Yesterday I got this e-mail:

Hello Richard, It has been enjoyable watching you evolve in your study of the markets. From a slightly cocky and arrogant ( which is sometimes necessary to have ) to this sweet guy that wants to dance with the market. Remember the old etrade commercial? Anyways you seem to have a very good mathematical and creative mind. My question is what is your experience and knowledge with matrix theory, combinatorics and graph theory? There is a much more arsonal of tools than what the heard mentality uses. Where did you go to school and what is your studies/degree. Appreciate the feedback and be cool… sincerely, (name removed)

… then today, I get this from the same person:

to richard: It does not suprise me that you do not reply to my email? Move the markets??? what a joke! It should be move WITH the market dot com. There is no place for EGO in the market!!! When you are wrong you must admit it. And we are all wrong at times… human nature. You are fooling yourself with your indicators.. INDICATORS ARE A JOKE! The truth is YOU CANNOT TRADE BIG LOTS.. you are not GENETICALLY WIRED FOR IT. There is an electrical impulse that is triggered off and you will never get over the FEAR of LOSING MONEY… good luck, (name removed)

Dude… give me at least a couple days to respond before you go all postal. I’m sure your mother told you how special you were before helping you climb into the padded short bus every morning, but I get a large mix of fanmail and hatemail every day. Just not usually from the same person! Sometimes, especially around US holidays, I get a backlog that I have to work through later.

Anyway, I have a party to go to… I just couldn’t resist posting this little bit of website-owner joy. Keep that in mind if you ever want to start a website: it brings out all kinds of people.

In this video, I go over the opening half-hour or so on my PnF chart and an 89-Tick chart. It was a dramatic opening with a big gap. That usually leads to great opportunities to profit from suckers who try to catch the bottom. That’s the way I play them, anyway…

Enjoy!

I realize you can get PnF charts from tradingstudies.com, but I am a programmer, and I had a simple need for 1 tick x 3 box reversal PnF charts on my Ninjatrader. So, I made a quick-and-dirty implementation. Because I just threw it together, it only works for 1-tick boxes, but you can select any reversal size you want. Here is a screenshot:

As you can see, they report volume, which gives them a leg up on most other trading platforms, if you can believe it!

Anyway, I also wanted to try out a new screencapture program, to see if it cures the audio sync issues I’ve been having for over a year now. Here’s hoping…

You can have the ninja quick-and-dirty PnF code for free on our forums.

TraderB52 put out another video, this time with a voice track. For those of you who have struggled to figure out what he’s doing in the silent videos, this should help a lot.

I want to thank him for all the great videos he’s put out. Thanks, man!

How many times have my live room folks heard me say something just like this:

“If you enter before the bar closes, you might occasionally make a tick or so more on your trade. However, once or twice every day, the signal that you thought was going to happen does not and you will lose about eight ticks. That means that you need about eight early entries to work as planned for every one that does not, and that simply won’t happen.”

(from Reading Price Charts Bar by Bar: The Technical Analysis of Price Action for the Serious Trader)

My thoughts exactly!

“At the end of every bar, most traders ask themselves, “What just took place?” With most bars, they conclude that it is just too confusing to understand and choose to wait for a pattern that they recognize. It is as if they believe that the bar did not exist, or they dismiss it as just institutional program activity that is not tradable by an individual trader. They do not feel as though they are part of the market at these times, but these times constitute the vast majority of the day. Yet, if they look at the volume, all of those bars they are ignoring have as much volume as the bars they are using for the bases for their trades. Clearly, a lot of trading is taking place, but they don’t understand how that can be, and essentially they pretend that it does not exist. But that is denying reality.”

(from Reading Price Charts Bar by Bar: The Technical Analysis of Price Action for the Serious Trader)

“The rhythm of the market is the large traders breaking to high five each other before they get back to work.”

Jorge was showing us how he cleans up by watching for the splitter to turn, and then waiting for truly big (300+ sized) trades to go by on the time and sales. He scalps for about a point, every few minutes, to great effect. There’s a bit more to it, but that’s the basic idea. I love the way ideas are thrown around in our room!

Ninja just released a list of features for NT7, and you can see the list here. A lot of the features make things more convenient that what we have in 6.5 (like dragging around indicators rather than setting up panel numbers). Some are real time-savers for programmers (like multicolor plots). Others are new capabilities, which are probably what I’m most excited about.

