Introduction on the TS-T-T (update)

The technique outlined below is suitable for discretionary traders. It is based on a fairly complex data analysis which has been translated into a set of proprietary tools. Before describing these tools, we feel it is important to have these first guidelines in mind, gathered along nearly 15 years of experience:

1) Most indicators, either custom made or built in trading platforms, do calculate one or several mathematical outputs at each bar. One may also (correctly) say that prices are noisy, chaotic in nature, which obviously make "market reading" rather difficult. However, in my opinion, the problem is elsewhere... Indeed, most of the time, there is simply nothing to read in the market, not necessarily noise, but just irrelevant useless information. To be quite pragmatic about it, let's say that buying and selling are essentially discrete decision points, the rest is 'vacuity' which should be handled by money management, i.e. keeping an eye on your position.Trading should therefore always inherently remain dependent on an event driven technique. In other words, if you wish to crunch large amount of numbers in any crude or sophisticated way, irrespective of the rare salient events where effective decision making is only sensible, well... you might just be wasting your time... and LOTS of so-called trading gurus are quite willing to take you for a ride along the meanders of the never ending quest of the Holy Grail... (note: LOTS is still a huge understatement...)

2) Any sound decision can only make sense in perspective or context, unless you stick to quick scalping or to the simplest reversal strategy, assuming you get your pivot calculations right too.The best way to represent context is to work in a multi-time frame environment (2, 3 or even 4 time frames). It seems obvious that a move in your time frame of choice, determined by indicators lining up nicely either long or short, can only show strength if supported by a similar set-up in a higher time frame. Choice of adequate time frames may however not always be easy, and one could only hope for a trading platform in the future which would have adaptive bar intervals.For synch purposes, time frames will often be in multiples like 1, 2, 4, 8 minutes. In addition, some will prefer finding confirmation from 2 or more higher time frames. Others may find more suitable to balance their time frame analysis with one higher and one lower time frame. It is likely that using a conservative rule base over 4 time frames can reduce trading ambiguity to next to zero. The trader's risk adverseness is key here as he/she will have to devise a rule set based on indicators confirming each other on different time frames making trading as comfortable as possible.

3) There are always times of congestion, relative market inactivity, which will inevitably affect indicator calculations. One way to reduce such impact on indicator reading is to opt for tick charts or volume charts, or alternative market representations like Renko charts. Congestion on a time frame should indicate going higher or lower. Most traders will try and go to a lower time frame to detect waves or cycles he/she can trade. It is however on the contrary often recommended to go higher, or even better go both higher for context, and lower for trading points.

4)Markets are highly dynamic. Prices are chaotic, non stationary etc... Still, this is no reason to try and throw everything but the kitchen sink into your favorite trading platform. Do not forget to still be able to fully understand the method you are trying to put together... You are the trader... don't ever forget this subtle point. Successful traders always know the finest details in trading calculations. Do not underestimate 2 things however: stats will be in most cases wrong as they do imply stationarity that is just not there. Secondly, many many 'market cycles' gurus will find cycles in a market that cannot produce any stable cycles. One way to put it is that if you look hard enough, and with a bit of faith, you'll always find what you are looking for. It is a common mental process distortion.

5) Markets are chaotic, and contain fractal features. Once you have found a sound technique, it should work the same on another set of time frames, as well as on other financial instruments. This is the 'acid test'. Many models just fit one instrument on a single time frame, and are bound to fail sooner or later. There may of course be some adjustments needed (not more than a few degrees of freedom if possible) to adapt from one instrument to the next, but not more than that.

6) I personally do not use astrology, lunar cycles, solar eruptions etc... I am not going to debate Darwinism, the Big Bang or other esoteric sources either. Some say trading is more art than science too... Scientists like me would rather say there is still some unexplained fuzziness in markets, a LOT of unknown stuff in Nature, and that's much better that way... we, humans are so big headed already... so please stay humble...

These forewords may sound like vague generalities, and there are admittedly many ways to spoil a cat (I love cats to i had to twist that cruel expression a bit), but they can be a crucial time saver to you in the end, and most important may prevent you from wandering around lots of trading costly dead-ends...

Essential Tools

1) A prerequisite to trading in my opinion is some knowledge of Fibonacci numbers, and in that respect, I can for instance recommend reading Jo DiNapoli's books. Most traders calculate Fib retracement and expansion numbers. There is more to it, and I may write about it at some point, although there is already ample literature on the Internet. Be careful though not to be too 'trigger-happy', Fib is still no panacea. It also fails!

2) Another very interesting calculation tool is the Murray Math Lines algorithms. It is still a proprietary algorithm, I believe, but it has however been mimicked and rewritten for most platforms nowadays. We of course have our own. A *FREE* VBA version of the algorithm is freely available on a MS Excel spreadsheet.

3) Adaptive indicators which calculate OK in a multi-time frame environment, such as stochastic indicators. Stochastics have that annoying tendancy to respond to a fairly narrow bandwidth. Try and make them as adaptive as you can, and when they lose efficiency, just jump time frames.

4) Get yourself a good pivot algorithm. It may at first look like just another display method for swing analysis, but there is more under the bonnet... Pivot sequences (in 2 or more time frames) can be used to derive waves, and can be used with advanced artificial intelligence algorithms to detect the next pivot hence patterns with sometimes very high probability. We use a numbering scheme (pivot classification somewhat remotely inspired by Clyde Lee).

ForeTrade - November 2007

MTFS Pulse indicator

Another little goodie in our toolset is the MTFS_Pulse indicator.

