Chapter 1 – Understanding Markets
·
Auctioning process – connecting buyers and
sellers at a price they both agree
·
Types of buyers
o Responsive
buyer (seller)– a buyer(seller) that enters the market when the price is
below(above) the value
o Initiative
buyer – a buyer that enters the market when the price is at or above the value
·
Trading is a game of repetitions. Traders that
can consistently trade the best repetitions are those that have mastered the
markets.
·
Many novice traders focus on the money too early
in their trading career, which is a mistake. Focus on playing the best setups
at the right times and prudent money management techniques and the money will
follow.
·
Types of market days
o 1.
Trend Day – most aggressive. The market will typically start fast and the
farther the price moves away from the start, the more participants enter.
o 2.
Double-Distribution Trend Day – market open in a quiet manner trading within a
tight range for first 1 or 2 hours, thereby creating an initial balance that is
narrow. The market later breaks from this range and forms another range.
o 3.
Typical Day – wide initial balance established initially, then the market
trades quietly within this initial balance range through the rest of the day.
o 4.
Expanded Typical Day – initial balance range is moderate compared to Typical
day. There is initial directional movement, but susceptible to violation of
range during the day.
o 5.
Trading Range Day – wide initial balance and price oscillates within the
extremes of this range.
o 6.
Sideways Day – price is stagnant and oscillates within a narrow range.
Chapter 2: Engaging the Setup
·
Having clearly defined setups at the ready can
prove to be quite helpful when prospecting entry opportunities.
·
Basics of a candle stick is illustrated.
·
Wick reversal setup
o 1.
the wick should be 2.5 to 3.5x or more than the size of the body
o 2.
For bullish reversal signal, the close of the bar should be within top 35% of
the overall range of the candle
o 3.
For bearish reversal signal, the close of the bar should be within bottom 35%
of the overall range of the candle
·
When a reversal wick forms at the extreme of a
trend, the market is telling you that the trend either has stalled or is on the
verge of a reversal.
·
One method to confirm this type of setup, is
that the close price of the bar following the reversal wick candle should be
lower than the low of the wicking candle. (Bull to bear reversal)
·
Extreme Reversal setup
o This
is a “two-bar”. This is a classic “rubber-band” trade.
o Structure:
§ 1.
1st bar is about 2x larger than the average size of the candles in
the lookback period.
§ 2.
The body of the 1st bar should encompass more than 50% of the bar’s
total range.
§ 3.
2nd body opposes the 1st. if 1st bar is
bullish, the 2nd should be bearish and (vice versa)
o This
pattern usually forms at the beginning of the day, especially in the 1st
30 minutes of the session.
o This
setup shines when it has developed in the direction of an existing trend. When
the market is trending, this pattern can form during the “pull back” phase,
thereby allowing you to enter the trend at a better value.
·
Outside Reversal Setup
o Can
be compared to a trampoline’s bounce
o Hybrid
between an engulfing pattern and the traditional outside day pattern.
o Structure
of this 2-bar setup
§ 1.
2nd bar is engulfing and should be 5-25% larger than the size of
average bar in the lookback period.
§ 2.
Bullish outside reversal: L2 < L1; C2 > H1
§ 3.
Bearish outside reversal: H2 > H1; C2 < L1
o If
you combine the 2 candles of this setup, it will result in wick reversal setup.
·
Doji Reversal Setup
o Pinpoints
indecision in the market, which can highlight profitable reversal
opportunities.
o Structure:
§ 2-candle
setup (1st is a doji candle)
§ 1.
Body size should be 0 to 10% of the total range.
§ 2.
Bullish: H of doji < SMA10; one of 2 bars following the doji should close
above doji high (H1 > Cd or H2 > Cd
§ 3.
Bearish: L of doji > SMA10; one of 2 bars following the doji should close
below doji high (L1 < Cd or L2 < Cd
o For
a signal to appear, three factors must be preset: 1. A doji candle, 2. Trend
confirmation, 3. Close price confirmation.
o Higher
timeframes (15m or 1h) are better in this prediction using this pattern than
lower timeframes like 1m or 5m.
Chapter 3: Introducing the Money Zone
·
Money Zone offers market generated levels that
are based on the time and price relationship.
