Linkon7"s complicated trading system...!

[linkon7]

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Objective is to recreate this system, step by step, logic by logic.

There are plenty of intraday traders in traderji who have no clue on how to trade. They expect a simple arrow based system that decides everything for them and all they have to do is punch the orders and dream of making big bucks overnight. Its never been that simple and it definitely never will be in the near future.

All systems try to objectively define the randomness of market and works in phases. A pure trend following system gets jacked on sideways day. A contra system gets jacked on a directional day. I have made many attempts to combine the 2 phases of the market and this model is the best i could come up with till date. Unfortunately it wont be easy to follow unless the logic behind the system is crystal clear.

This system incorporates :
1. Guppy MMA.
2. Accelerator Band of Headley.
3. Ichimuku core concept.
4. Camarilla Pivots.
5. Divergence on 5 oscillator, (RSI, MACD, HIstogram, Stochastic and CCI).
6. Boilinger Band.
7. Boilinger worm.

Bringing all these concept and putting them under one context and correlating them took me a long long time. So i dont expect this to be very simple for many traders to follow unless the root concept is clear. Assumptions behind taking a trade needs to be clear so that when the assumptions is proven wrong, one needs to get out.

All trades has an equal chance of hitting stoploss and objective is to identify a high probability low risk setup using all the tools at my disposal.

 

[linkon7]

Lets start with the basics.

Fact is our eyes see what it wants to see on the chart and more often gut feeling is proven wrong by the market. Chasing price has never worked and most of the time, market tends to reverse immediately after entry. Sometimes, sl gets taken and then moves in the desired direction. Market movement appears chaotic and most new traders cant make sense of the direction.

Focus is always on discipline. Every trader feels that if he follows his system with discipline, then he is bound to end in profit. End result is normally a systematic way of loosing money as Bias is the key. If our bias is aligned with the market, then a bad entry will get a decent exit. If we fight the market, then a good entry will hit stoploss every time we place a trade.

First thing we have to objectively define is the bias of the market.

I classify Market bias as

1. Running market.
2. Momentum market within a range.
3. Sideways with long bias.
4. Sideways with Short bias.
5. Sideways with no bias.

 

[linkon7]

To objectify the bias of the market, I use cam levels and accelerator band.

Mind set : Why cam levels... ?

Lets look at why cam levels work.

Say a stock made a high of 200, a low of 100 and finally closed at 150. Bulls were ready to buy it even at 200, bears were willing to sell it as low as 100 and the fight between them ended bang in the middle, 150.The battle between the bulls vrs the bears is evenly matched for the next day.

conventional pivot will tell you that the pivot (high + low + close divided by 3) is at 150. Above 150 we can buy as bulls are in charge and below 150 bears will take over the match. Next day if the stock opens between 155-160, we can go long since most indicators will give us a buy signal, but the probability of success is 55-60%. However if the bears take charge and bring it to 145-140 region, most of our stop loss gets triggered, we might switch direction and decide to go short. probability of success still remains at 55-60%. stocks always has a tendency to revert back to the mean (point of control-POC-value area). Any trade initiated around this area has a far higher chance of a whipsaw and hitting stoploss both ways.

Cams help us by avoiding trades in this region. The levels generated for our example are :
H4 : 205 --> break out in the up side, go long wt SL at H3
H3 : 178 --> Strongest resistance, Go short wt SL at H4
L3 : 123 --> Strongest support, Go long wt SL at L4
L4 : 95 --> Breakdown, Go short wt SL at L3

Trades are initiated only if price comes between the H3 and H4 level or between the L3 and L4 level. H3 is treated as strong resistance and short trade at this level has a 78% probability of success.

We reverse at H4 or L4. At 205 or 95, balance between bulls and the bears is totally one sided with one group with good profit and willing to add more, while the other group is at a loss and is looking to book losses adding to the pressure.