Here are the things I’m looking forward to most:

• No more success in compilation dialog box. Sounds small, but I hate it when that modal box gets buried and freezes up ninja’s other windows.
• Downloadable replay data. We asked for it on the forums and they listened. They did hedge about maybe having to pull the feature, but I really hope this gets in.
• Ability to replay multiple days continuously. Very nice!
• Nested indicators on indicators. I been able to do this on multicharts for a while, and until now it has taken custom programming on ninja. Thank you!
• Point and figure charts. Yes! I wonder if they’ll do stacked one-box reversals, or not?
• They acknowledge that we will still be able to code our own chart types, even though this is not directly supported still.
• Multicolor plots. This has been a real pet peeve when I do colorful ninja indicators.
• Greatly reduced memory footprint.

… but there’s lots more. I think the ninja team has done a great job with this feature set, listening to their users. I’m a proud lifetime license holder of NT, and look forward to getting my hands on the developer release.

“Small operators should take a leaf from the book of those who buy and sell enormous quantities of securities. It is their foresight which enables them to profit. To cultivate foresight means to study the market’s condition.”

My biggest trading mistakes happen when I forget my inspirational message for 2009. When I buy too much into my own ideas about where the market should go next, the market always reminds me who’s in charge.

“It is just as important to study the small lots as the large lots. The smaller quantities are like feathers on an arrow — they indicate that the business part of the arrow is at the other end.”

“The dollars will come along fast enough if you can make more points net than you lose. The professional billiardist playing for a stake aims to out-point his antagonist. After trading for a few months don’t consider the dollars you are ahead or behind, but analyze the record in points. In this way your progress can be studied.”

Just a short note today… you know, trading was pretty lame in ES today… stuck in a range since shortly after the open. Still, I traded the last hour and a half pretty well, in my opinion. Because clients ask me about it every week, I’ve been reading about Volume Spread Analysis. Hopefully someday soon I’ll have time to write about it… so far I have only had time to chat about it with my eotprolive folks in our room.

Anyway, I’ve been adapting the vsa concepts to range bars, and I think it’s gone well. The key is our VR4×1 indicator, which tells me which way traders are leaning. That’s 1/2 of the equation (the market order half), and the other 1/2 is identifying liquidity, and whether I think the market pressure will overcome it or not.

So, one example of a change to basic VSA (as I understand it, anyway) is that they will say a low-volume up candle in a downtrend indicates no demand. On a range bar, though, if I get an up candle, it’s because several price levels have been breached… and if that happened on no volume then it actually indicates no supply to me. Funny, huh? So on my range bars, I actually want to see a high volume up candle during a downtrend, because this means it took a lot of buying to break those levels, and that’s not likely to continue since I’d only be short when the volume pressure is predominantly down. You see?

Here are my 4 trades from the end of the session, with interesting points numbered (click to enlarge):

First off… on price we have our channel indicator. I only want to get long in the lower half of the channel, and only short in the upper half of the channel. This gives me an edge right away, because it will be statistically rare for price to give me too much heat after entry.

The first subgraph is our VR4×1 volume trend indicator. This is my trading bias and also helps me see from an overview perspective which way active traders are pushing.

The second subgraph just shows me the raw bid vs ask volume for 1 bar. This, along with the volume histogram, helps me identify liquid areas in the market. The thickness of the histogram indicates how many ticks were in the bar. This can tell you quite a lot, since a low-volume bar with a lot of trades in it would indicate that it’s amateur hour. And that’s just one example.

The bottom subgraph is just plain old volume. I use it with the raw bid vs. ask as I just described above.

See how every indicator on my chart serves a specific purpose? I can’t stress this enough. I have lots of indicators that I love (Alla’s Average, Volume Splitter, Math Lines, etc.), but I only use them when they serve my trading idea. Only use indicators that show you what you need to see for your plan! Read this over and over until you get it.

