Seeing beyond charts

The main indicator used in today’s trading is the price chart. Graphically we can see the past behavior of price and we can speculate in the future behavior to profit from it. Charts only give a lot of information but we can extract even more, that’s why we use different kind of indicators. This post is about the chart types and indicators used in XBP Trading to see beyond the charts and enter low risk trades.

First let’s focus on the screen setup used. We use both time charts and tick charts. Time charts are the most common used charts where each bar represents X amount of time. In our case, we use 2 time charts: Daily and 1 minute. The tick charts form a new bar every X amount of transactions occurred. 1 transaction, or tick, is the action of buying/selling a certain amount of contracts (volume). In our case, we use 3 tick charts; 4,500, 1,500 and 500 ticks.

The main difference between time and tick charts is that time charts will print a new bar regardless of the activity of the market, even on the extreme that there are no transactions the time chart will print a new bar (in this case just a flat line), while tick charts only print new bars when actual transactions occur, letting the trader to see the periods of more activity with better detail while filtering out those periods with less activity. You can find more information on the subject here: http://www.investopedia.com/articles/trading/10/data-based-intraday-chart-intervals.asp

Now let’s discuss each of the 5 charts and their indicators to see how they help us to uncover more information otherwise hidden.

Daily chart

Purpose: To see the big picture. Where the main support and resistance levels are and which is the main trend.

Indicators:

  • Support and Resistance levels and Trend Lines drawn manually: In another post we will discuss in detail where to place these levels and trend lines.
  • XBP Sine Wave: This indicator help us to understand the trend of the market. Sine Wave will mark high probable support and resistance levels when the market is in consolidation phase (range bound) and pull-back and end of trend signals when the market is in expansion phase (trend).
  • Universal Oscillator: Presented by John F. Ehlers in his article “Whiter Is Brighter” in Stocks & Commodities magazine in January 2015, this oscillator has zero lag and works both as a countertrend oscillator and as a trend identifier. You can check out more information here and here.

1 minutes chart

Purpose: To detect market exhaustion levels thanks to the $TICK indicator and to detect intra-day support and resistance levels.

Indicators:

  • XBP Open Range: This study draws the high and the low of the opening session, by default the first 30 minutes of the trading day (as per NYSE). Often these levels act as support/resistance during the day. They can act as good entry points to enter a trend’s pull-back when price breaks above/below the Opening Range or they could act as good entry points when price is bouncing off the levels to stay between them. The indicator shows a “cloud” in the area between the levels for easier identification.
  • VWAP (Volume Weighted Average Price): This indicator is included as part of ThinkOrSwim. VWAP is considered the reference price for the day and normally acts as a good dynamic support and resistance level. I don’t trade the VWAP but I like having it on my charts as I know that many traders have it as well. Is common to place stops behind VWAP hoping that it will act as a bounce level, but rarely it does if the price comes in a vertical enough angle. Having the VWAP in your charts will allow you to know where does stops are and wait until the stops are hit to either open or close your trade. You can read more about VWAP here.
  • XBP $TICK: This could be considered not an indicator in the very strict definition of it but a market internals “symbol” provided by NYSE. $TICK measures the number of stocks trading on an uptick minus the number of stocks trading on a downtick. It allow us to have a sense of the overall market. Despite that we are trading futures in the Chicago market and that $TICK measures stocks in the New York market, there usually is a correlation in climax within the two markets. $TICK extremes can signal quite accurately tops and bottoms in the future’s market, especially in range bound days. And divergence between $TICK and ES are actually a very powerful signal. In a future post I will detail $TICK in more detail. Meanwhile you can read more about $TICK here.
  • XBP ALMA: Arnaud Legoux Moving Average is the best moving average that I’ve seen so far. I use a moving average as a reference of where a “fair” price point is at any moment. If I want to go Long I would wait to buy below ALMA. If I would like to enter Short I would wait to sell above ALMA. This simple exercise can save you half a point in many days and help to raise your profitability bit by bit.
  • Universal Oscillator

4,500 ticks chart

Purpose: Tick charts are my main operating charts. 4,500 ticks chart offers the big picture of the trends. As Dow Jones believed in the markets there are 3 trends: the tide, the wave, and the ripples. 4,500 ticks chart is to detect the tide during intraday trading.

