. The next chart is a 30-minute Emini S&P along with a 30-minute trin chart. Looking at the trin chart on the 9th you can see that trin kept on marching steadily higher indicating more and more selling as the day went on. The market built a trading range during the noon hour then broke higher from this range in the early afternoon. Copyright © 2004 Orville Saari All Rights Reserved
But according to the trin chart you would not have wanted to buy this break out. But you could have been ready to sell this market when the break to the upside failed and catch a good move down. Copyright © 2004 Orville Saari All Rights Reserved
The 11th was a good example of trin signaling trades to the buy side. In many ways this day was a mirror image of the 9th. The market once again builds a range then a false break this time to the downside. Even with this break trin is unable to even reach the .60 level. The break to the upside was no surprise and you could have easily caught this late afternoon trend to the upside. You could have also watched for a swing in the tick at these points to confirm your trade with the trend. When you look at days where trin spent most of the time between .80 and 1.20 with no real trend the market was very indecisive with a lot of whipsawing back and forth. Knowing what Tick and Trin are doing can be invaluable when day trading the emini markets.
Copyright © 2004 Orville Saari All Rights Reserved
