Trading Divergences

Report
presented by
Thomas Wood | MicroQuantSM
Divergence Trading Workshop
High Probability Continuation
Day One
and Reversal Patterns
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Workshop Outline
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Simple Ways to Improve All of Your Trading
Introduction to Indicators Used
General Rules for Stop Placement
Understanding Divergences
Trading “No Returns”
Knowing When a Market is Entering
Consolidation
Trading the “Golf Club” and “High Flying Flag”
Identifying Momentum Inflections
Simple Ways to Improve Your Trading
Success
Tips to Improve Trading Success
“Most people will not wait for the environment to tip itself off.
They will walk into the forest when it is still dark, while I wait
until it gets light.” Mark Weinstein
• Never sell the highest high or buy the lowest low of
momentum.
• Look at trading as a game. Do not focus on the dollar amounts
gained or lost, that is just the way to keep track of your
“score.”
• Only take the trades you have the highest amount of
confidence in. If you ever find yourself saying “I am not really
sure” then skip it and live to trade another day.
Tips to Improve Trading Success
• Watch what the price action tells you when highs/lows
or support/resistance is broken. Is it behaving correctly?
• Think for yourself. Learn your analysis and follow it.
• Make sure you are willing to change your opinion if you
are wrong.
• Every market has their own personality. Make sure you
understand the markets you are trading
Tips to Improve Trading Success
• Make sure you are making more than your risking on
your trades!
• You want a reward risk ratio of a minimum 1.5 to 1
• Make sure you are actually exiting for a valid reason. Do
not say “Oh I am up $400 I am going to close this out”
Why settle for $400 when you could have held for
$1500?
• You CAN go broke by taking profits! (I am guilty of this
saying myself)
Tips to Improve Trading Success
• Review your trades and trading strategy EVERY DAY.
• Write on a piece of paper what you are going to do every
day before you start trading. This will help you stick to
your trading plan.
• Write a trading plan.
• Know when you are having an off day and quit.
• Don’t try to “dig yourself out” this is a losing proposition.
• Treat each day as a new day starting from zero.
Analyze Three Components of Technical Analysis
Questions on Tips to Improve Trading
Success?
Introduction to Indicators Used
Cannot Use White Background =(
Specifications of Natural Gas
• Moves in $10.00 per tick intervals
• Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1
Crude Oil (Volatility Adjusting)
• Impacted by Nat Gas Supply announcement every Thursday at
10:30 AM EST
• Announcement can cause major fluctuations
• Follows trendlines decently, not 100% though.
• Important to pay attention to the momentum when
approaching a trendline. Can help you understand how it will
react.
• Pit Hours: 9:00 AM EST – 2:30 PM EST
• Majority of good setups occur 30min-1 hour before pit open.
• Best Divergences: 240 min 60 min and 30 min
• Best Candlesticks: 240 min 60 min
• Trade Entries Based on 100, 250 and 500 tick
ValueBars
Specifications of Natural Gas
• Moves in $10.00 per tick intervals
• Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1
Crude Oil (Volatility Adjusting)
• Impacted by Nat Gas Supply announcement every Thursday at
10:30 AM EST
• Announcement can cause major fluctuations
• Follows trendlines decently, not 100% though.
• Important to pay attention to the momentum when
approaching a trendline. Can help you understand how it will
react.
• Pit Hours: 9:00 AM EST – 2:30 PM EST
• Majority of good setups occur 30min-1 hour before pit open.
• Best Divergences: 240 min 60 min and 30 min
• Best Candlesticks: 240 min 60 min
• Trade Entries Based on 100, 250 and 500 tick
MQ Momentum
Specifications of Natural Gas
• Moves in $10.00 per tick intervals
• Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1
Crude Oil (Volatility Adjusting)
• Impacted by Nat Gas Supply announcement every Thursday at
10:30 AM EST
• Announcement can cause major fluctuations
• Follows trendlines decently, not 100% though.
• Important to pay attention to the momentum when
approaching a trendline. Can help you understand how it will
react.
• Pit Hours: 9:00 AM EST – 2:30 PM EST
• Majority of good setups occur 30min-1 hour before pit open.
