From time to time in different markets there is a change in the nature of price movements. Is this a short-term deviation from the norm or long-term changes, requiring changes in approach to trading strategies that we are going to use for efficient trade.
It is essential that it is we are going to change in our approach to meet the changes - does it mean to change the technical indicators that we use to examine or modify the chosen marketing tool. The modification can be simply linked to the recognition that market conditions have changed and necessary to be less aggressive and more legible in our choice of deals.
But first, we need to quantify and understand the changes that have taken place. First, for example, let's look at the current market conditions ES. Most days, the price effect is sufficiently narrow range, a large number of market noise associated with random buying or selling. Let us evaluate this: when a full range of the market at 6-8 points per day, it is difficult to profit, unless you are highly skilled professionals to skalpirovaniyu market.
For instance, I do not. I regard themselves as traders, trading on the movement. I prefer to enter into a one - three transactions per session, taking part from the middle of any intra-day movement, which may arise. For example, if the day of the full range of 10-12 points, I would hope to capture 60-70 per cent intra-day movement from minimum to maximum.
Let's look at one example of intra-day schedule in order to understand what I am talking about.
5-minute schedule ES
Almost perfect intra-day trend is down, where the price was moving steadily down in descending channel, to close near the daily minimum. The strategy is quite simple - to enter the descending trend in a bear crossing the Stochastics.
This is a common situation for the type of session, which is very straightforward to trade. All you need to do - this is to take each state perekuplennosti to Stochastics and trading in the lower side, in accordance with the general trend. These types of sessions are less frequent and are more the exception than the rule.
Each state perekuplennosti on the graph shown above, provided a suitable entry in the descending trend. The first entry was a fairly aggressive, because it was in the beginning of the day and then we, in fact, did not have any indication as to whether the trend of top-down or perhaps up the GEO will be accompanied by bovine continuation.
I also pointed to the last entry at approximately 12:30 pm as very doubtful because of its proximity to the end of trading session. So, let's let's call this session with 2 beneficial entrances in the steady down trend. A full range of 17 points, both of these inputs could be on the 10-point profit.
The following graph shows the type of session, with whom we have to face much more frequent in recent times. The trend remains in doubt throughout the session, with the wrong signals at every turn. The problem aggravated by the fact that the distance between the turn is so small that, by the time we can discern a change and switch to a new direction, the movement has in fact completed.
5-minute schedule ES
This is a more conventional option pricing activity in many markets with a lot of false signals in the long or short side. This often leads to losses, even when we are on the right side of the trend, our business may be closed by stop-order because of market noise.
Using the same strategy to the entrance, as in the first example, let's look at each of the inputs on the basis of Stochastics in the day. According to my calculations, it is 5 transactions in the short side, and 3 transactions in a long - certainly it would lead to negative results if to respond to all signals that are received.
Even if you discard the first and last signals in the short side, because the first was in the very early days, when the market generally can not determine the direction and the latter acted only after a significant downward path during the final hours trading session.
This leaves us with 3 signal in the short side, none of which would lead to some good result. The most best deal in this day would provide signals to the longest side at 8:00 and then at 10:30, and if we had anticipated yields at the peak of these two movements, we may have received as a result of a profit of 3 points and 5 points, respectively. That might be enough to compensate the loss of 3 Losing transactions in a short side and one transaction in the long side.
The reality is that, in the market such empty or losing session will certainly occur. It is - part of the game. But we should have more sessions in which the trend is developing, to get consistent profits on the market, which we chose.
However, in many markets, from time to time the number of «bad» sessions is greater than the number of «fit for trade» sessions. This is a bad prospect for success. Before we continue, nevertheless, let's look at the method that we can use to quantify the change of which we speak.
Most graphics software packages have a convenient indicator - average true range, which measures the range, on the average number of periods (I used 14). After a while, we can see, is expanding the range of the market or shrinking. As you can see in the chart below, the range of ES market is definitely shrinking.
Daily schedule for the December contract ES
The overall trend remains the bottom-up from the August level, but trading on the trend in intra-day basis in the past few months have been quite difficult. A significant drop in the Middle true indicator graphically displays the range of challenges we face, because the range of 15-16 points for the session fell to only 10-12 points.
While the upward trend in the market has remained intact, we can see a sharp decline in the indicator ATR, which began in August, displaying a transition market ES in a narrower range than we have seen in previous months, which at one time seemed rather narrow than wide. To see whether this short-term aberration or something more substantial, I switched from the contracting ES, which gives us only a few months of data and looked at the contract schedule of daily S & P 500 (SPX).