Anyway, here’s my quick commentary on the numbered items in the chart:

1. Look at the two candles before my entry… the first had down pressure but it managed to close on its high. To me, this means there was very little ask-side liquidity. The second candle closed on its lows but on lower volume from more ticks (amateur hour). I figured if the next candle caught a bid (it did) then I’d get in. I did cheat a little in that VR4×1 didn’t turn green, but it did go higher than its previous bar so I assumed green bars were coming. Waiting longer would risk a poor fill in the upper half of the channel.
2. My cat stepped on my mouse and bought a contract. Way to go, kitty.
3. My exit. Look at the high volume with lots of ticks. Now, I normally might try to see if we’d push through, but lately I have a phobia of prices ending in ‘7′. It’s stupid, I know… I laughed about it in the room (screenshot below). Anyway, it turned out to be about perfect for an exit.
4. So, at 3 we had established a local top, and you can see that VR4×1 had turned red. So, I was looking to get short. The bar before my entry put in some nice volume, but my entry bar closed on its lows despite up pressure (indicating no liquidity on the bid to me). So, I thought I might have to be nimble if we reversed at support again, but I’d give it a shot.
5. We did break through, but every candle had less down pressure (you can see this in the second subgraph, but also in the way VR4×1 went flat). I took my exit.
6. I got long. Upward pressure had been building and price had stalled out, which is why I exited my earlier trade. The two candle before my entry had rising volume, and I was able to get a good fill. Again, VR4×1 hadn’t turned green yet, but I expected it to at any moment. But, it didn’t. As price continued to churn, volume pressure inched back to the down side. The advantage of getting such a good fill is that I had several chances to get out with a tick of profit. For some reason I can’t explain right now, I didn’t do that. Also, I hate to admit it, but I somehow did not notice that VR4×1 remained red until 7…
7. So, I noticed that things weren’t going my way, and when the fresh decline in VR4×1 caught my attention I reversed short for a small loss. This trade went in my direction right away, making me glad I acted when I did!
8. My exit candle. We had put in a high-volume candle 3 candles ago, and here we were just a little lower and putting in a high-volume candle again. High volume means that there’s plenty of liquidity we have to eat through to go down, which means demand. As long as selling pressure holds up, it’s no problem, but I didn’t want to press my luck towards the end of the day. I booked my profits and went to run some errands.

Here’s when I noted my exit in our chat:

Hmm… not such a short note, after all!

The other day, I posted a different way to colorize vr4×1, and I posted a screenshot showing how you might want to enter trades when price pushes in the opposite direction of the volume indicator.

Tonight at our eotpro indicator lesson school, I’m going to go over this idea with people in detail. Here’s the 5 examples I spotted on today’s ES action (click on the image to enlarge):

With just that one indicator and price, you can get 4 winners and 1 loss today. I was at my desk and traded the last one today, which happened to be the sweetest one, too. Nice!

All I look for is:

• Price diverges against VR4×1’s direction for 3 or 4 bars in a row, then turns back in VR4×1’s direction
• If those 3 or 4 bars were also against the overall price trend, then enter the trade as price goes back in VR4×1’s direction
• If those 3 or 4 bars were with the current price trend, then assume VR4×1 is early and only enter if this is also a double top or double bottom

That last criterion is a fail-safe against cases where VR4×1 is out of sync with the price trend. Often volume will precede price, and turn up before the end of a downtrend or down before the end of an uptrend. You don’t want to step in front of trains! But if there’s strong VR4×1 divergence during a double bottom or double top, then it can be worth it to put on a position and see if you’ve caught a reversal.

VR4×1 With Less Smoothing

FYI I put my recent favorite way to visualize Shelly’s Volume VR4×1 in this forum post for Tradestation, Multicharts, and Ninja. No plans for eSignal, please don’t ask.

Here’s the pic of it I posted, with some areas where price diverged from it circled (click on the image to enlarge it):

I just use the standard time-honored EMA-trigger method of coloring the line, which allows me to get away with cutting way down on the smoothing of VR4×1 itself, while still having nice long runs of green and red without a lot of whipsaw. For fast trading, this is how I’ve been watching vr4×1 lately.

My Custom Bars

I was once again impressed by the custom bars I’ve been using… I’ve mentioned them a couple times before on the blog. They are a lot like volume bars, except at times they really cut through the noise in a way normal volume bars can’t.

Here’s an example of 10946 share bars, 6-tick range bars, and my custom bars side-by-side. I’ve circled a nasty congestion area on all three charts. See how my bars clearly show the center of the gyration is a tiny value area at 930.50ish? Kinda cool… Also, mine was the only chart where the moving averages didn’t temporarily cross in a bearish fashion…. (click on the image to enlarge):

(vr4×1 is flat on those charts because I just pulled them up for the pic, and vr4×1 is a real-time only indicator).