What is a Bull/Bear Flag?

These patterns are taken directly from classical charting (Schabacker, Edwards & Magee, etc.) Flags are a continuation pattern in a trending market. They are found on all time frames, all markets, and offer one of the better risk reward ratios for trade setups. A flag formation should be preceded by a “pole” or initial momentum move in the direction of the trend. The ensuing consolidation tends to be relatively shallow. Continuation patterns are much shorter than reversal patterns. The longer a “flag” goes sideways, the greater the odds that it will turn into a reversal pattern as opposed to leading to a new leg in the direction of the trend. Be careful looking for flags after the market has tested the top of a  trading range or vice versa.

What is a “Grail” Trade?

The “Holy Grail” trade was originally described in the Street Smarts book. The setup occurs when the market’s trend has been strong enough to cause a 14-period ADX to rise above 30. When the price then retraces back to the 20-period EMA, odds favor a retest of the most recently formed high or low.

What is Momentum Pinball?

Momentum Pinball was originally introduced in the Street Smarts book as setup to indicate a Buy Day or a Sell Short Day ala George Douglas Taylor. Taylor looked to go short after 1-2 days of rally, and cover and go long after 1-2 days of decline. The pinball indicator is calculated by using a 3-period RSI of the daily net change. The “Street Smarts” book contains a complete and detailed description of this trade.  Long trades are only taken when the price is above the 20 period EMA and vice versa for short trades.

(Momentum Pinball, Anti, Holy Grail, 80/20 and 90/10 bars, and 2-period ROC signals are some of my ORIGINAL concepts. It is repeatedly brought to my attention that there are individuals on the internet offering newsletters and courses based on my original copy-write protected materials. Please note that I do not have any affiliation or association with these entities.)

What is an “Oops” Trade?

“Oops” is an expression originally coined by Larry Williams. The setup occurs when the opening price gaps outside the previous day’s range. A buy (or sell) stop is placed just inside the previous day’s range in case the market then closes the gap, indicating a reversal. The trade is best treated as a scalp trade and exited before the close. This pattern has no long-term forecasting value.

What is the “Breakout Mode”?

We use a “breakout” mode strategy when the market has had some form of range contraction. A trend day, or large range expansion day, often follows periods of range contraction, or small average daily ranges. When we are in breakout mode, we use strategies to enter in the direction the market is moving, instead of waiting for a reaction in the price. One of the key factors of breakout mode is to keep an open mind that the market can break out in either direction.

How do you measure market breadth, put call ratio, and volume?

Market breadth is monitored by looking at the number of advancing issues minus the number of declining issues on the NYSE. Put/Call data is provided by the individual exchanges. We look at the equity only put call ratios, in addition to the index put call volume ratios We look at the volume on the NYSE and compare it to readings made at the same time on previous days.

TICK

TICK: This is the net change of all NYSE stocks on an uptick minus all NYSE stocks on a downtick. Plus or minus 1200 tends to be an extreme reading.  in a trending market environment extreme in the ticks can be used as a momentum indicator indicating further price movement to come in the direction of the trend.  However, when the market is in consolidation mode, after it has already had a big move, ticks will mark the ends of the short term swings up and down.

VIX

This is the Volatility Index that is based on the implied volatility of the at the money puts and calls

What is an NR7 day?

An NR7 is a day in which the today’s daily range (today’s high price minus low price) is narrower than the previous six days. The significance of this pattern is that it represents a marked decline in price volatility. Range expansion and an increase in price volatility tend to follow an NR7 day. An NR4 day is similar to an NR7 day except that it represents a day in which the range is the narrower than the previous three days.

Toby Crabel originally presented the concepts of NR4, NR7, WR7 etc., in his Market Analytics Letter written in the 1980’s. We give credit to him for initiating research in this area. His original articles were published in the magazine, Technical Analysis of Stocks and Commodities.

What is a WR7 day?

A WR7 is a day in which the today’s daily range (today’s high price minus low price) is wider than the range of the previous 6 days. The significance of this pattern is that it represents an expansion in price volatility. A trader can often buy or sell a test of the WR7 day’s high or low, on the following day for a scalp trade.

What is Average True Range (ATR)?

The Average True Range (“ATR”) was introduced by Welles Wilder in his book, New Concepts in Technical Trading Systems. ATR is a measure of volatility, and it is a component of the ADX indicator. ATR is calculated by finding the greatest value of:

1. The distance from today’s high to today’s low.
   2. The distance from yesterday’s close to today’s high.
   3. The distance from yesterday’s close to today’s low.

The main difference between ATR and the plain ‘daily range’ is that ATR takes into account gaps.

Toby Crabel originally presented the concepts of NR4, NR7, WR7 etc., in his Market Analytics Letter written in the 1980’s. We give credit to him for initiating research in this area. His original articles were published in the magazine, Technical Analysis of Stocks and Commodities.

What is a divergence?