Look - a major change in the overall market dynamics. Since the peak of July 2002., ATR indicator shows a series of lower highs and lower minima, causing the indicator to a level about 10 points a day.
Daily schedule of S & P 500 (SPX)
Looking at the SPX over the past 18 months shows the steady decline in daily range. The range of 15-17 points per day, which was earlier than usual, declined to 10 points. This decrease in range of a third is a significant change in the playing field.
It does not show, but after looking at historical data, I found that the last time the indicator ATR was so low for the SPX at the beginning of 1998.
This gives us very important information as to when we can expect an expansion of intra-day range for the ES to more normal levels. When we can see that the SPX back up above 20 and preferably closer to the middle of its historically normal range (approximately 25) It is a good sign that we can expect the daily range in the ES at the level of 15-18 points.
In the meantime, we have several different ways in which we can cope with the far from ideal conditions of trade in such markets. The first is the more intelligible the choice of transactions, waiting until the market shows signs that at this session will develop the trend or to sell only in accordance with the longer-term trend. In this case, we will enter into fewer deals, but we hope that will tilt toward a more favorable ratio of the winning and losing deals.
Another possibility that deserves consideration is the choice of more effective marketing tool. Qualities that a market-based instruments should have - it is more intra-day ranges, and the propensity to develop trend rather than to perform chaotic motion.
One final note on how to trade with the above-described circumstances. Please note that I had not considered as one possible means, the change of technical indicators used or trading signals. You see, if you are not qualified for professional skalpirovaniyu market, in fact, it does not matter what tools you use, when the market fluctuates in a very narrow range and there is growing movement to allow us to perform technically based inputs, to establish reasonable stop-order and does not tumble at the extremes of fluctuations in the one or two significant movements of the day.
So, unlike other approaches, where the trading strategy is selected by changing the conditions of a market, it was considered another option. If we have already spent a strategy of trade, which has granted us with the testing in markets that are moving in some way, we should choose a market for trading, based on whether the nature of its motion compatible with the chosen trading system. If the market ceases to be consistently compatible with our strategy, then perhaps it is time to evaluate how the selected markets in line with our strategy.
It is essential that it is we are going to change in our approach to meet the changes - does it mean to change the technical indicators that we use to examine or modify the chosen marketing tool. The modification can be simply linked to the recognition that market conditions have changed and necessary to be less aggressive and more legible in our choice of deals.
But first, we need to quantify and understand the changes that have taken place. First, for example, let's look at the current market conditions ES. Most days, the price effect is sufficiently narrow range, a large number of market noise associated with random buying or selling. Let us evaluate this: when a full range of the market at 6-8 points per day, it is difficult to profit, unless you are highly skilled professionals to skalpirovaniyu market.
For instance, I do not. I regard themselves as traders, trading on the movement. I prefer to enter into a one - three transactions per session, taking part from the middle of any intra-day movement, which may arise. For example, if the day of the full range of 10-12 points, I would hope to capture 60-70 per cent intra-day movement from minimum to maximum.
Let's look at one example of intra-day schedule in order to understand what I am talking about.
5-minute schedule ES
Almost perfect intra-day trend is down, where the price was moving steadily down in descending channel, to close near the daily minimum. The strategy is quite simple - to enter the descending trend in a bear crossing the Stochastics.This is a common situation for the type of session, which is very straightforward to trade. All you need to do - this is to take each state perekuplennosti to Stochastics and trading in the lower side, in accordance with the general trend. These types of sessions are less frequent and are more the exception than the rule.
Each state perekuplennosti on the graph shown above, provided a suitable entry in the descending trend. The first entry was a fairly aggressive, because it was in the beginning of the day and then we, in fact, did not have any indication as to whether the trend of top-down or perhaps up the GEO will be accompanied by bovine continuation.
I also pointed to the last entry at approximately 12:30 pm as very doubtful because of its proximity to the end of trading session. So, let's let's call this session with 2 beneficial entrances in the steady down trend. A full range of 17 points, both of these inputs could be on the 10-point profit.
The following graph shows the type of session, with whom we have to face much more frequent in recent times. The trend remains in doubt throughout the session, with the wrong signals at every turn. The problem aggravated by the fact that the distance between the turn is so small that, by the time we can discern a change and switch to a new direction, the movement has in fact completed.
