Friday 14 March 2008

Trend Lines and Entry Signals

Trend lines article today. Got an email from Jeff asking "For day trading you mentioned you need confirmation with multiple time frames - can you give an example?"

The Better Trend Lines indicator shows Congestion Zones with white paint bars. Breakouts from Congestion Zones usually result in large moves - the trick is avoiding false breakouts and getting the direction of the trade right. I use 3 things to filter the trades and increase the accuracy of the signals:

  • The breakout is usually in the direction of the trend preceding the consolidation
  • I always check the trend direction of the next higher time frame, and
  • Look for confirmation from volume patterns using the Better Volume Indicator

The example charts below should help illustrate these points. It shows Friday's Emini action and a short trade that resulted in a 43 point intra-day move!

Emini Trend Lines Entry Signals Image 1

Trend Lines (Emini 2,097 Tick)

First the higher time frame chart. The highest time frame day trading chart I use is the 2,097 tick Emini chart. In this time frame we've got a Consolidation Zone at the beginning of the day.

The Emini was falling from a high of 1,336 before it entered a Consolidation phase and so the likelihood is that it would resume the down trend when it broke out of this Zone.

The break down below the lower trend line was a Low Churn bar. Low Churn bars (with a low close) often confirm the start of down trends. You will see this pattern repeated again and again, in all time frames, using the Better Volume Indicator.

Emini Trend Lines Entry Signals Image 2

Trend Lines (Emini 233 Tick)

Now the lower time frame chart. The lowest time frame I use day trading is 233 tick and this is for more precise entry signals. The first point to note is that this consolidation is a complex ABCD retracement pattern (labeled on the chart).

Remember the market is always trying to fool you, shake you out of your trade. The first Consolidation Zone broke to the upside - you wouldn't take this trade because it was against the higher time frame trend.

The second Consolidation Zone broke to the downside and was the right entry point, but just in case you missed that there was a third Consolidation Zone break down that really got going quickly.

Now, how would the Better Volume Indicator help you determine what was really going on. This is the real secret - I've never seen anyone talk about this stuff before.

  • Leading into pivot B we have a Volume Climax bar (red) showing short covering as the 1,321 level is broken
  • Then at pivot B we have a High Volume Churn bar (green) showing new sellers are entering the market and stopping price move up
  • Right after pivot B we have a Low Churn bar (white) - down trends almost always start with a Low Churn bar
  • Leading into pivot D we have another Volume Climax bar (red) with very high volume - this is a blow off move and professionals are getting short as amateurs think a new uptrend is starting
  • Next we have a Low Churn up bar (white) which is a final weak push up and leads to the trend line break down
  • Notice again the start of the down trend is a Low Churn down bar (white)

I'll be updating my Better Volume page soon and adding a video I've recorded recently. Although the Better Volume Indicator works on any time frame or market, I find these patterns repeating again and again on intra-day tick bar charts.

Check out the Better Trend Line video here. Good luck with your Emini trading.

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