back start next
[start]                         [ 25 ]                           
!*1> -5 » ," « 0 •»106::r«... ¹114.438 L=110.375 y=1817100 Median (5:60) 113.500
| || |
, - *...
Sell Early Range Breakout-
Directional Day Filter-
i 60 Minute Bar
Category 3 Support
Sell Break of Support
-114.Q0C 413.500 113.000 -111 500 -112.000 -111 50C 111.030 110.530 110 000 1C9 500 109 000
i oe sec
Figure 10.18 The initial short position is established as the market breaks out of the early range low. An additional short position is entered as support is broken laterinthe day.
Chart created with TradeStation® 2000i by Omega Research, Inc.
as the majority of the trades so far have occurred below the filter line and the close of the 60-minute bar is clearly located near the low extreme of the early range. Since we are expecting the range to expand on the downside on this day, we will place a sell stop slightly below the range as indicated by the solid horizontal line on the chart. The short position is filled as the market trades through our sell stop.
Exiting the trade now becomes a function of the trading style being used. If one is a long-term day trader, it is certainly acceptable to hold such a trade into the close in anticipation of capturing the entire move of the security. Other shorter-term exit strategies can be used in the case of the trader who is not comfortable with the additional risks involved in this long-term approach.
An additional trade in the direction of the major trend is also isolated on this chart that may be used either by those wishing to trade several times through the day or as a point to add to a profitable position by those holding onto the trade for the entire day. This trade appears as a break of support created as a result of a corrective rally that occurred shortly after the first new low of the day was placed at 10:00 am. The break of this support leads to the major decline that was projected much earlier in the day by our trading filter.
This five-minute chart of Analog Devices Inc. (ADI) (Figure 10.19) f demonstrates the use of the Directional Day Filter to generate a long breakout trade.
The trend of the day is identified as higher since the majority of activity is above the filter line and the close of the 60-minute bar is I also far above this line and near the intraday high at this point. Since we are expecting any range expansion to be expressed by regularly 5 raising the intraday high, we first place a buy stop above the intraday range as marked by the 60-minute bar. This position is filled about an l hour later as the market trades through our stop.
Additional trades indicated on the chart occur as overhead resistance created by market activity is eventually broken as the rally extends itself. Two such trades are illustrated on the chart. The construction, application, and interpretation of several support and re-l sistance chart formations was covered in detail in Chapter 7, "Market-y Defined Support and Resistance Categories."
nia LAST-5 min 06 9/2000 :C=SS 250 ►30. 000- -56.32% 0=81.188: H=82.250 L=57.875 V=0 Median Ljne<5,6C0 90.675
Category 3 Resistance
100.00D 99.000 98.000 97.000 96.000 95.000 94.000 93.000 -92.0D0 91.000
8/19 9:00 9:25 9:50 10:15 10:40 11:05 11:30 11:55 12:20 12:45 1:10 1.35 2:00 2:25
Figure 10.19 long positions are established in the direction of the major trend upon breaking the high Of the early range and breaking resistancetwice later in the day.
em aoo 9:25 -. 10:15 into 11:05 : 11:55 12:2c 12.4s inn 1:35 2 2:25
Figure 10.20 Four distinct long entries are enabled by the forecast of an
uptrending day by the Directional Day Filter.
Chart created with TradeStation® 2000i by Omega Research,Inc.
On another AD1 chart (Figure 10.20) we can demonstrate several trading possibilities using this indicator.
At the 60-minute time frame in this case the trend forecast for the remainder of the session is not as clear as on some days. Note that the amount of activity above and below the filter line looks to be a bit in favor of the high side, but not convincingly so. However, the close of the 60-minute bar lies within 10 percent of the top of its range. It is also obvious that the bulk of the intraday range at this point is above the filter line. These items, along with the rally that preceded the plotting of the 60-minute bar, tend to give the day an upward bias and, combined with the slightly higher component provided by the market activity slightly on the high side, can give us reason to classify the trend for the remainder of the day as sideways to higher.
Our first trading opportunity, labeled Buy 1, arises as the market briefly kisses the filter line and then moves higher for a few bars. A buying opportunity arises at this point. Although the market does eventually pull back once again to challenge the validity of the filter line, the low of the day holds, maintaining our forecast higher tendency for the day.
As the market pulls back from the intraday high that plotted the 60-minute bar, a resistance area is created about midway through the pullback. Although some time is required for the market to mount a challenge to this rather long-standing resistance area, it is eventually successful in doing so, creating the breakout buy labeled on the chart as Buy 2.
An interesting point next develops on this chart as the market approaches the intraday high during the 12:30 P.M. time frame. The market is first turned back by this heavy resistance, initially falling hack to midrange for the day. This activity also creates a significant Category 3 resistance area at the very intraday high, creating a formidable barrier to further market advances. As discussed in Chapter 7, devoted to support and resistance points, the stronger the resistance, the stronger is the market momentum that will be created when a breakout does occur. In essence, this area offers us two reasons to place a buy stop directly above the resistance point, as a Category 3 resistance point is located at the same spot as the intraday high.
Our buy stop, labeled Buy 3, is filled here when the market is finally able to overcome this long-standing hurdle. The reaction back down from this breakout is long enough to create a third Category 3 resistance area, which is used once again for placement of a buy stop. Buy 4 occurs as the market trades through this area.
Briefly reviewing the activity of this AD1 chart, recall that the forecast for a sideways to higher day was issued by the Directional Day Filter only one hour into the session. The chart patterns can only be classified as sideways to higher, as the pullbacks were severe and new highs were made, but only with a significant struggle. Thus the accuracy of our filter is again confirmed.
The Directional Day Filter can be a powerful tool for the trader willing to spend the time necessary to become familiar with its use. As with many such items, the understanding and application of this indicator is as much an art as it is a science. While there are certainly black-and-white days when the prediction for the daily trend is quite clear, there are also multiple indeterminate days. On such days the determination must depend on the experience gained by the trader as he or she has observed the activity of the indicator, possibly using multiple settings for the calculation of the average line and the time to make the trend prediction.
directional day filter
Significant research has shown this indicator to be 75 percent accurate in its daily trend projections. Details of this research are presented in Chapter 13, "Directional Day Filter Breakout System."
1. Many simple technical indicators work well simply because many people use them.
2. The Directional Day Filter is useful in enabling the trader to trade in the direction of the dominant trend of the day.
3. The Directional Day Filter can identify up days, down days, and sideways days.
4. The Directional Day Filter is also useful as a support and resistance measuring tool.
ALTERNATE USE OF
Identification of Exhausted Corrections within the Major Trend
IilM Thus far in the book we have discussed in detail the Directional I Day Filter, which, with 75 percent plus accuracy, can identify i each trading day as uptrending, downtrending, or nontrending.
Additionally, we have detailed the problem with the use of oscil-(Jti lator indicators that continually issue sell orders during up-Hlil trending days and buy orders during downtrending days. We S» have also discussed in detail a method of using divergent set-; .* tings of these same oscillator indicators to improve the accuracy i -. of issued trading signals.
i In this chapter I will begin the discussion of the practical use
of a unique application of oscillator indicators. This practice involves the use of dual signal oscillators used to identify the ex-
[ff- haustion, or termination, phase of market corrections that occur periodically during the progress of the major trend of the day.
j* : This method will be noted to be quite different from the common
• ;* application of these indicators, which often results in trading signals being issued against the dominant trend. I will combine
; ;l the Directional Day Filter with the dual setting configuration of
[start]                         [ 25 ]