Horizontal Data

How do we use horizontal data to trade the markets?

The following quotes reflect the different time frames available to trade.
"The trend is your friend, be patient." - an old adage.
"Identify the trading bracket, in your time frame and trade it. Buy low, sell high." - an old SPI trader.
"Get a feel, buy or sell it, doesn't matter which, look for 4-6 ticks and stop at 2 tick loss." - an infamous 10 year bond trader.

To use the work I do effectively, I think we have to identify what type of trader we are, which is largely determined by the time frame we are comfortable trading. Some people use my report to provide a framework, a background to their own trading style. Other people use it reinforce their own analysis. Some people just use the support and resistance levels, buying off support and selling off resistance. Of course if a support level is broken, it then becomes resistance and the converse with resistance.
Longer-term traders tend to be trend followers, even within a broad trading bracket. They tend to hold positions for days, even weeks. They trade in the direction of the longer-term trend. They usually are represented by the commercial contingent, who trade in large licks but not often. Therefore the volume is small for a large mark up. They trade a little for a lot. They are most active at the high or low side of the trading bracket and often act as the catalyst to price breaking free from a trading bracket. They rarely trade at the extremes of a trading bracket. That is the domain of the local trader.
Short-term traders tend to be more rotational, bracket traders. They trade a lot and are therefore large volume traders, but they hold their positions for a relatively short period of time. This could be for a few seconds, minutes or as long as overnight. They trade a lot for a little, taking lots of small profits and lots of, hopefully, smaller losses. Most of us, being speculators, fit into the later category and only occasionally the former. Very few can trade in both time frames. System traders often fit the description of a longer-term trader, the other time frame trader.
So short term traders, who are often referred to as day traders, scalpers, locals, are the ones who are prepared to take on some of the risk, for a short period of time, that the larger commercials are trying to off load. The longer-term trader is more likely prepared to give away a little in terms of price, to the speculator in order for him to transact in large clips. This creates opportunities for the short-term trader, presenting advantages through price aberrations that often don't last very long.
Trading brackets exist in all time frames and the parameters are determined by recent market activity. These trading brackets, once identified and the earlier the better, allow us to trade the rotation from low to high and then from high to low. The trading brackets are basically the range of the first standard deviation about the point of control, the range in which most trades have occurred within the latest distribution. Therefore there will always be tails, outliers, representing price exploration that has met with the opposite activity. If a tail doesn't exist, it actually tells us more, in that it will be created at some stage.
Trading brackets exist for 80-85% of the time the rest of the time the market is making vertical moves. These vertical moves are generally the result of a fundamental change in value of the underlying commodity. This change is most probably conveyed to the market by commercials, who push price or allow price to be pushed, outside the recent value area, just to establish a new value area somewhere else. Unless you are a longer-term trader already exposed in the market, it's very hard to capture these moves and profit from them. On the other hand 85% of the time we can be calmly trading the rotation range, the trading bracket. Admittedly it's not always easy to do this, it means buying at the lower side of the trading bracket when the market looks weak and selling at the high side of the trading bracket when the market looks strong. But 85% of the time you will be right.
Often it's the day traders who are selling at the low side of value, or buying at the high side, they are transacting with commercials on the other side. Being a conservative trader I like to go with short term direction, so rather than selling into a rising market near the high side of the bracket I chose to wait for some horizontal development or look for price to pop higher, then sell the reconnection when price re-enters the trading bracket lower. That way I'm going with the short-term market direction rather than against it. It means that I miss some opportunities from time to time, but I get chopped less. Development is about 4-5 tpo's at one price and that takes a minimum of 2 hours, this is often too long for a short-term trader. We can use this above or below the bracket. If price pops higher, then develops above the bracket I will instigate a long position with stops back below the reconnection point, the high side of the trading bracket. So once again it's a matter of timing and the timing is often a result of the recent market activity and its current state.

The second trade - the exit

In the case of a rotational trader, it's sometimes very hard to wait for the rotation all the way to the other side before taking profit. I'm personally happy to take profits at the point of control. This is always a good target as you have the greatest chance of success. After all it is the point of control because it is the price where most trades have occurred recently. This second trade is the important trade, getting into the market is easy, getting out is not so easy, be it a profitable trade or not. I do recommend using stops, whether you place them or not. By the same token I also recommend placing profitable exit orders, in advance. They can always be reviewed, but don't review the stops unless it is a trailing stop, moving in your favour.

Break out trading

Now I'm not saying breakout trades won't work, they do, just not all the time. Using horizontal data we have a way of measuring how old the distribution is simply by the horizontal count at the point of control. Therefore it provides us with quantifiable degrees of development, it's these changing stages of development that indicate the possibility for a break or continuation of the trading bracket.

I hope this goes a little way to explain my report; I've covered a lot of points here and haven't even really got started. So I will continue this series of discussions, probably on a weekly basis, which will mostly be in response to questions posed by my readers. If you have any questions, points you'd like clarified please contact me.