Cam levels can be played by themselves but we will use these levels on the back drop to aid our decision making process.

 

[linkon7]

Headley's Accl band is a trading envelope. The nice thing about this price envelope is that it lets price break out of the band and stay outside as long as there is acceleration in price movement. It doesnt expand rapidly like bolinger band to encompass the price bars when there is a sudden rise in volatility.

We can use this band to get a acceptable trading range of the market upto 2 std deviation.

When we have a running market and we are looking for a retracement to buy the dips or sell the rally, then this band will act as our short term reference point.

The band is our assumed trading range and its location with reference to the cam levels is our primary directional bias.

Boilinger band is a volatility indicator that measures standard deviation of price from the moving average. Accl band measure the acceleration of price from same moving average. The 2 bands combined together give us a good measure of the momentum in the market.

Columbus introduced me to biolinger worm and when combined with my other 2 band, the combo is deadly accurate on a sideways market.

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[linkon7]

Multi TF analysis, ichimuku style


Uptrend is defined as a series of higher high and higher low. Some track visual pivots to define this uptrend but this cannot be objectively defined as a pause in direction will throw multiple pivots and whack the mechanical system into a tail spin.


Cloud constructions :

1. chart under analysis.

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2. plot the highest high (green) and the lowest low (red) of the last 15 bars and the mid point of this 2 line is plotted as yellow line. This yellow line is the center of the 30 min tf bar. Every time a new 2 min bar is formed, a new high / low data is included. If this new bar makes a new high than its last 15 bars, then the yellow line shifts higher. If it forms a new low compared to its last 15 bars, then the yellow line shifts lower.

Every time, a new bar is formed, the last bar of the series of 15 bars is discarded. If the last bar was the lowest low among the 15 bars, then the yellow bar shifts higher as the lowest low of the 15 bars series got a higher low. This is irrespective of the fact that the new bar that is added need not be a new high / low bar.

Overall progress of the midpoint of the 30 min bar can be observed on 2 min time frame interval.

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3. we now plot the 60 bar highest high (green) and lowest low (red) and plot the midpoint as white line. This white line is the midpoint of 2 hour time frame bar and shift of this while line will only occur when
a new high is made which is higher than the last 60 bars or
a new low is made which is lower than the the last 60 bars or
oldest bar that is being discarded was the lowest low of the last 60 bars or
oldest bar that is being discarded was the highest high of the last 60 bars

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4. Now plotting the yellow and white bar as a cloud gives us the backbone of our trend following part of our system.

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When the market is in an up trend then shorting the market will only ensure heart burn. No matter how good the signal we will try to avoid shorting the market as long as cloud is green and thick. We will look to buy the dips and short will be permitted only below the white line. We might miss a few good trades, but its always better to align with the larger trend of the market. This will ensure that a bad entry will have a good chance of gaining a decent exit.

 

[linkon7]

Guppy MMA

Guppy uses 2 sets of moving average to distinguish between the traders (shorter EMA) and Investors (larger EMA). There has been enough discussions on guppy and I have nothing new to add.

I use Guppy MMA to just color the bars and to identify the trend cycle. Here i just use the shorter EMA only namely 3,5 and 8 ema of the close.

when the 3 set of ema expand on one direction, it marks the beginning of a cycle and once the expansion turns to contraction, my bars change color to neutral. When the ema reverse and expand on the reverse direction, that completes the cycle.

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We never know if a new cycle will generate a range extension and honestly i dont care. No one can predict the direction of the next tick and we have to accept the randomness.

During trading hours, i want to be crystal clear when i should continue holding my position. As long as the bars have the desired color, i will continue to hold. If the cycle saw a new range extension, then i might be tempted to keep all the profit on the table and wait for the beginning of the next cycle to add some more. I might book partial profit and wait for lower levels to add the same quantity. I might just exit the whole quantity and wait for lower levels to re enter.

Trade management is dependent on the structure of the day and my system should define atleast the partial exit points.

