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Daytrading Tool - 5 minute buy/sell signals

post #1 of 14
Thread Starter 
This is a very straightforward tool, and you can pick it up pretty quickly, there is a tool for this trade... it is called "you." This buy-sell signal is meant to provide improved entry/exit judgment, in other words it is like any other tool: not fail safe, needs to be used properly, and only improves your odds, which is the best you can do in the stock market. I got this idea from Andrew Keene at keene on the market.com. I am most interested in the buy-sell signals that come as buy signals off a swing low between cash market open at 9:30 and about 11:15, as manifested on the 5 minute ES (S&P Emini Futures) chart. This tool should translate well to most liquid indexes and some prominent stocks that trade gobs of money daily, like AAPL. The morning reversal off dips matches the trend since Dec '11, so I will use it until the trend dies. Then I will reevaluate the tool, and perhaps employ it in a down trending market.

Usually the market puts in a day session high or low in the first hour. Ideally we get a buy or sell signal immediately following what turns out to be the high or low. What you want to see is a relatively wide range bar (not massive, just a bit wider than the preceding few bars) that exhausts a micro trend, and then a reversal bar that is your entry signal. This reversal bar should usually be a wider range (body of candle, i.e. open to close) than the preceding bar, and should with very very few exceptions close higher than the preceding bar's open for a buy signal, or lower than preceding bar's open for a sell signal. If this is hard to visualize, look at this annotated chart:

197

Note the buy signal just after the open. I did not take this, because I expected a morning dip, as has been the custom for the vast majority of trading sessions this year. This proved to be fortunate as the move was not worth it anyway. The sell signal (just after 1394.25 high) was a good one, tested prior candle's high, closed below the open. So we are in this trade short from about 1392.75-1393. I use ES chart as a proxy for trading SPY options, because the real action is usually in the futures, but I like the SPY options liquidity and it fits my schedule better than futures trading. So I am long some SPY in the money puts from here. We get a few good red candles flushing us down a bit. Then energy begins to wane. Around 11:30, we get a buy signal, another good one. It moves straight up off the open, goes above prior bar's high, and closes above prior bar's open. We get immediate follow through on the next bar then waffle around for a bit. But it turns out to be a great exit, netting about 40 cents on SPY short on a range to that point of about 60-65 cents, not bad at all.

We need to talk safety, i.e. stops and risk-reward. You need to have a feel for the markets' daily movements and general trend to optimize this tool. Stops should be outside the high/low for the day, if you are playing the early reversals. A move outside the day's range usually invalidates your signal, and you should consider always having hard stops as far outside of the range as you are comfortable given your risk tolerance and your analysis of the risk-reward ratio on the trade. For instance, I felt we would see 1387 from 1393, so I could set my stop to 1395 for a 1:3 risk-reward ratio. My stop was safe and I ended up bailing just a few ticks early when downside momentum waned.

Now, before closing this post out... look at the "not a buy" signal we got around 1:50 PM. The bar was shaping up well... but remember what I said about the set up for the reversal bar? we don't want it to be TOO wide, we don't like that much volatility on our reversals, it makes it harder to see them for what they are, and harder to trust them, plus volatility increases your chances of being stopped out. The "not a buy" bar rallied hard, but couldn't recoup that much ground in five minutes. Here is what happened since then.

244

Hmmm... looks like it might be a bear flag? Regardless, not the highest-odds entry, and that is what this tool is meant to bring us, so no trade there. I do think the low is in today but I don't need to let my money do that talking.

Here is another thread you might find useful in concert with this thread. You might notice I left some red and green arrows on this chart, they are EMA (brighter) and MACD (darker) crosses, and are discussed in more detail here: http://www.hotstockmarket.com/t/203601/spy-daytrading-tool-blend-of-emas-macds-vwap-atr-trailing-stop-on-5-minute-chart
post #2 of 14

Bingo. Nice write up. I have been getting away from indicators for a while now just focusing on price and volume to gauge whether to enter or to exit a trade and you know what, it works. I often see so many people just sticking indicator after indicator on their chart as if it will make them a better trader (my former self included) when the reality is those will only give mixed signals time after time, not to mention the fact that the majority are lagging (price has already started making the move by the time your indicator gives you the green light). I would seriously recommend any and everyone to look at this and go back to the basics. Just try trading from candlestick patterns, trendlines, chart patterns, and support and resistance. I'm sure many will find they actually do BETTER this way.