A divergence occurs when a momentum indicator or other instrument fails to confirm a move in the price action of the market under observation. For instance, if the SP futures makes a new low in price, but the 3/10 oscillator fails to make a new momentum low, then the SP is said to be diverging from the oscillator. Likewise, if the SP futures make a new low that is not confirmed by new lows in a related market or index (for example the SP versus the Dow Industrials, or the SP versus the TICK), this is also considered a form of divergence. Divergences are useful in that they warn of a loss of momentum and often precede a reversal in price.

What is the difference between Keltner Channels and Bollinger Bands?

Bollinger Bands are based on a standard deviation function. Very often, you will see times where the market is moving HIGHER but the lower Bollinger band is declining. This does not happen with Keltner channels. Though both are based on a volatility functions, Keltner Channels will maintain a more constant width than Bollinger Bands and thus we find them more pleasing to our eye. We also have had much better success in using range functions in our quantitative modeling as opposed to standard deviation functions, especially when creating short-term timing systems.

Bollinger Band trades

we use 2 standard deviation bands centered around a 20-period moving average to make trades on the day following a trend day.  we do these trades in the morning session only.  the concept behind this is that a push to the upper or lower band will setup a countertrend trade.  the objective is a push back to the moving average.  no stops were used in our testing, we just used an exit of whenever the trade hit the moving average or end of day in the worse possible scenario.

What is A-B-C?

A-B-C is a term borrowed from Elliot Wave terminology that denotes a three-wave corrective pattern that is often found in the middle of a trend. Waves A, B and C are often of the same magnitude in both price and time, and the pattern tends to have the appearance of a zigzag.

What is an EMA?

When we refer to the EMA, we will always be referring to a 20-period exponential moving average. This line can be thought of as a proxy for a “regression to the mean” in a trending market. It has little value in a trading range market. Unlike a simple moving average, which takes the average price of the last ‘X’ periods, the EMA method takes a weighted average of the most recent price and the average price from the bar before.

What size stops do you use?

In general, we use an initial stop of 5 points in the SP futures unless specified otherwise. For scalp trades in the SPs, we use a 3-point stop. In the domestic futures markets, we use a fixed $500 stop per contract unless specified otherwise. If there is an unusual expansion in volatility, we will use wider stops and lower our leverage. Stops should be tightened up as a market moves off in your favor.

In stocks, we recommend using stops to limit losses to no more than 2% of your working capital.

Stops can vary with the market volatility.  We try to limit initial risk to a maximum of $500 per contract.  In some futures markets when the range is greater, this can be higher and often with the Eminis, a stop of 4 points can be reasonable.

What are the BO levels on your trade sheet?

These are the parameters for a proprietary volatility breakout system that we trade during certain periods. A buy is triggered on a break above the upper number and short is triggered on break below the lower number.

What is a “Pivot Point”?

This can be a previous swing high or low, or visible chart point such as the high or low of a gap area. Globex highs and lows, along with the previous day’s high and low are all forms of “Pivot Points.” We do not use Fibonacci numbers or arbitrary calculations. We are interested in levels that ALL market participants are aware of, as would be the case with a key high or low.

Tick Charts vs. Time Interval

On most software applications a 5000 tick chart of the SPs would be equivalent to a 5 minute chart.  and a 16000 tick chart is similar to a 15 min time frame.  We prefer to use these type of tick charts in the early morning session since they adjust the globex trading relative to the activity level.  Day session only charts on a 5 min interval can have large gaps on the opening, making indicators relatively useless for the first hour. However,  5 min charts on a 24 hours basis tend to be distorted.

What is “relative strength” and “relative weakness” that we talk about?

Simply put, a stock or sector that exhibits relative strength is performing better than a related index, such as the SP500 or Nasdaq. Relative weakness would be a sector or stock that is under-performing a benchmark index. With commodities, the relative strength leader is the one that is performing the best on the day. The early morning relative strength leaders usually continue to perform the best throughout the day.

Why do you look at so many stocks?

Stocks that are market leaders can often turn before the stock index futures do. This is particularly true of the high beta ‘momentum’ stocks. Monitoring individual sectors and relative strength can add valuable information regarding the overall technical condition of the market. We limit our database to only the top 250 trading stocks.

I want to join your service. What do I have to know about the stock market?

Though prior knowledge and experience are not strictly required, it is important that you understand that trading involves risk. Our online trading service is educational in nature and will be of best value to you if you can monitor the markets real time.

How many trades do we make each day?

There is no normal day, and the number of trades varies with the volatility of the stocks and futures contracts that we are trading. However, we find it better to be patient and wait for a few well thought out high probability trade setups, than to settle for marginal trades. We find that when traders start overtrading, they get sloppy and make mistakes.

How long does it take to learn to trade successfully?

In our experience, the average length of time it takes for a person to be able to trade with the consistency and confidence necessary to make a decent living is 3-5 years minimum. Some people are never able to do this, as they are unable to master the mental side of the game. A few people have been able to find their niche quickly and show consistent profitability after just 6 months. This is the exception though.