Trading the Extremes
Unfortunately, images on Linked-In can suffer a bit on size constraints. The image above was captured from a 40" display on my trading desk. At least, you can get to see what I am working on as we edge closer to getting our trading patterns converted to AI. Right click on the image to "View Image" to get a larger, more precise perspective.
Before I begin, it is always a good idea to read over the disclaimer below.
What we discovered is that there are consistent intra-day patterns as the price moves to extreme levels of resistance and support. Above is the S&P futures index otherwise known as the ES Mini. The reason why we like the ES Mini is that it has high volume, outstanding liquidity and it is one of the most widely traded indexes, a favorite for traders of all sorts. Volume, liquidity and volatility are key factors we are looking to digest as we train computers to look for those consistent patterns.
Let's review some of the call-out legends to provide a little clarity. The call-outs are marked appropriately in the text below in Bold for you to follow along when referring to the image above:
A...marks the extreme resistance line. We noticed that as the index approaches this high point, it has a tendency to "fade" away. The "fade" is initiated when the "Pulse Indicator"...C...a low lagging momentum line turns "red." Does this mean that an intra-day top has been reached? Not necessarily! All our trade setups need to confirm the "fade" has the potential momentum to make a high probability, trade-worthy swing. Keep in mind that there can be several intra-day extreme tops during the day's trading cycle which lasts from 6:30am to 1:00pm Pacific Time. Each month has 20 trading days, excluding Sundays, the opening day for the week.
Let your eye wonder vertically down from A to the lower level indicators. The whole section E is comprised of our confirmation indicators. Notice D. This is one of our prized confirmation indicators, a formula that takes into account multiple volume, time frames and tick movements, all compressed into one indicator. D turns "red" to indicate selling is taking place on multiple levels and "green" when buying is on. For example, a corresponding "red" ribbon-like indicator makes it possible for the trader to see a nice visual of the downward movement and avoid false moves or "feints." Likewise, a "green" ribbon denotes buying takes place. Of course, when we convert these indicators to an AI environment, the computers will look at our algorithms to make the appropriate trading execution.
It gets real interesting when you look at B. This is an extreme low. Notice the "bounce" off this low. There were four (4) tests of extreme highs and lows on this day. Again, tests off extreme lows and highs are the best for high probability trade executions. We love these as the measured risk is nominal when compared to mid extremes. AI alerts will be in place to notify the trader when these extremes happen. Some of the best extreme like trading opportunities occur in the late evening and early morning before the official opening. Yes, one can trade 24 hours a day on the indexes. However, the volume will dry up during these hours. Traders who setup positions during these hours and head to bed are called "swing" traders. When an extreme low or high is made, the probability of the index approaching the "PP" line is over 90% of the time. We like those odds.
Okay...let's discuss those mid extreme levels. There are dozens that pop for each day's trading cycle. This makes trading very interesting! Opportunities galore! It takes a quick visual eye to catch these mid extreme level swings. Our indicators do not lag much at all and as a consequence "Stops," protective measures to protect the trader from violent news related swings can be tighter, as in closer to the entry point.
All trades must have "Stops." You will set them, depending on your trading style and risk tolerance. We typically set our "Stops" anywhere from 8-12 "ticks" from the entry point. A "tick" is an incremental move. It takes 4 "ticks" to equal one (1) point. A one (1) contract trade is worth $50 for every point or $12.50 a tick. We pay roughly $5 in commissions for every "round turn" per contact," meaning that a one (1) point trade on one (1) contract from entry to exit (round turn) nets us $45.
Back to the mid extreme levels...notice C, the "Pulse Indicator." Follow each movement of this indicator as it turns "red" going down and "blue" going up. The "Pulse Indicator" is what we call a leading indicator meaning that it will signal in advance a price turn. It will always precede the action "arrows" which are "red" for down and "green" for up. Now get this: the "Pulse Indicator" will signal a 4 tick or greater move in over 90% of the price moves! We look for these signals at or around the "PP" line, typically, as they enjoy lower risk and a more predictable outcome. Coming off the "extremes" a reversal bounce can occur around the "PP" line before resuming the trend to the opposite "extreme."
When trading mid extreme levels, we always glance at the lower level indicators for confirmation. Like playing a video game, one has to train the eye for those sometimes quick moves. AI will make it much easier to trade these automatically as the executions will be blindingly fast. AI will also make judgments as to how much to scale into a trade as well as set the trading strategy on the fly.
What do we look for in a profit target? The setup strategy says it all and we will give more detail on this in our next article. Basically, we use execution scale, breakeven set points and predetermined profit targets. If you look at just the "Pulse Indicator" for the trade possibility and scale twenty (20) contacts for a set profit target of four (4) ticks, and the trade is successful, you will make $1,000. The commissions will be $100 and you will net $900. This is a very aggressive trade! Not every trader can tolerate a news related reversal event that sends the trade the other direction taking out the "Stops" for a nasty loss. It can happen! Never, Never trade without a "Stop." Always, trade what you can afford to lose...start small and build up your confidence and your bankroll before trying any aggressive trading. We will give you plenty of strategies.
Until the next article, live, love with passion!
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