 

Also, time frame is very important. Yes, you can easily load up a 1min or tick chart and trade off that, but you know what, you will get a lot of noise and mixed signals not to mention you are trading against algos and other automated systems that profit from mispricing and spreads. I wouldn't recommend any trader to use less than a 5 minute chart. Seriously. 5 minute is the perfect timeframe to have candlesticks secure their trend without too much whiplash and trend changing that you find with the shorter timeframes. Add a 15 minute to see a more firm trend, an hourly (or 2 hourly) and a daily for overall, long-term trend and you should have all the tools you need to trade with. The daily chart is the only chart I like to add SMAs on, simply because the 20, 50, 100, 150, and 200 are all followed pretty religiously and many securities respect those levels. Aside from that, price and volume will tell you what you need to know to make a successful trade.

post #3 of 14
Quote:
Originally Posted by Bishop View Post

Bingo. Nice write up. I have been getting away from indicators for a while now just focusing on price and volume to gauge whether to enter or to exit a trade and you know what, it works. I often see so many people just sticking indicator after indicator on their chart as if it will make them a better trader (my former self included) when the reality is those will only give mixed signals time after time, not to mention the fact that the majority are lagging (price has already started making the move by the time your indicator gives you the green light). I would seriously recommend any and everyone to look at this and go back to the basics. Just try trading from candlestick patterns, trendlines, chart patterns, and support and resistance. I'm sure many will find they actually do BETTER this way.

 

Good to hear buddy!  I encourage everyone to take that kind of step.  It's all about effort vs. result ..... how can you possibly know if they match up without assessing volume in relation to the price action?  

post #4 of 14

Good thread Rando.

post #5 of 14

good read.  i must admit, i will need to read this again before market opens, and then try to visualize it live when the market opens.

 

thanks

post #6 of 14
Thread Starter 
Quote:
Originally Posted by bluesmap View Post

i will need to read this again

I recommend that nobody take a trade on this until they have not just read it a bunch of times and feel they really understand it, but also just observe it casually at first, for a few days. Then once you get some kind of feel for it, watch it closely in tandem with your existing trading style. After a few weeks you may feel comfortable putting on a trade.

This morning we got a nice bounce after some quick selling. I was watching for a textbook reversal candle. Bulls stepped in, but not strong enough to give us a 5 min close above the prior red candle's open. It was a bullish harami, which does not qualify as a buy signal according to this technique. I almost chased it... but we had a number coming at 10 AM, and it just didn't conform to the rules, so I didn't take a trade, assuming either number would not juice the markets or bulls simply were not showing enough activity to keep the move going high enough to make the trade worth having taken.

And as to Bishop's comments, I agree with most of what you said. When I am looking at the indicators on this chart, they are primarily there to reinforce correctness of decisions I already made, which are made based on price, volume, and time opportunities. The EMA cross is a quick confirmation of correct entries, the MACD is a slower version of same. The ATR is mostly an exit aide, to help make sure you see the flashing exit sign in case you flat-out missed it with your eyes/gut/analysis.

I've used this for months but only just decided to post it... hopefully the market will prove it to be a useful tool moving forward. If you deviate from what I've outlined, do so at your own risk and have good analysis backing up your decision to do so... this can surely be improved, but be confident you're doing so. And finally... make sure your analysis agrees with this before even considering trying a trade... map out some paper trades to see how it works, and how you react to utilizing this. A lot of the profits are based on exits that depend on your analysis on the fly, feeling the thrust's momentum waning, and getting out when you're not sure it is right, but it feels right. Anyway... hopefully this proves useful to some.
post #7 of 14
Thread Starter 
Rock... your analysis of stopping volume is present in this tool also... I should have mentioned that. I'm sure you see the similarity between the 5 min reversals sought here and the stopping volume you have illustrated to all of HSM and me in PM, many many times. Thanks for that.
post #8 of 14

Thanks, Rando! Always good stuff from you, sir. 

post #9 of 14
Thread Starter 
Of course as soon as I posted this 5 min buy-sell thing, the optimal buy signals we've been getting for weeks finally get tricky. Monday we had basically no dip and a weak buy signal, but it was an A+ trade if you went long off the open in the face of minor selling pressure.

