MarketColor as the basis for a Structured Trading Approach

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MarketColor defines the context of the current condition or market STATE. It is the underlying “technical” tone or environment for the trade period and should be used as the basis to standardize trading tactics and create a more structured trading approach.

Many traders get caught up in the moment and fail to account for the bigger picture or context in which the moments are occurring. Armed with a quiver of trading tactics, which they strive to execute consistently, they have little basis on how to value one opportunity from the next. As long as the signals are the same, they are the same signal and have the same value right? Wrong! The context in which the signal is occurring determines the value any a tactic signal has. By aligning trading tactics with complimentary market state condition traders are able to standardize their approach and create a value weighting system for their signals.

Trading is difficult and complex. Strategy and tactics must be unified and simplified if they are going to be part of a sustainable trade plan.

JSServices MarketColor analytics begins the simplification process by classifying conditions into unique market STATES. Each STATE has its own set of attributes which individually are the same as other STATEs but when combined with characteristics, produce a unique expectation for each STATE. Trading tactics can be standardized to these nuances to create a structured approach where the alignment to each market STATE determines the value of the opportuinity.

Practical Application

MarketColor State

A general type BULL TREND (#UPT) has the same attributes as a signature NEUTRAL POSITIVE TRANSIITON (#NPT) MARKET STATE. The characteristics of a #UPT are defined as a steady positive trend verses a #NPT which is more indecisive and potentially volatile as the market has yet to confirm a transition into a new trend. Trading tactics can be standardized to these facts to create a structured rule based approach that is aligned with the characteristics of each MARKET STATE. A basic practical application would be to adjust risk parameters either on the amount of leverage used or stop placement. A #UPT has steady positive trend characteristics and should incorporate wider stop placement verses a #NPT which should use tighter risk parameters as its positive trend characteristic are not confirmed. Adding this structure a trade method aligns what is more likely to occur with the applied risk. Risk more in STATES that are likely to support a tactic signal as less in STATES that are not as clear.

      

                                                         MarketColor State (MCS)

MarketColor Technical Profile

The MarketColor technical profile can also be incorporated to add additional structure to a trading method as a criteria filter for signal acceptance or market selection. In this example both the ES and NQ are in BULL TREND (#UPT) MARKET STATES however the ES technical profile is showing signs of being overbought with a negative RED indicator in the RSI (Relative Strength) and a YELLOW extreme signal in the SSTOC (Slow Stochastic). NQ is generating a new buy signal (GREEN) in the MAC (Moving Average) system but this is not supported by the DMI or ADX indicators. Of the 2 markets neither has a positive fact foundation but the NQ ‘s foundation is less risky, as overbought condition can produce abrupt negative corrections. A basic criteria filter would be to only accept buy signals in a BULL TREND when the RSI and SSTOC are either in neutral (BROWN) or supporting color (BLUE, GREEN or AQUA). If this condition is not true then no buy signals should be accepted. This filter may miss some good opportunities but is in alignment with what is more likely to occur and over time will produce a more consistent result.

   

                                MarketColor Technical Profile (Structure Tab)

Aligning trading tactics with complimentary technical conditions provides structure by standardizing

 

Creating a Structured Trading Approach

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JSAnalytics offers a foundation to create a more structured trading approach. It does this by providing the basic ingredients needed to make any clear decision – facts. In terms of trading the analytics are objective quantitative measurable market truths. The numbers “don’t lie” and need no subjective interpretation. No matter what your opinion is, the facts remain the facts. For a trader this is powerful, as our internal dialog is always second guessing if the decisions we have made are correct. Without a benchmark “fact check” it is easy for emotions to influence trading and cloud the decision making process . By creating a structured trading approach built on a fact foundation doubtful emotions are replaced with confidence and resolve.  Market movement is seen for what it is with no emotional attachment. Execution of a trade plan is methodical and structured. The process offers a quantifiable way to measure performance and improve consistency, as every decision made can be compared to the same decisions made in the same context and structure. As a trader you are an observer of real time market movement within defined context and have a structured trade plan to anticipate and capture opportunity as well as a framework to improve the process of doing it.

How do you get started creating a more structured trading approach? By aligning trading tactics and methods to a FACT FOUNDATION.

There a 3 factual contexts that every trader and trading system must account for and be aligned with:

  • The current market STATE and the characteristics that define it.
  • The current STRUCTURE and its influence on the STATE expectations
  • The STRATEGY themes that are inherent in STATE and STRUCTURE bias dynamic

JSServices identifies a markets STATE, STRUCTURE and STRATEGY themes as the FACT FOUNDATION to create a more structured trading approach with is MarketColor, PriceMap and PlayBook analytics.