• Best Divergences: 240 min 60 min and 30 min
• Best Candlesticks: 240 min 60 min
• Trade Entries Based on 100, 250 and 500 tick
MACD
Specifications of Natural Gas
• Moves in $10.00 per tick intervals
• Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1
Crude Oil (Volatility Adjusting)
• Impacted by Nat Gas Supply announcement every Thursday at
10:30 AM EST
• Announcement can cause major fluctuations
• Follows trendlines decently, not 100% though.
• Important to pay attention to the momentum when
approaching a trendline. Can help you understand how it will
react.
• Pit Hours: 9:00 AM EST – 2:30 PM EST
• Majority of good setups occur 30min-1 hour before pit open.
• Best Divergences: 240 min 60 min and 30 min
• Best Candlesticks: 240 min 60 min
• Trade Entries Based on 100, 250 and 500 tick
Questions on the Indicators?
General Rules for Stop Placement
General Rules for Stop Placement
• You want to place your stop far enough away
that if it is hit, you know you were wrong. But
that if it is hit, your not going to break the
bank.
• Typically I place stops above a high or low. Try
to place stops beyond some type of support or
resistance.
• Know when high volatility is expected because
this can cause massive slippage on your stops.
General Rules for Stop Placement
• Watch what a market does if your stop is hit.
Sometimes very easy to spot a “run on the
stops”
• The market is designed to beat you. Make sure
your stops are not getting hit at highs or lows.
*Go back and analyze all the times you were
stopped out. If you had given it 2-3 more ticks
would you have stayed in?
• Review your trades, learn from your mistakes
Questions on General Rules for Stop
Placement?
Understanding Divergences
What is a Divergence?
• When the price and indicator are no longer
correlated (moving with each other)
• Price continues to equally high/low prices while
indicator weakens
• There can be both bullish and bearish divergences
• Bullish divergence occurs when prices are equal
to, or go lower than, previous price lows while
indicator goes higher
• Bearish divergence occurs when prices are equal
to, or go higher than, previous price highs while
indicator goes lower
Trading Divergences
• You can trade divergences on both the MQ
Momentum and the MACD
• MQ Momentum will identify smaller
divergences as well as large divergences
• MACD will have less signals, but higher
probability (More people watch MACD)
Trading Divergences
• You can trade divergences on both the MQ
Momentum and the MACD
• MQ Momentum will identify smaller
divergences as well as large divergences
• MACD will have less signals, but higher
probability (More people watch MACD)
Trading Divergences
• You can trade divergences on both the MQ
Momentum and the MACD
• MQ Momentum will identify smaller
divergences as well as large divergences
• MACD will have less signals, but higher
probability (More people watch MACD)
Trading Divergences
• You can trade divergences on both the MQ
Momentum and the MACD
• MQ Momentum will identify smaller
divergences as well as large divergences
• MACD will have less signals, but higher
probability (More people watch MACD)
Trading Divergences
• You can trade divergences on both the MQ
Momentum and the MACD
• MQ Momentum will identify smaller
divergences as well as large divergences
• MACD will have less signals, but higher
probability (More people watch MACD)
Divergence Identification Step 1
Divergence Identification Step 2
Divergence Identification Step 3
Entry and Stop Placement
• Once the divergence has been identified, entry
occurs at any of the following:
– Equally high/low prices
– Broken previous high/low
– At Significantly Overvalued
– Once Momentum Rolls Over
• Once Position has been entered, stop is placed
at any of the following:
– Just beyond previous high/low (5-10 ticks)
– Just beyond support/resistance
Entry at Equally High Prices
Entry on Broken High/Low Prices
Entry on Significantly Overvalued
Entry After Momentum“Rolls Over”
When Do You Know Your Wrong?
• The best divergences move your direction
within 1-2 bars of the interval you are
trading.
• If momentum histogram spikes a significant
amount on first up/down bar
• If momentum continues to climb/decline
even if prices are significantly
over/undervalued
Tips to Improve Success
• Make sure market reaches into the
overvalued/undervalued price points
• Make sure the histogram AND indicator
lines show the divergence
• Drill down for your entry.
