Guest Post: The Common Denominator

Posted on May 12th, 2007
Written by Mr. White Folks
Posted in: N/A (old archives)

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Unlike Richard I’m still using old fashioned candlestick charts. I recently wrote an article on pimp moving averages, and how they helped me stay in a winning position longer. However, last week I was chopped to death. My PMAs would be pointing up/down, and by the time even the 5 pma flattened, I had already missed the ideal place to buy/sell. I was dying a death by a thousand cuts.

There are a few key indicators that I use to make decisions on when to enter and exit a position. One of the most important ones is volume. Personally, I prefer the old fashioned chart with a separate volume indicator. I use a 36 period volume moving average which covers the span of three hours on a 5′ chart. I find it especially useful in the crude markets to help determine the pace of the action. However, what was working two weeks ago, didn’t work last week. So now I have my PMAs, 36 period VMA, and my novice TA skills not working. I’ve been here before, and will be again. So what happened?

As I mentioned in the article on Pimp Moving Averages, any one candlestick or indicator can’t be taken in isolation. That’s my belief, and I know others disagree. However, each of us have a set of beliefs about the markets and the world that will influence how we trade. Something else I mentioned was the struggle I have determining whether I should be in a position for a scalp or a longer move. After going back over every real and paper trade made for quite some time, I see an important factor that would have helped in every case. Its a basic concept outlined by Farley — 3D. I can’t remember when I started using the 3D view, but its been a couple of months now. I’ve tried it before, but since I trade from a laptop at work, it wasn’t always convenient.

My absolute best trades (momentum) came from a break of consolidation on a longer time frame (60′ or daily). The other moves were either fading a breakout (that I believed to be weak) or scalping for a small gain. In retrospect watching the pressure build on the 60′ while being mindful of the daily support/resistance should have carried much more weight. Play a momentum style using the PMAs to hold a position on breaks of consolidation on the 60′, and switch to defensive/scalping/fading mode when crude is trading in a defined range. As Richard points out, the basics aren’t that basic.

Here are two separate views of the same market on Friday. The 5′ and 60′ view, and the 5′ and daily. When I am afforded the luxury of a big boy setup, then I can have all three charts up at the same time. However, for now watching the 5′ and 60′ while being mindful of possibly a larger pattern developing on the daily, and where support/resistance lies is suitable.

60.JPG

daily.JPG

Volume and PMAs are still an important factor within my trading style, but the common denominator is differentiating between trend and chop. That is a struggle that plagues many of us. Hopefully, this will help.

Comments

  • it's such a small difference in the multiplier, I guess the SD would have to be pretty big for you to see it. Maybe this will rarely be the case on a 5' chart.
  • richard: as an experiment, i'm overlaying the 1.9 - along with the 2 - deviation over my 5' chart...the bb settings are 13 period (H + L + C)/3...so far it looks the same
  • john
    D: when i read some of your stuff, i feel as though i've been pulled out of a high school algebra class and dumped into a masters level program...keep the ideas coming, but it may take a while to absorb it

    - tapeworm
  • TraderD
    Any indicator will fail to work under some conditions. For MA's the problem will be cycle length. An indicator like the MA Histogram (or the SMI) will give a visual indication that the MA signal is weak, because the Histogram will be small (compared to peak values), or the SMI and it's signal line will be flat rather than have a steep slope.

    Ehler's work has some indicators that provide a numerical cycle length, but its hard to come up with indicators that can make use of it that will improve system performance, though I have tried.

    I've had the best success by using adaptive lookback based on Standard deviation to get an adaptive overbought/oversold indication.

    This type of code has worked the best:

    Indicator, Std and Lookback are numbers. Indicator could be any Oscillator like RSI, %R, Sto, etc., Std is the standard deviation, like 1.9, and Lookback is the number of bars to lookback on a peak high/low.

    Midband = Average(Indicator, Lookback);
    Highband = MidBand + StdDev(Indicator, Lookback) * StD;
    Highband = Average(HighBand, Smooth);
    LowBand = Midband - StdDev(Indicator, Lookback)) * Std;
    LowBand = Average(LowBand, Smooth);

    HighZone = HighBand;
    LowZone = LowBand;

    I typed this in so there could be syntax error. This is easy language.

    - TraderD
  • john
    i need to actually get his book...i haven't been able to find much information on them, so i have just been watching to see if i can interpret what it may take to "open" them up...once in a blue moon i will exit a position, because it appears that the bb may prove stiff resistance...i'm always a fan of finding divergences, but that is one i never considered...again, i should get the book and get to the source
  • I've always thought of the bands like overbought and oversold indicators, but the big idea I came across in the book was to use them as ways to define relative definitions of "high" and "low". Like, even though a stock makes two peaks at 9.5 and 10.0, it may not be making new highs relative to the upper band. There's a %b indicator that basically just tracks the price position relative to the bands, so you can use it like MACD to see if there's a divergence.
  • on the intra day charts, i use a 13 period bb, so i will see what the 1.9 deviation spits out...hey, i might even try a 1.93 :-)

    thanks for the suggestion
  • Have you played much with the BB parameters? I was in a bookstore yesterday flipping through Bollinger on Bollinger Bands and he suggests going to 1.9 deviations as the MA period gets closer to 10. (and similarly, going to 2.1 as the MA period gets closer to 50).

    I never seem to have all the time I need to do these things, but I thought yesterday I might play with the bands a little, now that I know more about how the originator thought they should be used.
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