MarketColor defines the context of the current condition or market STATE. It is the underlying “technical” tone or environment. Just as a professional athlete will alter their tactics based on weather conditions, playing surface and opponents strength, so to a trader must standardize trading methods to the characteristics of the market STATE. MarketColor objectively provides these facts so a structured approach can be developed for each uniquely classified market STATE condition into a simple IF/THEN approach. IF its rainy, cold and playing on a natural field THEN the strategy is to play more conservatively. IF playing indoors on artificial surface THEN execute a faster strategy. In trading it as not as simple as this as the context or STATE can change during the “game” session. We need more facts than just what the characteristics of the condition or state “is” we need to know when those conditions or facts are changing or are no longer true. For this we need to know what the STRUCTURE is that defines the market STATE or the JSServices PriceMap.

Market STRUCTURE is the price framework that defines the market STATE. As long as price action is holding STRUCTURE then the definition of the STATE is true and the characteristics that define it should be expected to influence trading conditions. If price action is not holding structure it is a “tell” that the market STATE is in transition to a new STATE and trading conditions are changing. In general markets that hold structure are easier to predict as their characteristics are known. The characteristics of a market that is transitioning to a new  STATE are not as clear as we do not know what STATE the market is transitioning into. The market STRUCTURE framework or PriceMap identifies the price points where the market will make a decision to hold structure and persist or break structure and transition. It is at these price points where liquidity is the highest, risk is the lowest and opportunity the greatest. The PriceMap provides the framework to create a structured trading approach that is unified across all markets. To achieve alpha however we must anticipate opportunity and have a STRATEGY that differentiates the value between opportunities.  We need a guide or “PlayBook”.

JSServices PlayBook offers an objective FACT FOUNDATION to improve consistency by identifying the STRATEGY themes that are expected to dominate price action.  IF the MKT is in this STATE with this STRUCTURE THEN this is the optimal STRATEGY. If however there is a break in STRUCTURE then this HEDGE STRATEGY should be executed to capture the shift in STATE. The PlayBook removes the question of “What to do?” by presenting the best opportunity for the current STATE and STRUCTURE bias. Professional sports teams have certain plays designed for certain defenses, position on the field or time left on the clock. These plays are structured, optimized, practiced and executed consistently. During the playoffs is when we really see the beauty of a well orchestrated game plan executed by the victor. Every series the correct “play” is matched with the context of the game at the moment. As a trader your are the coach or director of your team of tactics. By having a FACT FOUNDATION you know the STATE expectation and characteristics prior to playing the game. With trading however you do not need to play every play and can be selective to only participate in STRUCTURES that favor your success. When you do trade it can be with STRATEGIES that have been optimized through consistent execution in the same STATE and same STRUCTURE no matter what market or asset class.

Trading is one of the most difficult, exciting, demanding, fulfilling businesses. Without a structured approach the challenging aspects of trading can quickly overwhelm frustrate us. When trading is done with a structured approach however the positive attributes of the vocation begin to shine and feed on themselves providing clarity to every individuals unique path to success.

Request a demo of our Desktop application which will allow you to integrate al JSServices analytics into your workflow and create a more structured trading approach.

 

 

 

 

 

Risk Structure

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RISK STRUCTURE

Volatility Indices are used to identify the underlying risk condition or STATE a market is currently in. The PriceMap sentiment bias or R LEVEL for the underlying security or futures contract defines the RISK STRUCTURE of the RISK STATE.  Observing price action of the underlying security or futures contract, within the RISK STRUCTURE, in the context of the VIX RISK STATE provides awareness to markets vulnerabilities.

Example

The image below shows the Monthly, Weekly and Daily R LEVEL sentiment bias for the SP500 E-Mini.   In general: Trading above the R LEVEL is positive and below negative. Observing the differential between the current price and the R LEVEL provides insight to its influence as either a repellent when near or attraction when far away. The influence is also determined by the time frame of the structure. The available time frames are Monthly, Weekly and Daily which outline the RISK STRUCTURE of the market.

UNDERLYING RISK STUCTURE

Daily, Weekly, Monthly R-LEVEL Risk Structure

In the example above the ES futures market price is above the Monthly, Weekly and Daily R-LEVEL, identifying RISK OFF structure. Confluence of this fact with the RISK STATE of the underlying VIX provide clarity to the real vulnerabilities of the market. The example below shows that the VIX is below its Monthly R LEVEL. The Monthly time frame being the highest value in terms of market influence. As long as the VIX is below the 12.35 DIR (DIRECTIONAL) R LEVEL, volatility is in a RISK OFF position. Combining this with the fact that the ES futures are trading above all 3 sentiment bias time frames puts the current rally in a strong position with supporting volatility expectations.

