System trades – Jan. 19, 2016


ESH6-Jan. 19 2016

Nat’s ‘system trades’ on Tuesday illustrated one of the issues that still needs to solved: how to trade the price around the “control line.”

After the chart is printed, its easy to see that the whipsawing around the “control line” (sort of a sentiment reversal line) was temporary, and the direction for the day was down.

It might even have been possible to reach that decision from the decline in the pre-market, after a big ramp overnight on light volume.

But the whipsaws were pretty substantial, about 10 points above and below the 1885 line, and nobody wants to be stuck in a position swinging through 20 points, especially if you’re trading multiple contracts.

Of course the safest trade was to wait for the price to reach the buy level and enter long. The price reversed at that point almost to the tick, and the bounce was good for about 25 points.

The people monitoring the live trade room did well, because Nat was calling the turns quite accurately. But obviously some kind of filter is to smooth out the entry when the price is moving back and forth across the control line.

Oil futures, Jan. 19, 2016

Oil futures, Jan. 19, 2016

However the best trade Tuesday  was in the oil futures. We’ve been concentrating on the ES because that’s the most popular trade, but the outcomes in the oil futures are equally consistent.

Yesterday the CL missed the Sell line by five cents, then marched right down to the buy level. The whole move was worth about $2000 per contract.

We need to find ways to make these calls more actionable.

Got any ideas? Put them in the comment box below.


Comments here please..



System trades – Jan. 19, 2016 — 8 Comments

  1. Thank you for providing these market insights.
    There are multiple ways to make these calls more actionable. I am sure the live trading room is one of them.
    But you can call these trades and deliver them to
    1- Twitter private feed.
    2- RSS feed such as RSSOwl
    3- SMS or text messages
    4- Combination of all the above.

    Let me know if you need any help.
    A. Muhsin

  2. For days like yesterday, a good idea is not to trade until the completion of the first hour of the NY session. (9.30 to 10.30) On the break of that first hour range, maybe it is safer to assume a bias in the direction of that break. Of course staying out of the market during that 1st hour of trading has its cavits, meaning, if there is not whipsaw then a perfectly and timely entry from Nat’s control line, is missed.
    Then again raises the question, how do you know when whipsaw arrives??. My guess is, you hardly ever know that, you just deal with it.

    • Hi Harris. Thanks for your suggestion.

      The working hypothesis we’ve been looking at is to assume that the price will retrace at the first touch on the control line (from either direction). At the second/third touch, if it substantially penetrates the line — maybe it would be better to be thinking about this as a zone? — it is declaring an intraday trend, with the target the next inflection point.

      If it retraces a a 2nd or 3rd time, the line is holding and the trend forming is in the opposite direction.

      Make sense?

      Still need some kind of filter. 10 points both sides (Tuesday’s trades) is a little too much to be comfortable.

  3. In both of the 1/19 posted trades, price went through the control line, turned to retest it, could not get far, dropped back to gather steam, retested one more time and then fell as expected.
    In the case of oil, price could not get through the resistance that formed right above the control line around 9:10 am. The right shoulder of the whipsaw in ES formed a lower high.
    I could not see enough price action history in the previous day’s posts to see if the same ‘two-retest’ behavior was present when encountering the control line, but perhaps a bounce or two at the control line should be expected and price action at nearby support/resistance areas used to determine the ultimate direction. It may be a good idea to take profits at the control line and re-enter a trade when the price action around the control line sorts itself out and the new direction is apparent.

    • Hi Jo. Nice to hear from you.

      Excellent suggestion, and in practice that’s what we’ve been doing: exiting trades at the control line and watching for opportunities/indications to re-enter. In the live trade room Nat typically makes those calls.

      That price behaviour — a couple of tests at the control line before starting a new intraday trend — seems to be fairly common, and exit-and-re-enter is a pretty good way to deal with it.

      The problem is a little different when we’re considering initiating trades at the control line. As Harris suggests avoiding the back-and-forth around the open misses some good opportunities.

  4. One man’s opinion…

    If you go back in time to “normal” market activity in December, I don’t recall the control line being broken regularly. I think penetration was once a week.

    Right now, the market is “emotional” – not rational – so the correct trades come from “reading the tape” as Nat calls the targets.

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