How to Increase Your Odds for A Successful Trend Trade Greg Capra Sponsored by Mastertrader Live Presentation Starts at 3:30 PM Chicago Time DISCLAIMER: Futures and options trading are speculative and involve risk of loss. The information information in this seminar is taken from sources believed to be reliable. It is intended for information information and education only and is not guaranteed by the CBOT as to accuracy, completeness, nor any trading result. It is not intended as investment investment advice, nor does CBOT endorse or support any product or service represented in the presentation. presentation. The views and opinions offered by individuals or their associated firms in interactive seminars are solely those of the authors, and do not necessarily represent the views of the Chicago Board of Trade. The Rules & Regulations of the CBOT remain the authoritative authoritative source on all current contract specifications & regulations. "Dow Jones," "The Dow," "Dow Jones Industrial Average," and "DJIA" are service marks of Dow Jones & Company, Inc. and have been licensed for use for certain purposes by the Board of Trade of the City City of Chicago (CBOT). The CBOT's futures and futures-options contracts contracts based on the Dow Jones Industrial Average are not sponsored, endorsed, sold, or promoted by Dow Jones, and Dow Jones makes no representation regarding the advisability of trading in such products. Information provided is taken from sources believed to be reliable but is not guaranteed guaranteed as to its accuracy or completeness. The Rules and Regulations of the Chicago Board of Trade should be consulted as the authoritative source for information, rules, and contract specifications.
An Introduction To Trading the mini DOW with the Pristine Method®
PRESENTED BY GREG CAPRA PRESIDENT AND CEO OF PRISTINE CAPITAL HOLDINGS WWW.PRISTINE.COM
www.pristine.com
Disclaimer It should not be assumed that the methods, techniques, or indicators presented in this book and seminar will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples in this book and seminar are for educational educational purposes only. This is not a solicitation of any order to buy or sell. “HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES IN THIS BOOK and SEMINAR SEMINAR HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS WE STATE MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.” The authors and publisher assume no responsibilities for for actions taken by readers. The authors and publisher are not providing investment advice. The authors and publisher do not make any claims, promises, or guarantees that any suggestions, systems, trading strategies, or information will result in a profit, loss, or any other desired result. All readers and seminar attendees assume all risk, including but not limited to the risk of trading losses. Day Trading can result in large losses and may not be an activity suitable for everyone.
Copyright Copyright © 1994-2007 1994-2007 by by Pristine Capital Holdings, Inc. Inc . All rights rights reserved. reserved. Printed in the United States States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form form or by any means, or stored in a database or retrieval system, without prior prior written permission of the publisher. 3
Combining Support and Resistance, Market Internals, Trends and Price Patterns for high probability trades. Sponsored by The Chicago Board of Trade and MasterTrader.com
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TREND TRADE PLAN The Plan for trading the mini-sized Dow (YM) Define the “reference points” of support support and resistance or, more importantly the lack thereof. Define the market environment each day with market internals. Define the current trend or lack thereof. Trade when a predefined price pattern forms in alignment with the above. Money Management
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SUPPORT and RESISTANCE Actual Support and Resistance Prior price highs and lows, e.g., pivots A series of price bars, e.g., a base An unfilled gap between price bars
Subjective Support and Resistance Fib Retracements-Exten Retracements-Extensions sions Trading Bands or Envelopes Moving Averages Trendlines
These analysis tools are used by many to locatee or predict locat predict suppo support rt or resistance resistance.. The only real support or resistance is
Pristine Capital price. Holdings,This Inc.
the key to objective analysis. 6
SUPPORT and RESISTANCE Price support and resistance reference points tell us where others are likely to act (buy-sell) or react (take stops). When those points are far apart, the odds are that prices will trend toward those points when internals are supporting.
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SUPPORT and RESISTANCE Breakout failures have “ shock value” value” that overcome demand
When price support (demand) and resistance (supply) are in a range, trend trading does not work.
Void Distance Void Prior support, as well as market internals, guide us to the odds of potential trend reversals. Most trends end once they become climactic based on emotional extremes. 8
SUPPORT and RESISTANCE Retracem Retr acement ent leve levels, ls, moving moving averag averages, es, and/or and/ or trendline trendliness did not stop stop this move move lower. lower.