The CBOE (Chicago Board of Options Exchange) and the CFE (Chicago Futures Exchange) has expanded coverage of volatility indices or VIX into grains, currencies, crude oil and interest rates along with sector ETFs and individual stocks. Knowing the fact associated with a markets RISK STATE and STRUCTURE  improves awareness and offers an indicator of confluence to standardize trading tactics into a more structured approach.

For more information Click HERE.

 

Risk State

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RISK STATE

Hedging is about managing risk which can be defined in term of volatility. Volatility Indices identify the RISK STATE or condition of the underlying security or futures market. The price points at which the RISK STATE will change are identified in the RISK STRUCTURE of a markets associated VIX. The RISK STRUCTURE alignment can be used as the foundation framework to create a hedge strategy in the underlying security or futures market position to be hedged. This is done by observing the current price position in relation to the PriceMap R LEVEL within the PriceMap framework of a markets VIX.

R LEVEL

The R LEVEL is the dynamic point of equilibrium that defines the Sentiment Bias for the trade period. It is the price level where the bias shifts from positive to negative and vice versa. Where the R LEVEL is on the PriceMap framework determines the RISK STATE. In terms of a Volatility Index like the SP500 VIX the bias shift can be looked at as RISK ON /RISK OFF flip switch for the RISK STATE.

Example

The following is a Hedge Strategy Overlay example applying JSAnalytics to the SP500 VIX. The example shows how to identify the current risk condition and the specific action qualifiers that will trigger shifts in that condition along with the recommended strategy themes and tactics to construct a hedge to protect against an increase in volatility.

RISK STATE

$VIX RISK STATE

The image above shows the Monthly structure for the cash VIX Index which is in a LOW RISK condition below the R LEVEL. A move above the R LEVEL will change the state to a RISK position.  Knowing the FACTS of the RISK condition or State provides clarity, which can be used as the basis to construct a systematic approach to managing risk and constructing a Hedge Strategy.

The CBOE (Chicago Board of Options Exchange) and the CFE (Chicago Futures Exchange) has expanded coverage of volatility indices or VIX into grains, currencies, crude oil and interest rates along with sector ETFs and individual stocks. Knowing the fact associated with a markets RISK STATE improves awareness and offers an indicator of confluence to standardize trading tactics into a more structured approach.

For more information Click HERE.

 

Getting Started – Market State

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MARKET STATE

Standardize your method with the characteristics of the market STATE using JSServices MarketColor Analytics to create a more sustainable trade plan.

  • Identify the STATE conditions your trading style works best in or is more comfortable for you to trade
  • Know the characteristics that define each market STATE
  • Use the MarketColor Grid to identify markets whose current STATE compliments your trading style

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PlayBook Entry Strategy Tactics

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Trade Entry Tactics

The PlayBook Strategy Themes represent the best risk defined opportunities for the trade session and are defined using 3 basic ENTRY tactics;

  • FADE momentum
  • BREAKOUT, trade with momentum
  • REVERSAL, false breakout exhaustive signal

entry-strat-1

The naming schema for a PlayBook Trade Tactic BUY R FADE strategy reads as follows; looks to BUY the market at the R LEVEL using a FADE entry technique. This is a “theme” so the essence of the strategy is to FADE momentum into the R LEVEL area. Trading tactics and methods should be aligned with the basic properties of a FADE.

Risk Parameters

The Risk Parameters identify the area of influence or acceptance zone surrounding a trade entry level in which an opportunity remains valid when executing a specific trade tactic. The reason is that many profitable opportunities cannot be filled at the optimal entry level, in which case the surrounding acceptance zone is used to gauge if the fill price still presents an acceptable trade opportunity. The surrounding acceptance zone boundaries are defined by the AD (Alert Distance) and VAR (Variance) PriceMap Market Metrics offer a guideline for a systematic approach to the Trade Entry process by defining where to enter the market with the best chance to succeed with acceptable risk.

marketmetric-apmd-7

  • VAR (Variance) metric defines the variance surrounding a PriceMap level that should be considered “at the level”. This metric can be used for risk management but its primary function is to identify the optimal ENTRY area. The VAR is also the signal acceptance zone for a minor or validation level.
  • AD (Alert Distance) metric defines the signal acceptance area surrounding a Directional or Major PriceMap level. This metric also qualifies the structure thresholds for conditional alerts and stop placement for JSServices PlayBook strategy themes.