·
Market Profile
o Structure
§ Price
represented on vertical axis and time represented on horizontal axis
§ Alphabets
are used to categorize segments of time next to price. Called as Time Price
Opportunities (TPOs)
§ 1st
letter represents 1st segment of time, usually the 1st 30
mins of the day. And so forth.
§ Point
of control (POC) – the price where the most trading activity occurred during
the day.
·
It is significant because it represents the
fairest price to both buyers and sellers.
§ Value
Area – where 70% of the trading activity occurred during the day.
·
Money zone
o Point
of control (POC) is same as Value Line (VL)
o Upper
bound is Value Area High (VAH) or Money Zone High (MZH)
o Lower
bound is Value Area Low (VAL) or Money Zone Low (MZL)
·
Developing Point of Control (DPOC)
o Dynamically
updates as new data enters the market, calculating fair value bar by bar
o The
level at which the DPOC closes the current session will become the static POC
for the upcoming day.
·
Developing Value Area (DVA)
o Calculates
where 70% of the day’s trading activity has occurred in real-time, bar by bar.
o This
area will then become static reference-area for the next trading session.
·
Volume at Price (VAP)
o Same
as Market Profile, but based on volume.
o Allows
to assess major points of interest quickly, highlighting potential areas of
support and resistance.
o Volume
Point of Control (VPOC) is the price where the most volume was traded during
prior session.
Chapter 4: Advanced Money Zone Concepts
·
Money Zone is an extremely powerful tool because
the levels are purely based on market-generated information. The levels show
you where the money has changed hands.
·
Opening relation to Value and Range
o Three
opening relationships
§ 1.
In Range and In Value
·
Indicates market sentiment from prior day has
not changed and market is currently in balance
·
Days risk and opportunity are both low, which
leads to a quiet trading session.
·
A Typical Day, Trading Range Day, or Sideways
Day will usually develop from this type of relationship.
§ 2.
In Range and Out of Value
·
Indicates market sentiment has changed slightly
·
Offers more risk and opportunity.
·
A Trend Day, Expanded Typical Day, usually
develop from this type of relationship.
§ 3.
Out of Range and Out of Value
·
The market has opened out of balance, indicating
that market sentiment has clearly changed from prior day.
·
If market does not fall back within the prior
day’s range, the market is likely to accept new value and further range
extension will be seen.
·
A Trend Day or Double-Distribution Trend Day
usually arises from this relationship.
·
Offers the most risk and opportunity.
·
Value Area Relationship
o Understanding
the relationship between current value area and prior value area is extremely
important.
o There
are 7 types of Value Area relationships
|
No. |
Two-Day
Value Area Relationship |
Sentiment |
|
1 |
Higher
Value |
Bullish |
|
2 |
Overlapping
Higher Value |
Moderately
Bullish |
|
3 |
Lower
Value |
Bearish |
|
4 |
Overlapping
Lower Value |
Moderately
Bearish |
|
5 |
Unchanged
Value |
Sideways/Breakout |
|
6 |
Outside
Value |
Sideways |
|
7 |
Inside
Value |
Breakout |
o There
are guidelines and not set in stone.
o 1.
Higher value relationship
§ Current
day’s value area is completely higher than prior day’s value area
§ =
current day’s VAL > previous day VAH
§ Most
bullish
o 2.
Overlapping Higher Value relationship
§ Current
day’s value area is higher than prior day’s value area
§ Current
day VAL < previous day VAH
§ Moderately
bullish
o 3.
Lower Value relationship
§ Current
day’s value area is completely lower than prior day’s value area
§ =
current day’s VAH < previous day VAH
§ Most
bearish
o Actions
to be taken in trending markets (above three scenarios)
|
Entry
options in Bullish Trend |
|
|
Open
above value |
Buy
at VAH and POC |
|
Open
within value |
Buy
at POC and VAL |
|
Open
below value |
Sell
at VAL and POC |
|
Entry options
in Bearish Trend |
|
|
Open
below value |
Sell
at VAL and POC |
|
Open
within value |
Sell
at POC and VAH |
|
Open
above value |
Buy
at VAH and POC |
o 4.
Overlapping Lower Value relationship
§ Current
day’s value area is lower than prior day’s value area
§ Current
day VAH > previous day VAL
§ Moderately
bullish
o 5.
Unchanged Value relationship
§ Current
day’s value area almost same as previous day value area
o 6.
Outside Value relationship
§ Current
day’s value area engulfs the previous day value area
§ Most
likely to see a Trading Range, Typical or Sideways day
o 7.
