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Quantum Charts has not been released to the general trading public yet, but if you would like to sign up for an early copy, go to the following link: www.QuantumCharts.com. New videos (released soon) will demonstrate many, many trading opportunities. |
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Today's Featured Article
Every minute, every hour, every day, there are profitable trading opportunities. The market moves. There are times when the market moves more than others, but the opportunities are still there.
The day this article is being written, the S&P 500 Dec contract closed down about 10.00 points. Was there any technical analysis evidence to support the possibility that such a drop might occur? What about tomorrow's market action? Is there any technical evidence to support the possibility of the market moving up or down?
There actually was evidence supporting the possibility of the move down. Further, the move down also set into motion a pattern that offers additional evidence supporting a short-term move in the market. This specific opportunity, and how it was uncovered is illustrated in a video that will be posted next week on
www.QuantumCharts.com
(I will have several videos uploaded to the website illustrating the power to uncover profitable trading opportunities such as the one above, using Quantum Charts. A taste of this power will be illustrated in the article today. Be sure and sign up and view the videos by going to the website.)
The ability to analyze market action on a daily basis requires programming skills. If you don't have programming skills, you are forced to pay a programmer. Obviously, the costs would be greatly prohibitive. When there are CONSTANT trading opportunities, traders need the ability to find them.
In my last article, I introduced the simple, yet powerful process through which Quantum Charts allows traders to uncover and analyze trading opportunities. Using an eBay chart, I provided a short-term selling opportunity using a triple moving average as a filter. This week, I am going to make the natural progression from using the triple moving average as a filter to using it as the basis for a strategy. I say natural progression because I did not have the idea to do so on my own. The idea came into my head as I was playing with Quantum Charts. More on this later.
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As in the last article, I will be using the same three moving averages consisting of the 8 bar, 32 bar and 128 bar moving average. There is nothing magical about these numbers, they are just one way in a myriad of ways to help determine or confirm the direction and strength of a trend.
I will begin by simply looking at what happens right after the initial crossover of the 8 bar moving average over or under the 128 bar moving average as long as the 32 bar moving average is on the same side. In other words, it would look like the following:
8 bar ma is below the 128 bar ma
32 bar ma is below the 128 bar ma
I want to look at market action as soon as the 8 bar moving average crosses above the 128 bar ma as long as the 32 bar ma is also above the 128. It starts with the shorter being below the middle and the middle being below the longer. As soon as this is exactly the opposite, what does the market do?
This is easily done in Quantum Charts by dropping and dragging the true condition in one condition group, and then taking the opposite condition and placing it in another condition group. The strategy looks like this:
Condition Group 1:
8 bar ma was below the 32 bar ma
8 bar ma was below the 128 bar ma
Condition Group 2:
8 bar ma was above the 128 bar ma
32 bar ma was above the 128 bar ma
The way this works is that all conditions in group 1 must register as true. When QC analyzes market action and determines this to be the case, it then begins to look for instances when conditions in group 2 register as true. QC then colors the bar on which this sequence of events occurred.
 If you cannot view the screenshot, go here.
As you can see, the blue bar in the middle was one occurrence where this scenario occurred. QC instantly colors ALL occurrences of this scenario, and then provides critical information about what the market did after each occurrence.
If you cannot view the screenshot, go here.
There were 38 occurrences where the moving averages flipped from being below one another to being higher than one another. As you can see, the first bar after this occurrence closed higher after the first bar 58% of the time, and closed lower 42% of the time. This flip flopped on the 2nd bar after each occurrence. You will notice that by bar 4 after the occurrence, the market seemed to resume the upside, which caused the moving averages to all be higher in the first place. By bar 4, the market closed higher than the close of the occurrence bar 67% of the time.
Another very telling statistic here is the magnitude of the move higher. On the first bar after the occurrence, the market closed higher by an average of 4.18 points higher. When the market closed lower (42% of the time), it only closed lower by 2.54 points. The combination of these two stats is not bad at all.
However, move over to bar 4 and you can see that both the percentage of time the market closed higher and the magnitude are strongly supporting a buying opportunity. The market closed higher than the occurrence bar by over 14 points on average 67% of the time. When the market closed lower (only 33% of the time), it did so by half as much at only 7 points on average. In short, the risk reward ratio is 2:1 [14.33:7.12] with a 2:1 [67%:33%] probability of coming away with a profit. You won't find too many opportunities with statistics better than this.
There are several ways you can view this buying opportunity. The first is simply to buy when this scenario occurs and hold onto the trade for at least 4 bars. However, what we see here is a "delay" in market movement. Theoretically, you could simply wait for the third bar after this occurrence and then buy, capturing a majority of the profit potential with market exposure of only 25% of the time. (Less time in the market equals less market exposure).
However, knowing that there is a delay, rather than simply waiting, I decided to see whether there was any opportunity to buy the market at a better price. If you will remember, the 2nd bar after the occurrence saw the market close below the occurrence bar 58% of the time...which means that not only is there a delay, but there is also the opportunity for a better price to buy at.
In order to take advantage of both a potential delay and a better price, I simply required that after the crossover, I would wait for the market close to be lower than the previous low.
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This was extremely simple using Quantum Charts by simply clicking on a bar where the close was clearly below the previous low and then dragging the true condition into my strategy box. It took a few seconds.