The Risk Parameters should be used to systematize the 3 main components of Trade Entry, the Conditional Alert, Entry Price and Exit Stop price.

Example: The image above shows a basic textbook example of a FADE, BREAKOUT and REVERSAL Entry Tactic incorporating the Risk parameter Acceptance Zone.

Conditional Alert

The Risk Parameters are used to confirm a Trade Entry Tactic is “true” or valid.

  • FADE technique is the most basic as it has only 1 conditional alert (A1). This is to confirm that the LTP (Last Traded Price) is “in front” of the PriceMap level so momentum can then be “faded” in the acceptance zone. The example above shows the AD (Alert Distance) being used as the A1 Conditional Alert.
  • BREAKOUT technique has 2 conditional alerts. A1 to confirm that price was qualified “in front” of the PriceMap level on the opposing side of the acceptance zone and then A2 to confirm a BREAKOUT through the PriceMap level creating a new bias. Once the BREAKOUT statement is “true” entry orders can be executed anywhere within the acceptance zone.
  • REVERSAL technique has 3 conditional alerts that must be met in sequence. Price must confirm that A1 is true first, then A2 and finally A3 to make the REVERSAL statement true. Once this occurs then entry orders may be placed anywhere within the acceptance zone.
Entry Price

After the Conditional Alert confirms the Entry Tactic the Risk Parameters can be used to systematize Entry orders within the acceptance zone.

  • FADE, in the example the BUY FADE entry is placed at the VAR (Variance) with the expectation that the momentum is going to press into the acceptance zone and afford an entry close to the PriceMap level.
  • BREAKOUT places an order at the AD as the expectation is that the new buy signal is going to just “ go” with a minimal pull-back.
  • REVERSAL order is placed in the middle between the AD and VAR as a balance between a “choppy” transition or a steady shift in momentum.

The example presented are basic guidelines which can be optimized by taking into consideration the characteristics of the market state, the position on the PriceMap framework, the Strategy Theme the trade is aligned with and the dynamic micro structure of the order book.

Exit Stop Price

The Risk Parameters Market Metrics VAR, AD, and MSD can be used as parameters to set Exit Stops. Reward expectations should be considered when selecting which metric to use for an Exit Stop. The stop should never be placed “at the metric” as this represents the boundary limit which is anticipated to be tested but not broken. As a rule of thumb a minimum 1-3 tic variance through the metric should be used to avoid getting “dinked” at the risk parameter extreme. Price Structure and the order book dynamics can be used to optimize stop placement as well as entry

The image above shows how Entry and Exit Stop orders can be optimized when price structure and resting paper in the order book are in alignment with Risk Parameters.

General Thoughts on Trade Entry Tactics

  • Awareness of the Risk Parameters provides additional insight and clarity to the current condition.
  • Signal acceptance should be limited to within the AD (Alert Distance) acceptance zone.
  • Entry within the VAR acceptance zone should be considered optimal.
  • Trading outside the acceptance zone assumes much higher risk and slippage and should be avoided.
  • The opposing VAR and AD can be used for STOP placement. The placement of such orders can be optimized with price structure confluence. In fact when price structure and market structure metrics are aligned it signals a good risk based opportunity.
  • Historical resting paper in the order book that is in alignment with Risk Parameter Market Metrics  can be used to optimize Stop Exit placement by adjusting stops through the liquidity.
  • If an ENTRY LIMIT order is placed too close to the PriceMap Level, the strategy will “miss” opportunities (winners), that “just didn’t make it” to the point of entry but will participated in all of the losers because market went through the PriceMap level.
  • If you want to have a position it is best to enter the MKT at the AD and then average in with a lower entry at the VAR. Ideally the micro structure of the order book should be used to optimize ENTRY orders with supporting liquidity events.

 

R LEVEL – Market Structure Bias (MSB)

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SENTIMENT BIAS – The R LEVEL

The R LEVEL [Reversal Level] is the “Over-Under” number for the trade period. Trading above the R signals a positive buy break bias and trading below the R signals a negative sell rally bias. This is the inflection point where sentiment shifts from positive to negative and vice versa.

r-level

The R LEVEL is the most significant price level on the PriceMap as it defines the session bias and is the best actionable starting point when using the analytics. Traders should be aware of price activity in relation to the R level and note if the current action is with or against the bias. In a general sense, signals in the direction of the R bias should be expected to be smoother, with follow through potential, and signals against the R bias to be more laborious and unlikely to be sustained.