Today was much trickier IMO. I realized they are probably going to keep mixing up the early selling and resulting buy signals, if this trend is to continue, they cannot let the money be that easy. So I jumped the gun getting in early on a similar setup as we saw yesterday. It took about 10 seconds after I bought SPY weekly 139 calls for them to begin taking us down 3-4 handles (the big early red bar below). I was a bit stuck and felt too much heat to add. Then the 5 min green bar that followed was short enough compared to the red bar that i was not convinced it was a buy signal. I did not add to my position, although I thought about it. That would have made me a nice trade for today, instead I sweated for an hour or so and got out on a second chance to book profits figuring passing up a second chance would be foolish.

The biggest reason for posting this chart is to show the usual pattern, an early dip, good buying opportunity with stop below the day session low, and then quick confirmation of the rightness of the trade (bright green up arrow four bars after the buy signal). Then you manage your stop by getting out when price closes below the green circles (the ATR trailing stop tool). Allow the close to happen below the green bar, as there are frequent attempts at mini-shakeouts on the way up. Also note the few times the EMA cross happened (red arrow) it crossed back up quickly, and VWAP acted as support all day. When the trade gets profitable enough, I tend to liquidate some of my position manually and not just via the stop, that way you can feel more comfortable with the remainder of the trade and also exit some at targets or logical overhead resistance (i.e. higher probability reversal levels). Anyway, I won't add a whole lot of posts here but feel free to post any screen shots if you find setups you take and want to do a self-evaluation on the trade!

327
post #10 of 14
Thread Starter 
One addendum, if the green bar making the LOD (9:45 open) is your trigger, you buy when it closes at about 139.85. Your stop is then under the low of 139.64 (21 cents) and the issue with this methodology is your upside target/reward is not fully clear on entering a trade. But if you assume all days will have at least an 8 handle range (most more, maybe 3-5% of all days will be smaller range, at most), then any stop that is less than about 30 cents will be a good one, in times of higher VIX you can loosen those requirements a bit more.

SPY ran to 140.56 HOD (at the moment), so the range is nearly 10 S&P handles, and the ATR trailer is140.36. Playing 1 strike in the money calls, I could have bought SPY 139s at 1.34, with a stop at about 1.17, and my trailer now would be at 1.64 (almost 2:1 reward to risk). An exit over 1.70 when SPY stalled out on its up move would have been pretty easy to get... half out there and half trailer. That is basically the optimal way to play this strategy without being entirely mechanical about it. But of course since they have mixed things up, I did not catch this one quite right... thankfully it was still slightly green.
post #11 of 14
Thread Starter 
This 5 minute buy signal has been working a little better in the last week, after being rendered much less useful during the 1350-1390 range for most of April... in a tighter range over a period of weeks, this tends to fire too many signals, many of which backfire... one key is getting the engulfing buy bar on price when there is evidence of exhaustion by sellers. Those two conditions go well together.
post #12 of 14
Thread Starter 
Here is another screen shot, of today's SPY 5 min through 3 PM. It's a choppy day, and as such the 5 min buy sell signals are tough to use without taking too much heat/realized risk. However, it is worth noting how the green dots (ATR Trailing Stop) have held all day long. It looks like market may flush to new lows, which would take out the trailing stop, but so far it's been great. You can use reversals off the vicinity of the ATR Trailing Stop as entries on choppy days, to get slightly better range on trades, and just observe the 4-5 touches it made today. It is interesting to see how this can work. Also, with price far above the VWAP (magenta curve) you can use a reversion play, and as you can see as price got above VWAP, several big red sell bars fired off quickly. Just one more snapshot to help you explore this method, if so inclined.

316
post #13 of 14

Hi rando,

 

 

       can you tell which software you used for explain this.... how can i download that?

post #14 of 14
Quote:
Originally Posted by Jeeva View Post

Hi rando,

 

 

       can you tell which software you used for explain this.... how can i download that?

 

It's part of the the thinkorswim platform by TD Ameritrade.  The particular indicator he's using is call ATRTrailingStop.

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