Trends like this one occur when there are few pr few price ice ref refere erence nce poin points ts of of support with market internals in alignment. The distance to those points and there size will indicate their potency as support. 9
Why Use Market Internals Market Internals provide an objective comparison between the current market environment and past based on historical references. Market Internals act as “ gauges gauges” ” to deter determin minee the broa broader der market’s current level of strength, weakness and sentiment. Market Mar ket Internal Internal readings readings should should be read in combination combination with each other. One internal gauge alone may be misleading. Market Internals guide our bias – Bullish – Bullish – – Bearish Bearish – – Ne Neu utr tra al. This stops us from projecting our own bias that may be influenced by our wishes, fear or greed at the moment. 10
Market Internals Intra-day Internals
End-of-day Internals
NYSE TICK
McClellan Oscillator
Equity Put/Call Ratio
NYSE TRIN
Advancing Stocks Ratio
Total Put/Call Ratio
NYSE Advance-Decline Line
Advancing Volume Ratio
OEX Put/Call Ratio
NYSE Advance-Decline
VIX and VIX Oscillator
Sentiment Surveys
Volume NYSE VIX DOW TIKI Buy and Sell programs
5-MA of the NYSE TRIN 10-MA of the NYSE TRIN Closing NYSE TRIN Closing DOW TICKI
Total Put/Call Ratio 11
THE TICK TICK Guidelines: The TICK is used to determine very short-term changes in market momentum. Trading ranges above 0 indicate a Bullish Bias. Trading ranges below 0 indicate a Bearish Bias. Extreme TICK readings (+ 1000, - 1000) suggest a short-term turn, but consistent readings between + 600 and + 1000 are very bullish, and vice versa. Divergences, or a non-conformation of price highs or lows, and TICK TI CK highs and lows, indicate relative strength or weakness, signaling a potential trend change. Confirmation of price highs or lows by TICK highs or lows suggests continuation. 12
NYSE TICK TICK spend spending ing time time between between +, - 600 is neutr neutral. al. This is a scalper’s market!
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NYSE TICK TICK staying well above zero and moving to extremes, very bullish.
New high and extreme! Breakouts in YM should go higher after a pullback!
TICK Support TICK often stays at a high level when prices trend higher. Trend traders should use this as a guide to hold onto longs. 14
NYSE TICK Resistance at extremes. Don’t sell or sell short based on this information alone!
TICK spending most of the time above zero and between + 600 and + 1000, very bullish. Support
When the TICK pulls back, ideally near the zero line, consider longs. 15
NYSE TICK TICK spends most time below zero, bearish. Lower Highs
HHs
HLs LLs Below -600 to -1000, very bearish. While bounces do occur from -1000, avoid longs, unless climactic.
HH-HL TICK, environment changing 16
YM & NYSE TICK TICK extremes can indicate a bottom, as well as confirm an upward move. While Tick extremes suggest a stall in an uptrend, trends typically do not end until prices reach a point of price resistance. Stars show bullish price-tick action.
TICK divergences can lead a turn in YM, but the most reliable signals will come when prices are also in an area of price support or resistance.
Bullish Divergence
TICK Support 17
THE TRIN TRIN Guidelines: Readings above Readings above 1.00 indicates more volume is associated with declining stocks. Readings below Readings below 1.00 indicate more volume is associated with advancing stocks. The TRIN’s TRIN’s trend is as importan importantt as the current current value. value. A TRIN rising from rising from 1.2 towards 2.0 indicates a more bearish market than one rising from rising from .55 to 1.0. Declining 1.0. Declining from from 1.2 to .50 is a more bullish environment than one declining one declining from from 2.3 towards 1.5. A sideways TRIN is associated associated with its level. While a Rising a Rising trend is Bearish and Bearish and a Declining a Declining trend is Bullish. This guide alone can be incomplete; therefore, a deeper understanding of the TRIN is needed. 18
NYSE TRIN g n i l a la f N I N R T , g i s i n s i R M Y
YM’s ran YM’s range ge contr contract actss once once YM and TRIN are in sync.
Sideways, TRIN rising . Note wide range bars
Range expands after YM is rising for two hours!
TRIN does not always trend opposite YM Below 1, but rising
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NYSE TRIN This chart tells us that the market can rise while the TRIN is rising, so there must be more to this indicator.
TRIN is below 1, so bullish, but rising bearish. Volume is increasing into decliners.
TRIN below 1 and flat to declining. Bullish, but this does not truly give a complete picture of the environment.