Market Structure Bias (MSB)

The R LEVEL represents the sentiment bias for the trading period which further defines the market State expectation by its position on the PriceMap. Where the R level is on the PriceMap Framework will skew the condition of the market state and define a Market Structure Bias (MSB). There are 9 potential R LEVEL positions on the PriceMap Framework each with its own unique influence on the current condition. Trading tactics should be aligned with the MSB skew to improve their effectiveness.

pricemaprlevelpositions

PriceMap Framework R LEVEL Positions

Market Structure Bias (MSB) R LEVEL positions

R =DIR

The R LEVEL equal to the DIR (Directional) is in a classic pivot point position, as sentiment is balanced or “on the fence”. The market is indecisive or is preparing to make a move. Any market State condition with the R=DIR structure bias should respect the pivotal nature of sentiment. Typically, when the R LEVEL is in this position it will either just breakout and “go” producing a linear move or a difficult rotational trade will consume the market for the trade period within the CR+ and CR- validation levels.

msb-image-dir

R=UP

The R LEVEL at the top of the Critical Range defines a “hard” resistance point at the UP (Upside Pivot). Energy is centered at this price point and a violation should be expected to produce sharp interest. A downside failure below the DP (Downside Pivot) however should NOT be expected to have the same energy and have a more measured expectation. This structure bias identifies a corrective expectation for positive trend type states and the optimal entry area for negative trend states.

msb-image-up

R >UP

The R LEVL above the UP but less than the UT1 creates a RESISTANCE BAND with the UP. Trading tactics should focus on the entire zone for signal acceptance. Typically this would be on the sell side as this is a resistance band but will transition into a support band if the market violates the R LEVEL and starts to transition higher. This structure bias identifies a corrective expectation for a positive trend type states and the optimal entry area for negative trend states.

msb-image-gt-up

R =UT1

The R LEVEL = to the UT1 (Upside Target #1) creates an even wider resistance band with the UP. Signal acceptance anywhere in the price band is acceptable however it is best to commit to opportunities closer to the UP or UT1. As the R LEVEL moves farther outside the CriticalRange the energy in the market place is skewed higher. Any lower price movement should be expected to be move measured and any positive turn from lower levels should be expected to target the R LEVEL. This structure bias identifies a corrective or digestive expectation for positive trend type states with the R LEVEL defining current lid for the underlying positive momentum. For negative trend states the R LEVEL identifies where the real selling energy is and the optimal entry area to get back on the down trend.

msb-imageut1

R >UT1

The R LEVEL above the UT1 identifies the high point for any price squeeze against the underlying trend if it is going to resume in the session. A market in this position has an underlying negative tone and any sell signals within the UP to R LEVEL range, are an actionable opportunity. Sales below the DP is a lower value opportunity and the threat of a corrective squeeze up to the R LEVEL is real. Typically the market will attempt some type of corrective move when the R LEVEL is in this position. A good “tell” is either an exhaustive REVERSAL signal at the DP or a transitional positive BREAKOUT at the DIR targeting the R LEVEL.

msb-image-gt-ut1

R =DP

The R LEVEL at the bottom of the Critical Range defines a “hard” support level at the DP (Downside Pivot). Energy is centered at this price point and a failure should be expected to produce aggressive offers. An upside breakout above the UP (Upside Pivot) however should be expected to NOT have the same energy and any upside breakout to be more measured. This structure bias identifies a corrective expectation for negative trend type states and the optimal entry area for positive trend states.

msb-image-dp

R <DP

The R LEVEL below the DP but greater than the DT1 creates a SUPPORT BAND with the DP. Trading tactics should focus on the entire zone for signal acceptance. Typically this would be on the buy side as this is a support band but will transition into a resistance band if the market violates the R LEVEL and starts to transition lower. This structure bias identifies a corrective expectation for a negative trend type states and the optimal entry area for positive trend states.

msb-image-lt-dp

R =DT1

The R LEVEL = to the DT1 (Downside Target #1) creates an even wider support band with the DP. Signal acceptance anywhere in the price band is acceptable however it is best to commit to opportunities closer to the DP or DT1. As the R LEVEL moves farther below the DIR the energy in the market place is skewed lower. Any higher price movement should be expected to be move measure and any negative turn from higher levels should be expected to target the R LEVEL. This structure bias identifies a corrective or digestive expectation for negative trend type states with the R LEVEL defining current floor for the underlying negative momentum. For positive trend states the R LEVEL identifies where the real buying energy is and the optimal entry area to get back on the up-trend.

msb-image-lt-dp

R < DT1

The R LEVEL below the DT1 identifies the low point for any price squeeze against the underlying trend if it is going to resume in the session. A market in this position has a defined underlying positive tone and any buy signals within the DP to R LEVEL range are an actionable opportunity. Buys above the UP are a lower value opportunity and the threat of a corrective squeeze down to the R LEVEL is real. Typically the market will attempt some type of corrective move when the R LEVEL is in this position. A good “tell” is either an exhaustive REVERSAL signal at the UP or a transitional negative BREAKOUT at the DIR targeting the R LEVEL.

msb-image-lt-dt1

Optimizing TradeTactics

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TradeTactics can be optimized when executed within market metric thresholds and their effectiveness improved by using real time order book events that identifying areas of intensity of trade, resting paper and liquidity shifts.