Indicators:

  • Support and Resistance levels and Trend Lines drawn manually.
  • XBP Open Range: Just as a reference. Explained in the 1 minute chart.
  • Think Scripter Previous Day High Low and Close (TS_PREVDAYHLC): I use this indicator from Think Scripter that marks the previous days’ high, low and close. These levels are used in the same way as VWAP. I don’t trade them but I like to have them on sight so I know that many traders would have placed their stops behind these levels. If price, for example, is rallying quickly towards the high of the previous day I will expect price to hit those stops and breakout the level. I will stay in the trade expecting this action to happen. You can find this indicator and many more at Think Scripter website.
  • XBP Sine Wave: Another John F. Ehlers indicator, this time published in his book “Rocket Science for Traders“. It is a price based indicator with two major interpretations. First, if the market is in an cyclical phase (not trending), Sine Wave will mark high probable dynamic support and resistance levels. Second, if the market is in an trending phase, Sine Wave will mark high probable pull-back and trend end levels. Sometimes is quite difficult to know in which phase the market is, that’s why this indicator will be a confirmation indicator for another indicator signal. One good thing about this indicator is its fractal capabilities. In a higher time frame, Sine Wave is signaling that the market is in an cyclical phase it could be that in a lower time frame the market is in a trending phase. When both time frames have a support or resistance level at the same price level that probabilities of that level to hold are greatly increased. The XBP Sine Wave signals are represented by white and red horizontal lines in the chart.
  • XBP Tape Speed: Tape readers focus their attention in the tape, trying to grasp a sense of activity in the market and gain an edge through it. One of the variables that they look for is the speed of the tape. Is believed that if the speed greatly accelerates that price level has a special meaning. Normally, high tape speeds mark the beginning or the end of trends, as well as clusters of stops being hit by market orders. XBP Tape Speed prints graphically a histogram with the speed of the tape for each bar in a tick chart. Values that are higher than the average are highlighted for easy identification. In a separate post I will explain more about this indicator.
  • XBP Price Bars: This indicator helps us to identify when big money is entering the market by highlighting those bars with a cyan color. One of the advantages of using tick charts is to know that every bar represents the very same amount of transactions. If volume is considerably higher in an individual and isolated bar is because in the same number of transactions the volume of contracts traded is significantly higher than in the surrounding bars. If, in contrast, the volume is significantly lower, the indicator will paint the bar yellow. Big market players enter/exit the market at tops/bottoms as they are the ones moving the market. The visualization of the volume activity that XBP Price Bars does is of extreme help when analyzing the market. XBP Price Bars also highlights with a purple dot the bars that had a high Tape Speed signal.
  • Universal Oscillator

1,500 and 500 tick charts use the same indicators as 4,500 ticks chart (except for TS_PREVDAYHLC) and they are used for fractal (multiple time frames) purposes, being 1,500 ticks chart the main chart used during intraday trading.

Putting it all together

All these charts and indicators work together to offer the following information:

  • Is the market in a trend or in a cyclical phase?
  • Where are the main support and resistance levels?
  • What’s the overall market doing?
  • Where are the low-risk entry points?

XBP Sine Wave analyzes price, XBP Price Bars analyzes volume and XBP Tape Speed does the tape reading for us. Universal Oscillator combines both price and volume to offer a second opinion while Opening Range, VWAP and the manually drawn support and resistance levels offer a reminder of past key levels to take into consideration. Finally, ALMA let you fine tune your entry to the lowest possible level.

Seeing beyond charts

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