Inside Value relationship
§ Current
day’s value area is engulfed by previous day value area
§ Most
likely to see a quiet day and low volatility
§ Sometimes,
this relationship can trigger some of the biggest breakouts.
§ Can
be a precursor to big moves in the market
·
Value area width
o Wide
area indicates prior session had a large range. Look to trade within the
extremes of the initial balance. Typical, Trading Range, or Sideways day.
o Narrow
area indicates prior day’s range was small. Prepare for Trend,
Double-distribution, or Sideways
·
Virgin Money Zone Level
o A
Money Zone level that was never touched during its session of origin
o Usually
attract price during a later session, serving as a price magnet.
o The
POC generated by this zone is called Virgin Point of Control (VPC)
·
Volume at Price
o Plots
horizontal histogram of volume at price and is directly overlaid on the price
pane.
o VPOC
– Volume Point of Control – fairest price of the day as seen through eyes of
volume
o HVA
– High Volume Area
o LVA
– Low Volume Area
o There
may be two peaks of HVA and this may be important because the price may tend to
move from one peak to another through LVA valley
·
Unchanged VPOC Relationship
o Occurs
when the volume point of control is virtually the same price for two or more
day in a row.
o Offers
the most explosive breakout opportunity.
·
Virgin Volume Point of Control
o A
VPOC that is not touched during its session of origin.
o Also
called naked VPOC
o Can
attract price at a later date and has more gravitational pull, as the market
will treat them like gaps that must be filled.
o Can
also be used as major reversal points, as long as the levels are tested early
in a session.
Chapter 5: Introducing Floor Pivots
·
Floor Pivots are extremely powerful price-based
support and resistance levels that are calculated using a prior period’s high,
low, and close.
·
Standard Floor Pivots formula
·
Expanded Floor Pivots formula
·
What makes Floor Pivots exceptional is the fact
that they are purely based on price and these are leading indicators unlike the
traditional indicators, which are mostly lagging.
·
Pivot Trend Analysis
o Buy
at support in an uptrend and sell at resistance in a downtrend.
o In
a strongly trending market, the price will strictly be above S1 in a bullish
trend and below R1 in a bearish trend.
o A
severe breach through the 1st layer of pivots may signal a reversal.
Chapter 6: The Central Pivot Range
·
Most powerful part of the Floor Pivots
indicator. It can forecast trending or sideways price behavior.
·
DPR – Developing Pivot Range indicator
dynamically calculates the CPR in real-time.
·
Several examples are shown with charts illustrating
the different strategies based on CPR and DPR
·
Pivot Width Forecasting
o It
is extremely important to understand how the market behaved in the prior
session in order to understand how the market may behave in the upcoming
session.
o Difference
between TC & BC (TC-BC)
o Extremely
tight pivot range in previous session -> often leads to breakout or trending
behavior in the following session.
o Extremely
wide CPR -> often leads to sideways or trading range behavior in the
following session.
o After
a session of nice rally (based on a tight prior-session CPR), the following
session will have a Sideways or Trading Range Day because, the prior-session
rally will result in a wider CPR.
o If
Initial Balance coincides with key pivot levels, you have highly confirmed support
and resistance levels that offer great opportunities for short-term bounces.
o Oftentimes
there can be a nice alternating pattern between days with unusually wide and
narrow CPRs.
·
Pivot Range Trend Analysis
o Playing
the bounces off the central pivot range in the direction of a prevailing trend
is a prudent course of action.
o In
a trending market, pull-back (to the CPR) opportunities occur early in the
session.
·
The Magnet Trade
o The
CPR is the equilibrium and can have an amazing magnetic effect on price that
can lead to a high percentage fill of the morning gap.
o When
the market gaps at the open, the trade inherently has a 63% chance of reaching
the CPR during the day.
o Additional
tips for even more powerful and profitable trade:
§ The
right-size gaps increase the success rate
§ 1.
Gaps that are too large don’t fill as easily as those that are moderate in size
§ 2.
Pivot-range placement should be at, or very near, the prior day’s closing
price. This helps the pivot range to attract price to fill the gap.
§ 3.
If the range is too close to price, it could hinder the market’s ability to
fill the gap.
§ 4.
Play it quickly and don’t wait all-day for the gap to fill. The longer it
takes, the more unlikely it is to fill the gap. “Pigs get fat and hogs get
slaughtered”
§ 5.