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THE TRIN TRIN is an excellent market internal indicator, but can be misleading at times, if you don’t know how to interpret it. By viewi viewing ng the the TRIN’s TRIN’s compo components nents,, it provi provides des a deeper understanding of the TRIN and its use. 21
THE TRIN How is it calculated? (Advancing Stocks / Declining Stocks) / (Advancing Volume / Declining Volume)
Advancing Adv ancing Stoc Stocks ks - 1715 /
Advancing Adva ncing Volum Volumee - 1222 1222310 310 /
+ 1187
Declining Stocks -
3.25
+ 48416
528
Declining Volume -
Divided by
738894
1.654
Equals a 1.97 TRIN Although this TRIN indicates a bearish environment, this TRIN value alone alone is misleading. misleading. The numbers calculated calculated are not bearish. 22
THE TRIN How is it calculated? (Advancing Stocks / Declining Stocks) / (Advancing Volume / Declining Volume)
Adv A dvan anci cing ng St Stoc ocks ks - 57 576 6 /
- 63 6328 2810 10
-1081
Decli De cliner nerss Stocks Stocks - 165 1657 7
.349
Advancing Adva ncing Volum Volumee - 1222 1222310 310 / Dec D ecli lini ning ng Vol Volum umee - 18 1855 5512 120 0
Divided by
.659
Equals a .53 TRIN Although this TRIN indicates a bullish environment, this TRIN value alone is misleading. The calculated calculated numbers numbers are not bullish.23
ADV A DVAN ANCE CE – DE DECL CLIN INE E LI LINE NE The Advance Advance – Decl Decline ine line line measures measures the the number number of stocks that are advancing verses declining. When more are advancing, the lines rises; more declining, the line falls. The A-D line does not consider how much each stock has moved or how much volume is associated with advancers or decliners, so its information is not complete. That said, said, the advance - decline line, when added to other other market internals, does provide a complete picture of what is occurring in the market.
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ADV A DVAN ANCE CE – DE DECL CLIN INE E LI LINE NE General A-D Line Guidelines: A rising A-D line indicates the number stocks advancing vs. declining is increasing
A declining A-D line indicates the number stocks declining vs. advancing is increasing
An A-D line line between between + / - 500 is neutral, neutral, but follow follow its its trend
The higher an A-D line rises, the more bullish. Values above + 500 are decisive
The lower an A-D line falls, the more more bearish. Values Values below - 500 are decisive
Readings Readi ngs of + or - 1000 and greater greater are ideal for for a trend to continue continue
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ADV A DVAN ANCE CE – DE DECL CLIN INE E LI LINE NE Set horizontal lines at every 500 increments Flat at neutral level means the market is choppy. Good for scalpers, but not trend traders.
Now the market is getting ugly. Don’t fight the trend!
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ADV A DVAN ANCE CE – DE DECL CLIN INE E LI LINE NE
Although the A-D is still at a negative level, it is improving.
Although this was at a very bearish level, the trend turned up. Now look at the TICK to see if it moved to a more bullish level. Market environments change! 27
ADV A DVAN ANCE CE – DE DECL CLIN INE E LI LINE NE
The trend is up and the level is bullish, don’t short. Hold those longs. It’s very likely that the TICK was hitting high extremes (+1000). That’s bullish with this A-D Line, and not a reason to exit long positions.
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ADVAN AD VANCIN CING G – DEC DECLI LININ NING G VOLUM VOLUME E Advancing volume is the volume in stocks trading above yesterday’s close. Declining Volume is the volume in stocks trading below yesterday’s close. The Advance Advance – Decl Decline ine Volume Volume Line Line measure measuress the advancing volume minus declining. When more is advancing, the lines rises; more declining, the line falls. When the A-D Volume Line is added to other market internals, it provides a complete picture of what is occurring in the market. 29
ADVAN AD VANCIN CING G – DEC DECLI LININ NING G VOLUM VOLUME E General A-D Volume Guidelines: A rising A-D Volume line indicates advancing vol. vs. declining vol. is increasing
A declining A-D Vol. line indicates advancing vol. vs. declining vol. is decreasing
An A-D Vol. Vol. line near the the 0 area or + / - 150000k is neutral neutral
An A-D vol. value above + 200000k and rising is decisively bullish
An A-D vol. value value below – 20000 200000k 0k and declining declining is decisively decisively bearish bearish
Readings Readi ngs greater greater than than + or – 200000 200000k, k, and trending trending are ideal ideal for a trend trend to continue continue 30
ADVAN AD VANCI CING NG – DEC DECLI LINI NING NG VOLUM VOLUME E
Sideways at a bullish level.
s l e v l e h s i l l u b r y e v t y a l i d p r a g n i s R i
Maintain a bullish bias, but be open to change if internals internals and and YM’s YM’s trend suggest suggest change.
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ADVAN AD VANCI CING NG – DEC DECLI LINI NING NG VOLUM VOLUME E Bearish, but at a neutral level. Check other internal gauges for guidance.