Overview

  • Market Metrics are the price thresholds for signal acceptance around a PriceMap level.
  • Intensity of trade is defined as an increased flurry of activity that is supported with good volume. This is displayed as a volume dot or circle on our integration partner platforms.
  • Resting Paper identifies price levels that have a significant amount of volume that has been “resting” for some time that identifies potential support or resistance.
  • Liquidity Shifts identify significant increase or decrease in volume at a specific price point which signal an increase or decrease to interest that that level.

Practical Application

Order book events provide insight for two types of events:

  1. Momentum REVERSAL
  2. Momentum BREAKOUT

When order book events occur within market metrics thresholds they provide additional clarity for TradeStrategies that have been normalized to specific PlayBook Themes. Performance is enhanced and the effectiveness of TradeTactics is optimized by incorporating order book events within market metric thresholds.

The following is a practical application of combining order book dynamics and market metrics to optimize execution tactics of a PlayBook strategy theme.

PlayBook Example:  ES PlayBook Oct 14 2016

es-full-pb-oct-14-2016

R=CRX+

In the PlayBook example above the ES is in a BEAR TREND with the R LEVEL above the market at the CRX+. In this market structure bias (MSB) the negative sentiment of the BEAR TREND will remain intact below the CRX+ R LEVEL. The CRX+ is a validation level that will confirm or deny an upside CriticalRange BREAKOUT.

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The FACT that the R LEVEL is equal to the CRX+ and is in the context of a BEAR TREND market state, makes it more likely that the CRX+ will contain an UP BREAKOUT. The R LEVEL in this position creates a “resistance band” to FADE momentum and accept exhaustive signals within the CRX+ – UP price band, anticipating a resumption of the BEAR TREND condition.

Optimal Strategy Theme

The OPTIMAL PlayBook Strategy Theme for the market structure bias is a SELL R FADE and a SELL UP REVERSAL. These strategies are in alignment with the general underlying BEAR TREND outlook that looks for sell signals below the R LEVEL.

The image below shows a successful performance for the Optimal Strategy theme for the ES on OCT 14 2016.

orderbook-int-trade-post-1

Market Metrics

By incorporating market metrics and the dynamics of the order book TradingTactics are optimized and performance enhanced. The image below shows the PriceMap overlay with market metric identifying the area of signal acceptance for the SELL R FADE and SELL UP REVERSAL.

orderbook-int-trade-post-2

Using the above image:

  • SELL R FADE – The market metric AD (Alert Distance) should be use as the initial entry for any FADE STRATEGY (R-AD in this example). By definition a FADE anticipates momentum to turn “in front” of the figure. Entry TradingTactics are enhanced by aligning them with the metrics that define the optimal threshold for signal acceptance. Without this intelligence good trades are missed which did not “make it” to the figure. By definition the “best” FADE is one that “exhausts” in front of the figure within the Alert Distance and Variance (VAR) Market Metrics.
  • SELL UP REVERSAL – A REVERSAL by definition is a “false breakout” that 1st violates a PricMap level and then trades back through it. The market metrics can be used to confirm a REVERSAL using the AD (Alert Distance) on both sides of the figure. First to signal a breakout by having price action exceed the UP+AD and next to confirm the exhaustive failure or REVERSAL by trading back through the UP-AD.
Order Book Dynamics

Order book dynamics optimize TradeTactics by providing key intelligence to the facts of the moment. The PlayBook identifies specific macro themes that TradeStrategies can be aligned to and normalized at specific PriceMap action levels. Market metrics define “where” a potential shift in momentum or state will occur by outlining the threshold of signal acceptance. Order book dynamics complete the optimization process by improving timing and identifying “when” an opportunity will occur and if it is valid. The image below shows how incorporating the micro structure of the order book enhanced the effectiveness of the execution of the SELL R FADE and SELL UP REVERSAL PlayBook Strategy Themes.

orderbook-int-trade-post-3-bm-2

Using the above image:

  • SELL R FADE – The context of the PlayBook Strategy Theme “FADE” and normalized PriceMap entry level “R” provide an expectation to anticipate a rejection from the R LEVEL which is the price point that represents the peak for any corrective action of the BEAR TREND state. The market metrics further improve vision by identifying the threshold area surrounding the R FADE to anticipate a rejection. Using this intelligence as the macro context of the SELL R FADE opportunity the order book dynamics provide the micro confirmation.
    • Order Book Events
      • Intensity of Trade – As price action breaks out above the UP there is a flurry of buying in-front of the R-AD metric. As the MKT trades into the signal acceptance area (R-AD) there is less intensity identifying a divergence of interest.
      • Resting Paper – A “wall” of resting paper builds up within the R-AD metric confirming an area of “resistance” which confirms the validity of the R LEVEL itself.  A re-test of the high area does not generate any intensity signaling a divergence in interest and confirming the SELL R FADE.
  • SELL UP REVERSAL – The “wall” of resting paper above the MKT gives a “more likely to occur” expectation to a negative turn and a resumption of the BEAR TREND. The macro context of the market state and structure provides trade vision that a REVERSAL from the UP would not only confirm the SELL R FADE strategy but would also generate a new sell opportunity with the potential to be the start of the next extension lower.
    • Order Book Events
      • Liquidity Shift – This event provides a “tell” that a new trend is developing by shifting liquidity down. In a prelude to a REVERSAL opportunity after a rejection from the R LEVEL a negative liquidity shift offers a chance to anticipate a failure from the UP-AD and get into a trade early with the order book shift.
      • Intensity of Trade – A failure from the UP-AD metric signals a SELL UP REVERSAL strategy which when supported by intensity of trade confirms the event and is similar to validating a BREAKOUT.
      • Resting Paper – It is interesting to note that prior to the UP-AD failure, resting paper below the market began to “move out of the way”, which was another “tell” confirming the negative sentiment shift and underlying dominance of the BEAR TREND condition.
Summary

Observing price action within market structure in the context of the market state and underlying PlayBook strategy themes provides a macro foundation for TradeTactics which can be optimized by incorporating market metric thresholds and order book events. This combination of macro structure and micro structure offers the best results in creating more effective execution of TradeTactics.

MarketMetrics – APMD (Average PriceMap Distance)

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Average Price Map Distance (APMD)

APMD (Average Price Map Distance) = the price segment distance the MKT is trading in for the defined trade period.

IF we know the price segment distance the MKT is trading in, THEN we can forecast or anticipate price movement.

Markets are in a constant state of expansion and contraction. The ebb and flow of the expansion and contraction can be measured as a function of the APMD. Typically a MKT moves in ½, x1 and x2 APMD segment impulses. This is “typically”, or rather, what is more likely to occur, as x3 and x5 segment moves do happen during event conditions. As a general rule x1 APMD is a good measure for a “decision point”, when a MKT reaches the point of dynamic equilibrium and “decides” to either continue expanding or start contracting. The PriceMap Framework defines this market structure and the APMD represents the distance between these points to dynamic equilibrium.

In the example below the CRUDE OIL contract demonstrates this well over the 3 sessions.

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Normalizing Exit Targets

Understanding the relationship between the PriceMap Framework and the APMD provides a metric to normalize exit targets for a TradeStrategy.

As a general rule the APMD should be used as the the minimum expected profit potential for a TradeStrategy executed at one of the PriceMap Action Qualifiers. R LEVEL strategies can go for more and be positioned for a x3 APMD move. A trade from the CriticalRange extremes has a minimum x1 APMD target but should go for x2 APMD and a DIR (Directional) trade x1 APMD. Any Validation level entry should base risk on a ½ APMD reward.

APMD Practical Application

Observing price action and the position of the LTP (Last Traded Price) within the PriceMap Framework provides awareness to the value of an opportunity. Trading tactics can be normalized by focusing signal acceptance at market structure points using the APMD as a measure of profit potential to define exit targets.

Identifying the relationship of LTP and the R LEVEL provides additional insight to the current expectation or “behavior” of price action. Momentum moving in the direction of the Sentiment Bias is more likely to follow through in the direction of that bias. The farther away from sentiment the LTP is, the farther away it is from the real “energy” or “liquidity”. Markets that expand >x2 APMD away from the R LEVEL may start to look “extended” and are more vulnerable to a “contraction” Even if that contraction is only ½ APMD. Keeping TradeStrategy signal acceptance in alignment with the Sentiment Bias is prudent, as is making position size or risk adjustments in accordance to the APMD distance between the R LEVEL and LTP.

Awareness is further enhanced by the significance the level has to the STRUCTURE of the STATE as well as the price segment distance the MKT has already achieved to get to the LTP level.