I dont need to plot the ema. Just mark the chart with small triangles to know the cycle and color the bar with information derived from guppy mma.

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[linkon7]

Oscillator Divergence.

This is the most over rated indicator there is. Every trader has atleast once in their life time spent a lot of days trading the divergence of some oscillator. Many believe that just because a new peak was formed with lesser momentum, it is a strong reversal signal.

The location of this signal is far more important than the signal itself. On a running market, there will be plenty of divergence and its at best an exit signal to take away partial profit from the table. Most of the time, such signal stays in profit for few bars before a single bar takes out the stoploss and resumes the tend with fresh gusto.

However, if the divergence occurs in our desired direction then its an excellent entry signal. If the divergence occurs when price is at the band and price is still inside yesterday's range, then we use it as an entry signal.

Divergence is plotted as small / big dots on the chart. A text confirming what divergence has occurred. There is no need to verify if the divergence is valid as divergence will be used primarily as a signal to trade management and nothing more.

 

[linkon7]

Behavior Pattern of the market players

Price is nothing but a transaction between a buyer and a seller who agree on the price but differ on the valuation. Both thinks they are smart and are getting the best value for their deal.

Price movement is a function of supply and demand imbalance. The supply / demand imbalance is created by trader's urgency to transact.

The market is comprised of buyers and sellers all competing through different analysis styles, on different timeframes, with different reasons for wanting to enter or exit. We don‟t know their individual reasons. It‟s the collective sentiment that matters. And price moves with whichever crowd most desperately needs to act.

It comes down to sentiment of the market participants.

As individual traders become increasingly bullish, they add to the bullish sentiment of the collective group of buyers. If enough of them do this, the overall sentiment of the whole market becomes bullish, demand overcomes supply, and price rises.

As individual traders become increasingly bearish, they add to the bearish sentiment of the collective group of sellers. If enough of them do this, the overall sentiment of the whole market becomes bearish, supply overcomes demand, and price falls.

The sum of all the buy or sell decisions forms the collective sentiment of the crowd, which may be bullish or bearish. And this collective sentiment of all market participants, leads to a net bullish or bearish order flow, which moves price.

The most „fundamentally‟ bullish stock will still fall if the sentiment of the crowd is bearish, and they don‟t want to own it.

The most technically perfect breaking of a neckline of a head and shoulder pattern (which is supposedly bearish) will fail to reach its projected target, if the sentiment of the crowd at this point changes to bullish, and they all want to buy this stock.

It’s not about the fundamentals or technicals.

It’s about people… and the decisions they make about market direction.


You need to see when they‟re in pain. You need to see when they‟re feeling greed.

Only then will you be operating in the real market, profiting from the traders who are operating under false assumptions and a lack of understanding of the game.

 

[linkon7]

Two identical scenario

on 20th July

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on 23rd July

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On both the days, price gapped up, traded below open for some time and then broke the LOD and then re entered price range. Difference is the context of the opening price range wrt to CAM levels.

On 20th, price opened below R4 and broke down below the R3 level. The break down is below the white line which represents the last 2 hr's midpoint. Price re entering the opening range (white arrow) is not that strong an indicator to go long. Its more likely that price will not sustain higher levels.

On 23rd, Price opened above the R4 level, the opening price did not sustain. And price traded for some time in a narrow opening range before breaking LOD. When price re enters the opening range (white arrow), it still above the R4 level which signifies a confirmed breakout as those trapped with shorts and those traders who traded the Opening range break down are all trapped and their desperation to act might retest the HOD atleast. Break of the HOD will cause more traders to add to the bulling order flow.

Opening range or the first 3 bars of 1 min TF and the location of the opening range with respect to cam levels determine the opening bias of the market.

 

[linkon7]

reserved for afl...

Need to substitute a lot of functions as some of them need a few dll to work...!

Plus need to incorporate trade management , target and exit into this afl....!