5-minute schedule ES
This is a more conventional option pricing activity in many markets with a lot of false signals in the long or short side. This often leads to losses, even when we are on the right side of the trend, our business may be closed by stop-order because of market noise.Using the same strategy to the entrance, as in the first example, let's look at each of the inputs on the basis of Stochastics in the day. According to my calculations, it is 5 transactions in the short side, and 3 transactions in a long - certainly it would lead to negative results if to respond to all signals that are received.
Even if you discard the first and last signals in the short side, because the first was in the very early days, when the market generally can not determine the direction and the latter acted only after a significant downward path during the final hours trading session.
This leaves us with 3 signal in the short side, none of which would lead to some good result. The most best deal in this day would provide signals to the longest side at 8:00 and then at 10:30, and if we had anticipated yields at the peak of these two movements, we may have received as a result of a profit of 3 points and 5 points, respectively. That might be enough to compensate the loss of 3 Losing transactions in a short side and one transaction in the long side.
The reality is that, in the market such empty or losing session will certainly occur. It is - part of the game. But we should have more sessions in which the trend is developing, to get consistent profits on the market, which we chose.
However, in many markets, from time to time the number of «bad» sessions is greater than the number of «fit for trade» sessions. This is a bad prospect for success. Before we continue, nevertheless, let's look at the method that we can use to quantify the change of which we speak.
Most graphics software packages have a convenient indicator - average true range, which measures the range, on the average number of periods (I used 14). After a while, we can see, is expanding the range of the market or shrinking. As you can see in the chart below, the range of ES market is definitely shrinking.
Daily schedule for the December contract ES
The overall trend remains the bottom-up from the August level, but trading on the trend in intra-day basis in the past few months have been quite difficult. A significant drop in the Middle true indicator graphically displays the range of challenges we face, because the range of 15-16 points for the session fell to only 10-12 points.While the upward trend in the market has remained intact, we can see a sharp decline in the indicator ATR, which began in August, displaying a transition market ES in a narrower range than we have seen in previous months, which at one time seemed rather narrow than wide. To see whether this short-term aberration or something more substantial, I switched from the contracting ES, which gives us only a few months of data and looked at the contract schedule of daily S & P 500 (SPX).
Look - a major change in the overall market dynamics. Since the peak of July 2002., ATR indicator shows a series of lower highs and lower minima, causing the indicator to a level about 10 points a day.
Daily schedule of S & P 500 (SPX)
Looking at the SPX over the past 18 months shows the steady decline in daily range. The range of 15-17 points per day, which was earlier than usual, declined to 10 points. This decrease in range of a third is a significant change in the playing field.It does not show, but after looking at historical data, I found that the last time the indicator ATR was so low for the SPX at the beginning of 1998.
This gives us very important information as to when we can expect an expansion of intra-day range for the ES to more normal levels. When we can see that the SPX back up above 20 and preferably closer to the middle of its historically normal range (approximately 25) It is a good sign that we can expect the daily range in the ES at the level of 15-18 points.
In the meantime, we have several different ways in which we can cope with the far from ideal conditions of trade in such markets. The first is the more intelligible the choice of transactions, waiting until the market shows signs that at this session will develop the trend or to sell only in accordance with the longer-term trend. In this case, we will enter into fewer deals, but we hope that will tilt toward a more favorable ratio of the winning and losing deals.
Another possibility that deserves consideration is the choice of more effective marketing tool. Qualities that a market-based instruments should have - it is more intra-day ranges, and the propensity to develop trend rather than to perform chaotic motion.
One final note on how to trade with the above-described circumstances. Please note that I had not considered as one possible means, the change of technical indicators used or trading signals. You see, if you are not qualified for professional skalpirovaniyu market, in fact, it does not matter what tools you use, when the market fluctuates in a very narrow range and there is growing movement to allow us to perform technically based inputs, to establish reasonable stop-order and does not tumble at the extremes of fluctuations in the one or two significant movements of the day.
So, unlike other approaches, where the trading strategy is selected by changing the conditions of a market, it was considered another option. If we have already spent a strategy of trade, which has granted us with the testing in markets that are moving in some way, we should choose a market for trading, based on whether the nature of its motion compatible with the chosen trading system. If the market ceases to be consistently compatible with our strategy, then perhaps it is time to evaluate how the selected markets in line with our strategy.
Mark Phillips
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