 If you cannot view the screenshot, go here.
I clicked on the bar, which turned it blue. Instantly QC analyzed the bar and provided me an exhaustive list of true conditions as you see in the bottom left hand corner. I then clicked on the "close is less than previous low" condition and dragged it into group 1 of in the strategy box. (The first group is considered the default group). I then click on the "analyze" button to produce the market movement stats instantly.
 If you cannot view the screenshot,
go here.
Just to summarize what this opportunity is, we are waiting for the triple moving average to move from being below each other to being above each other. When this occurs, we then wait for the market to close below the previous low. That's it.
When this occurs, the market moves higher the following bar by 74% of the time. However, unlike the occurrence bar, the magnitude of the move higher is not as impressive compared to when the market does move down. Accordingly, the probability of success is almost 3:1 [74%:26%], but the risk/reward ratio is at only 1.12 [5.01/4.43].
Moving further away from the occurrence bar, the number of times the market is above the occurrence bar decreases slightly (from 28 to 25 at bar 5 after the occurrence bar), but the average close higher once again tops the average close lower by more than 2:1 [12.33:4.88].
All in all, this would be a solid opportunity to buy on the open of the bar immediately after the occurrence, and exit on the close. This would have a high probability of success and it would eliminate any overnight exposure.
However, since the risk/reward ratio bias was not really captured by waiting for the market to close lower than the previous low, I decided to see what happens by waiting the two bars after the initial moving average crossover. This was easily accomplished by adding two condition groups to my strategy that simply require a bar to occur. This makes it to where the occurrence bar is now the 2nd bar after the crossover.
 If you cannot view the screenshot,
go here.
In this example bar, 1 is now what bar 3 was in our first statistic set. (We delayed the occurrence bar by 2 bars after the crossover). In this set of stats, we see a solid percentage of the closes higher on bar 1 at 63%, and then raising to 69% on the close of bar 2. The difference between bar 1 and bar 2 isn't so much the increase in probability as it is in magnitude. The reward/risk ratio is at 1.27 on bar 1, but jumps to 2.15 [10.45/4.86] by holding onto the trade for 2 bars.
On a side note, you can see that by bar 7, the reward/risk ratio pops up to 2.77 while maintaining a solid 69% of the closes being higher. The question traders need to ask is whether the additional profit potential (about 3.00 extra points) is worth the extra risk exposure (an extra 5 bars).
Finally, there is one last thing to look at before I conclude this article (which is only touching the surface of the power of Quantum Charts)...
Market Movement Stats:
Market movement stats are some of the most helpful statistics in uncovering profitable trading opportunities. No other trading program offers this kind of information. Knowing when and where to get in or out has been, up until now, two of the hardest things to determine. When you have a setup, seeing the full range of market movement empowers you quickly to know where and how you should get in, and where and how you should get out. These two decisions are critical in success.
Based on the information given in this article, which "strategy" would you use between the three variations provided? I will point you to one other stat to help you determine. Look at the average peak higher and average peak lower stats. Average peaks give you the market movement between the closes. This is very, very revealing because they represent what might happen if you place stops in the market.
Accordingly, the more revealing stat over the average closes on each bar is the average peak higher versus the average peak lower stats. I have provided them below:
Variation 1 -- Buy and hold for at least 4 bars:
Average peak higher on bar 4 was 14.33 while the average peak lower on down closes was 9.14. Accordingly, the true reward/risk ratio here is 1.56 based on market movement in between the closes.
Variation 2 -- Buy on the open, exit on the close (this one was where we were waiting for a close lower than the previous low).
Average peak higher on the up closes was 7.68.
Average peak lower on the down closes was 6.01.
The true reward/risk ratio based on market movement was 1.27.
Variation 3 -- Wait 2 bars and then buy, hold for two bars.
Average peak higher on the up closes was 13.26.
Average peak lower on the down closes was 6.10.
The true reward/risk ratio based on market movement was 2.17
Based on all things considered, variation 3 provides the best overall opportunity. Solid probability of success, coupled with high reward/risk ratio, coupled with short market exposure (only two bars).
For video demonstration on this and many, many more trading opportunities, be sure to go to www.QuantumCharts.com
and sign up to be notified when videos are posted. I have only touched the surface with this article.
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About the Author
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Ryan Jones
is considered one of the trading industries "most complete traders." Starting his trading career at the early age of 16, he had traded nearly every major market and strategy by the age of 21. At the age of 26, Ryan signed a book deal with John Wiley making him one of the youngest authors ever in the field of futures trading. His book, The Trading Game, Playing by the Numbers to Make Millions is still considered the authority on the subject of trading and money management by many leading traders. Ryan's advanced experience and knowledge across many trading fields such as Technical Analysis, Option Trading, Money Management and the S&P. It is through years
of trading experience that lead Ryan to create Quantum Charts, the only system development software that can find and create simple or complex automated trading systems without any programming.
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Special Message from Our Author
A New Era in Trading Has Begun.
Quantum Charts has not been released to the general trading public yet, but if you would like to sign up for an early copy, go to the following link: www.QuantumCharts.com. New videos (released soon) will demonstrate many, many trading opportunities. |
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