Example

In the example below, the MKT is in a BULL TREND state with sentiment positive, below the market equal to the DP (Downside Pivot). The UP represents the high point for any “contraction” of the positive trend and a valid SELL FADE opportunity. Prior to the UP being tested it was after a x1 APMD move from the DIR (Directional). This FACT combined with the R LEVEL being  x2 APMDs away from the UP, identifies lower positive energy at the top of the CriticalRange. The result of these  FACTS produce a x1 APMD “correction” back to the DIR where prices stabilize and produce a rally that is in alignment with Sentiment Bias for the trade period.

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PlayBook Strategy Themes

MARKET STATE AWARENESS is improved by monitoring PRICE ACTION within MARKET STRUCTURE in the context of the MARKET STATE.

Specific strategy themes are inherent in the state structure dynamic and each theme has a profit expectation that is based on the APMD.

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The image below identifies the Optimal and Hedge strategy themes for a BULL TREND MARKET STATE with the R=DP, that played out during the session along with expansion “E” and contraction “C” signals that produced ½ and x1 APMD segment moves.

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The APMD MarketMetric provides reward expectations to normalize a TradeStrategy by identifying the price segment moves the market is trading in.  Many times it is not IF the market is going to make a x1 APMD move it is just a matter of how it is going to do it. Observing price action within market structure in the context of the market state provides awareness to opportunities. The APMD defines what those opportunities are worth so proper size and risk management can be applied.

 

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PriceMap Qualifiers CriticalRange

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CriticalRange

The PriceMap defines the structure of the market state by identifying the key price band or CriticalRange for the trade period. The Upside Pivot [UP] and Downside Pivot [DP] directional levels encapsulate the CriticalRange which will behave like key resistance and support levels,  defining the behavioral area of indecision or neutral zone for the trade period. 

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The CriticalRange is broken up into 6 quadrants, defined by a directional level mid point and minor levels on either side of the UP and DP. This structure and the inherent meaning of each level are key to interpreting market “tells” in real-time.

DIRECTIONAL

The DIR (Directional) is the mid-point of the Critical Range but is not necessarily symmetrical. The DIR acts as a classic pivot point for the trading session that the market will rotate around to find its immediate bias within the CriticalRange.

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A held trade above the DIR gives the market a positive lean and below negative, targeting the UP and DP CriticalRange extremes. Trading within the CriticalRange represents a neutral posture for the market. A breakout of the CriticalRange signals a directional bias and possible trend move for the session.

 CR + and CR –

The CR+ and CR – define the interior quadrants of the CriticalRange. These minor levels will come into play as the market rotates around the DIR, either tightening the coil of a digestive trade or preparing for a transitional BREAKOUT.

  • Classic rotational trading within the CR+ and CR- range is typical for NON TREND type consolidation prior to a move. A market that has tested both the CR+ and CR- and has maintained the integrity of each, is a “tell” that a sideways trade will persist producing a NON EVENT session.

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  • A breach of the CR+ or CR- after a rotational trade around the DIR will give the market a bias targeting the CriticalRange parameters (UP/DP). If the signal is valid and “ready to go”, price action will maintain structure at the DIR after a CR+ or CR- breach. If it does not, it is a sign of digestion or potential reversal.

CRX + and CRX –

The CRX +/- are the Critical Range Breakout extremes. These are the price points that must be taken out to confirm a structural break or “Breakout” and can result in good exhaustive extremes.

  • Exhaustive Extreme – The CRX+ and CRX – identify the CriticalRange thresholds and represent an exhaustive extreme for any false CriticalRange BREAKOUT. If the integrity of the CRX + or CRX – remain intact any BREAKOUT signal must remain suspect. These levels can be used as stop levels for any FADE or REVERSAL strategy at the UP or DP as they are the “squeeze” high or low for any momentum exhaustion.

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  • Structure Break – The CRX+ and CRX – identify the confirmation points that must be violated to confirm a BREAKOUT. Once the CRX + or CRX – has been violated the market should maintain that bias above or below the respective CR + or CR-. The best BREAKOUT scenarios have the market hold structure above the UP or below the DP and just “go” with only one shot, if any, after a CRX +/- violation. Trading back inside the CriticalRange to the CR + or CR – will take some of the energy away from the BREAKOUT signal and is a “tell” for more of a “stop and go” trend condition.

PRACTICAL APPLICATION

* Use the price action within the CriticalRange to provide insight to the markets next move.

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* Use the CR +/- and the CRX +/- to confirm or deny a trend move.es-nt2-11-5-2015-5-08-34-pm

* Note tactic signals at these minor levels for position management of STRATEGY themes.

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