– Find a divergence on a smaller timeframe in
the same direction of your larger timeframe.
This will make your entry more precise.
• Try trade 2-3 times then quit.
Questions on Divergences?
No Returns
Trading the No Return
• A “No Return” occurs when a market
reaches over or undervalued, but
momentum histogram stays positive or
negative in the opposite direction.
• Can be both bullish and bearish.
• Should reverse on same bar, if not, then the
second bar at the latest.
*Use 5 Bar Analysis Period for
ValueCharts/ValueBars
Trading the No Return
• A “No Return” occurs when a market
reaches over or undervalued, but
momentum histogram stays positive or
negative in the opposite direction.
• Can be both bullish and bearish.
• Should reverse on same bar, if not, then the
second bar at the latest.
Trading the No Return
• A “No Return” occurs when a market
reaches over or undervalued, but
momentum histogram stays positive or
negative in the opposite direction.
• Can be both bullish and bearish.
• Should reverse on same bar, if not, then the
second bar at the latest.
Trading the No Return
• A “No Return” occurs when a market
reaches over or undervalued, but
momentum histogram stays positive or
negative in the opposite direction.
• Can be both bullish and bearish.
• Should reverse on same bar, if not, then the
second bar at the latest.
Trading the No Return
• A “No Return” occurs when a market
reaches over or undervalued, but
momentum histogram stays positive or
negative in the opposite direction.
• Can be both bullish and bearish.
• Should reverse on same bar, if not, then the
second bar at the latest.
Questions on No Returns?
Understanding When a Market is
Entering Consolidation
When is Consolidation Occuring?
• Watch Higher Highs, Higher Lows /
Lower Highs, Lower Lows
• Keep Track of Trendlines
• Watch for Break of Previous Bars
High/Low
• Watch How Price Reacts to Break of
Previous Bars High/Low
• Stop breaking and closing above
previous high/low
When is Consolidation Occuring?
• Watch Higher Highs, Higher Lows /
Lower Highs, Lower Lows
• Keep Track of Trendlines
• Watch for Break of Previous Bars
High/Low
• Watch How Price Reacts to Break of
Previous Bars High/Low
What to do with Consolidation?
• Consolidation is a setup for new
trade.
• Know that intraday market is likely to
be choppy
• Watch for breakout for higher
intraday volatility
• Avoid the “chop” (Markets are harder
to trade during consolidation)
• Mostly Based off daily price charts
Questions on When Markets are
Entering Consolidation?
Trading the Golf Club and High Flying
Flag
Golf Club and High Flying Flag
•
•
Golf Club pattern is a bearish continuation pattern
Down move, followed by 1-4 higher lows, then a break
of previous bars low with strong momentum
•
•
High Flying Flag is a bullish continuation pattern
Up move, followed by 1-4 lower highs, then a break of
previous high with strong momentum
Golf Club and High Flying Flag
•
•
•
•
•
•
Trade is entered on break of previous bars high/low
Stop is placed above/below broken bars high/low
Should at a minimum see test of previous high/low
Market should move in 1-2 bars max. If not, may be
wrong on trade
Want to see entry bar close in your direction. If not,
may want to get out
Want to see momentum stay in your direction the entire
time
How to Trade the “Golf Club”
•
•
Golf Club pattern is a bearish continuation pattern
Down move, followed by 1-4 higher lows, then a break
of previous bars low with strong momentum
•
•
High Flying Flag is a bullish continuation pattern
Up move, followed by 1-4 lower highs, then a break of
previous high with strong momentum
•
•
•
Trade is entered on break of previous bars high/low
Stop is placed above/below broken bars high/low
Market should at a minimum test the previous high/low
How to Trade the “Golf Club”
•
•
Golf Club pattern is a bearish continuation pattern
Down move, followed by 1-4 higher lows, then a break
of previous bars low with strong momentum
•
•
High Flying Flag is a bullish continuation pattern
Up move, followed by 1-4 lower highs, then a break of
previous high with strong momentum
•
•
•
Trade is entered on break of previous bars high/low
Stop is placed above/below broken bars high/low
Market should at a minimum test the previous high/low
How to Trade the “High Flying Flag”
•
•
Golf Club pattern is a bearish continuation pattern
Down move, followed by 1-4 higher lows, then a break
of previous bars low with strong momentum
•
•
High Flying Flag is a bullish continuation pattern
Up move, followed by 1-4 lower highs, then a break of
previous high with strong momentum
•
•
•
Trade is entered on break of previous bars high/low
Stop is placed above/below broken bars high/low
Market should at a minimum test the previous high/low
How to Trade the “High Flying Flag”
•
•
Golf Club pattern is a bearish continuation pattern
Down move, followed by 1-4 higher lows, then a break
of previous bars low with strong momentum
•
•
High Flying Flag is a bullish continuation pattern
Up move, followed by 1-4 lower highs, then a break of
previous high with strong momentum
•
•
•
Trade is entered on break of previous bars high/low
Stop is placed above/below broken bars high/low
Market should at a minimum test the previous high/low
Questions on Trading the Golf Club and
High Flying Flag?