The gaps fill in general during the earnings season, which are months following
the end of quarter: Jan, Apr, Jul, & Oct.
Chapter 7: Introducing the Camarilla Equation
·
First discovered by a successful bond trader
Nick Scott in 1989.
·
“camarilla” translates to a group of secret,
private advisors in Spanish
·
Traditionally, the most important levels are L3
and H3.
·
L1, L2, H1 & H2 are typically ignored and
generally not even plotted.
·
L4 & H4 is very important as this is the
last line of support/resistance. Usually breaks through these levels lead to
trending moves in the direction of the break.
·
L5 & H5 generally serves as a target should
a breakout occur through L4 or H4
|
H5 |
Breakout
Target |
|
H4 |
Bullish
Breakout |
|
H3 |
Sell
Reversal |
|
L3 |
Buy
Reversal |
|
L4 |
Bearish
Breakout |
|
L5 |
Breakout
Target |
Chapter 8: Advanced Camarilla Concepts
·
Developing Camarilla Three indicator similar to
developing Money Zone and Pivot Range indicators.
·
Use the 3rd layer of indicator as
width, i.e., L3 to H3.
·
Hidden Layers
o 1st
and 2nd layers of the Camarilla levels
o These
are useful when the prior day trading range is wide and hence the 1st
and 2nd layer of Camarilla is wider in current session.
·
Pivot Trend Analysis - always buy at support
while in an uptrend, and sell at resistance during a downtrend.
·
Many examples of positioning ad L3 and H3 are
shown in the rest of the chapter
Chapter 9: Higher Timeframe Pivot Analysis
·
Same concepts that we saw in the daily timeframe
will also apply to higher timeframes like weeks, months, and yearly. This may
help in capturing big waves.
·
These are useful for swing and position traders
or investors.
·
Example: if the price has trended through a
prior month, which makes the pivot range wide for this current month, more
likely the price will be a range-bound. This may be an opportunity in a daily
timeframe to make quick traded within the range boundaries.
·
The chapter provides ample examples of how to
use monthly/yearly timeframe pivot analysis to trade the shorter timeframe for
swing trades.
Chapter 10: Multiple Pivot Hot Zones
·
The power of confluence
o Confluence
occurs when two or more uncorrelated indicators identify the same level, or
levels, as key areas of interest. Aka Hot Zones.
o Hot
zone can be created by any combination of indicators, pivots, timeframes, so
long as the indicators are not correlated.
·
Double Pivot Hot Zones (DPZ)
o Any
support or resistance levels that develops when two pivots align to highlight a
level as significant. Example, R2 of Floor Pivot coinciding with H4 of
Camarilla Level.
·
The Golden Pivot Zone (GPZ)
o One
of the pivot levels from either the Camarilla Equation or the Money Zone lies
within the CPR (TC >= MZ . CE <= BC
o Any
bullish advance that fails at the GPZ typically leads to a drop toward the next
area of pivot support., which is generally S1 or L3.
o A
sell-off or pull-back to a bullish GPZ, generally leads to an advance back
toward the next area of pivot resistance, which is usually R1 or H3.
·
Multiple Timeframe Hot Zones (MTZ)
o When
levels from multiple timeframe confluence, then it may be a powerful level. This
brings various types of market participants together.
§ Investors
– Yearly Pivots
§ Position
Trader – Monthly Pivots
§ Swing
Trader – Weekly Pivots
§ Day
Trader – Intraday Pivots
o The
key to trading successfully using multiple pivot confirmations lies in the
ability to filter out “noise”. While all
pivots have a certain amount of significance, not all pivots are created equal.
Chapter 11: Planning for Success
·
Not every chart or every day will offer
picture-perfect trading opportunities. Illiquid and irrational markets will not
adhere to the pivots consistently.
·
When a market is not responding to pivots in a
predictable manner, simply exclude that particular market from your watch list.
·
Make it a habit to trade only charts that have a
history of responding to the pivots.
·
Become a master of a few setups, instead of a casual
fan of many. Expanding into new setups after mastering a few is usually a
prudent approach.
Book mentions
·
How I made one Million Dollars Trading
Commodities, 1979 - Larry Williams
·
The Logical Trader – Mark Fisher
·
Candlestick and Pivot Point Trading Triggers,
2007 – John Person