A-D Volume is declining and declining rapidly to lower levels.
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ADVAN AD VANCI CING NG – DEC DECLI LINI NING NG VOLUM VOLUME E Check other internals for guidance
A-D Volume is rising, but rising slowly at
neutral levels. This indicates a slightly bullish market, but not a decisive one.
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COMBINING MARKET INTERNALS Conflict Agreement
A-D Volume
NYSE TRIN
NYSE TICK
A-D Line 34
COMBINING MARKET INTERNALS Conflict Agreement
A-D Volume
NYSE TRIN
NYSE TICK
A-D Line 35
COMBINING MARKET INTERNALS Bullish Market Environment
Bearish Market Environment
Neutral Market Environment
TICKS 0 to +1000 with many ticks + 600 to + 1000 are key
TICKS 0 to -1000 with many tick ti cks s - 60 600 0 to - 10 1000 00 ar are e key key
TICKS betw between een - 600 to + 600, or oscillating in that area.
TRIN declining, ideally below 1.0, or sideways below .50
TRIN rising, ideally above 1.0, or sideways above 1.2
TRIN sideways, ideally between .90 to 1.05
A-D line rising, ideally above + 500
A-D line falling, ideally below - 500
A-D line sideways, ideally betwe bet ween en – 500 to + 500 500
A-D Volume rising, ideally above + 200000
A-D Volume falling, ideally below be low - 200 200000 000
A-D Volume sideways, ideally between betw een - 2000 200000 00 to + 2000 200000 00
These are ideal scenarios, and they can and do occur. But realize that there are many combinations of levels and trends. Experience will teach how to combine and interpret them. 36
DEFINING a TREND and TREND CHANGES If there is is a “Void” “Void” of price refere reference nce points points (support (support – resist resistance) ance),, the odds odds are high that a trend will develop when market internals are supporting. To take advantage of this, an objective method of trend analysis is needed. Moving Movi ng average average crossovers crossovers,, Trendline Trendline break breakss and/or Fibonac Fibonacci ci retra retraceme cements nts are all subjective and potentially misleading as methods of trend analysis. By simply simply monitoring monitoring pivotal price points, as the market forms them, we can can objectively follow the market’s trend. This method will also signal trend changes in the time frame being viewed. 37
DEFINING a TREND and TREND CHANGES ? All price pivot lows begin with higher low ( HL ) bars adjacent to HL HL
both sides of the “pivot bar.”
HL
Demand has increased
?
All price pivot highs begin with
The next bar will determine if a pivotal lower high ( LH ) bars adjacent to point of significance has formed. both sides of the “pivot bar.” Supply has increased LH LH
? For a change in trend to occur, a
LH
prior price pivot must pivot must be be overcome on a closing basis.
?
It cannot happen any other way! 38
DEFINING a TREND and TREND CHANGES
YM never traded above a prior pivot high within this trend.
While pivot lows formed (support), a down trend within a void, with supporting internals, suggests that they can be overcome. 39
DEFINE A PRICE PATTERN Trading is psychological to a great extent. Let’s use that to our advantage through technical analysis. Price patterns are pictures of psychology in motion. Have you ever bought a breakout or shorted a breakdown? Have any of those breakouts or breakdowns ever failed? How did it make you feel, think and what did you do?
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DEFINE A PRICE PATTERN Breakout Failure Breakout Failure
A breakout failure catches buyers on the wrong side of the prevailing trend. This typically results in a continuation of the trend soon afterward. Short under the failure bar’s low, stop 2 ticks above its high. 41 41
TREND and all INTERNALS in AGREEMENT Breakout Failures are not taken. The trend and internals are bullish.
Vol. Line is bullish
A-D Line is bullish
TRIN is bullish
TICK is bullish
Breakdown Failure signals a buy with bullish trend and internals.
With all internals in agreement at bullish levels and a bullish trend, the odds are high that the breakdown failure pattern will result in a continuation of the prevailing bullish trend.
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FINAL THOUGHTS Price patterns are pictures of the thoughts, expectations and emotions of the traders that formed them. When those pictures tell you that others have been caught on the wrong side of the trend and market internals, you have an opportunity to take advantage of it. Odds of similar similar patterns repeating repeating an outcome outcome in exactly exactly the same way are low. That said, pattern recognition does suggest a similar outcome. Accept the fact that you do not know what will happen next. The odds will be on your side, if you have a method of trading that you have internalized, have confidence in – and, of course, have the discipline discipline to follow. follow.
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