Trading Momentum Inflections
Trading Momentum Inflections
• Momentum Inflections are continuation
patterns similar to Golf Clubs and High Flying
Flag, except they are based on momentum
indicator, not price action
• Enter when momentum histogram starts
moving your direction again.
• Stop goes below the lowest low
• Need to see momentum steadily increase in
your direction
• Momentum does not have to stay green/red
Trading Momentum Inflections
• Momentum Inflections are
continuation patterns similar to Golf
Clubs and High Flying Flag, except they
are stretched out a little longer.
• Enter when momentum histogram
starts moving your direction again.
• Stop goes below the lowest low
• Need to see momentum steadily
increase in your direction
Trading Momentum Inflections
• Momentum Inflections are
continuation patterns similar to Golf
Clubs and High Flying Flag, except they
are stretched out a little longer.
• Enter when momentum histogram
starts moving your direction again.
• Stop goes below the lowest low
• Need to see momentum steadily
increase in your direction
Trading Momentum Inflections
• Momentum Inflections are
continuation patterns similar to Golf
Clubs and High Flying Flag, except they
are stretched out a little longer.
• Enter when momentum histogram
starts moving your direction again.
• Stop goes below the lowest low
• Need to see momentum steadily
increase in your direction
Trading Momentum Inflections
• Momentum Inflections are
continuation patterns similar to Golf
Clubs and High Flying Flag, except they
are stretched out a little longer.
• Enter when momentum histogram
starts moving your direction again.
• Stop goes below the lowest low
• Need to see momentum steadily
increase in your direction
Trading Momentum Inflections
• Try to time inflections with divergences on a lower
timeframe
• Make sure you are projecting out where a market can go
to. I.E. it should move this far if it is going to go
• Watch price action as well as the momentum, inflection
more likely to happen if there are higher highs, higher
lows. Etc.
• Trade in the direction of the trend (Use a trend indicator
like MQ Trend or Regression)
Questions on Trading Momentum
Inflections?
Profit Targets
Where to Exit?
• Identify support or resistance levels for profit targets.
When a market is close to a trendline/support or
resistance, it is often times drawn to that level before
reversing
• Watch for divergences or a signal that suggest a market
is topping/bottoming
• No more higher high/higher low, entering into
consolidation, divergence, candlestick reversal, etc.
• Use a value-target. I.E. Get out at significantly overvalued
if your long.
• Make sure you are using a value target on same
timeframe as original setup. Don’t go long on a
240min bar and exit because a 30min bar is
overvalued.
Where to Exit?
• Watch how the momentum is moving. If momentum
starts to move against you, get out.
• Watch for announcements. May be a good idea to get
out before an announcement comes out.
• If you cover on a trendline/support resistance line, you
can always get right back in if the market breaks that
price. This saves your profits if it does reverse.
• Make sure you are maintaining a high reward to risk ratio
• I like to see mine >1.5 to 1
Putting it All Into Action: Chart
Examples
Final Q&A
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