It is not often displayed to avoid clutter, but some users may find it interesting. The logic behind it is quite simple. This adaptive StoK indicator is processed through a filter to bring about turning points in the indicator. (It does not use the complex StoK indicator in the DLL, so it is basically a *free* indicator).

How to use it?
The aggressive trader will look at the white or the brown line whereas the more conservative one will follow the slower green line.

Let's have a look at the various events shown on this screenshot:

(1) White line (WL) turning south. Do we go short? Nope! Never trade against the dominant trend given by the Swing indicator.

(2) Green Line (GL) now also turning south. Swing also turned down: one can sell on the first red bar. It is a sure winner as we are also selling on a strong MM resistance level.

(3) WL turning up. Do we buy? Nope! Main direction is still down, but we know we could think of taking profits.

(4) When WL turned north, cashing in on the short would be in order if not done before. When all 3 lines turn up, and Swing also shows a turnaround, it is time to go long.

(5) What do we do here? The conservative trader may want to take profits. After all, we are again on a strong resistance level. Going short? No way! Swing is still up.

(6) This is a typical "return to the trend" pattern (similar to the bell shape pattern in MTFS). If we have exited early, this is a good time to get back into the market.

(7) Do we sell? Do we go short? NO! Swing is still up. Now again the conservative trader may want to take profit on the first weakening signs (red bar)

(8) Time to go short? Absolutely! Here the more agressive trader will be of course rewarded.

One could now stay short or take profits when the WL starts moving up.

Reading the MTFS indicator

The published market snapshots on the other blog do not necessarily express clrealy the way a chart must be read.

In this case, if we take a look at yesterday's snapshot, and focus primarily on MTFS, we can see the MTFS lines on the 60mins hovering around low levels without crossing: it is a sign of a congestion with a lower bias. This figure hardly ever works the other way around as bear and bull patterns do not quite match in a mirror. The market is not 'symmetrical'.

The daily MTFS is even clearer: DOWN! No crossing and a negative gradient indicating a support must be found lower. Yet if one believes a MM and/or Fib level is rock solid or if significance level is not that great, one may be a little less bearish and opt for rather anticipating a congestion or a trading range.

On the weekly chart, which does not look the easiest to read, one can see a very early crossover of MTFS lines indicating also that what ever happens will be at least a little bearish.

Obviously all the other tools will confirm this scenario, but we here see that MTFS is read by its overall shape, its behaviour, and by its lines crossing

Using Entropy to detect turning points (2)

Here is another example of Entropy interpretation, this time in conjunction with other indicators.

As a reminder, Entropy measures how 'orderly' energy accumulates and dissipates. When energy accumulates, it may have to go against current movement until prices start changing directions. One can also see prices reacting like a coil spring stores and releases energy, hence price reaction can sometimes be sudden when compressed. Again, one must be very cautious to pay attention to those discrete times (events) when the indicator really carries information, and simply ignore the rest. There are so many traders trying to read some information when their favourite indicator does not contain any...

Let's have a look at a few events described on the above charts:

Event (1)
Entropy has bottomed and LEntBin is very low and this clearly confirms there is a reversal potential here. Swing is still down but one should prepare for a long after pivot 1.

Event (2)
This is a minor event. Entropy is crossing over 0. It is likely Swing indicator is about to turn up at this time. This confirms an upward potential, yet MTFS is not great yet. One can choose to enter or to wait. Since we are sitting on a strong MM support, one can maybe wait that the support is tested again (as often), but one can also try and enter immediately.

Event (3)
Entropy is peaking momentarily, yet one does not trade against the Swing indicator, so this event is simply ignored.

Event (4)
Swing is firmly engaged upward, MTFS is showing white line separation: if not long yet, it is about time to enter!

Event (5)
Like event (3), this event is ignored, but at the same time, we wee energy dissipating fairly quickly. This up move may not last too long.

Event (6)
Same as (3) and (5), the bull run is probably going to end soon. Let's prepare in case Swing and MTFS turn around...

Event (7)
One should have entered short when Swing has turned firmly south and MTFS lines have now crossed. If not short yet, Entropy crossing below 0 is one more confirmation it is time to enter a short trade.

We then see that Entropy seems to have found a trough, and RUT is close to a strong support again. MTFS is still fairly bearish, but nothing wrong with taking profits...

Using Entropy to detect turning points

Let's have a look at Entropy to detect/confirm turning points. We have 3 interesting different pivot situations here.

On Pivot 1, Entropy reaches a peak. LEntBin below confirms it is a significant peak (Bin = 4). Knowing we have this turnaround on a strong MM resistance level, we can happily go short.

On Pivot 2, we have a trough in Entropy. One could the same way as on Pivot 1 just go long, yet the Entropy bottom is not very 'deep' so one might want to take a chance (and be right this time), but one should generally wait for confirmation on crossover for safety.

Before Pivot 3, we have a peak in Entropy and incidently a weakening of MTFS (white line crossing over), which both preempt the next swing when accumulated energy finally dissipates. In this case, using Entropy peak is way too early, and waiting for crossover is way too late. One must only be prepared, and use the bar colour, the swing, and MM levels to confirm pivot. The MM level here was the well-known stall level ahead of the strong 2250 resistance level.

Retrieving Calculations (API) - Part 2

The Swing indicator is a very central indicator in the toolset. Like most of the indicators, it writes data in the appropriate segment of the DLL to be used either through the API or to be used in EasyLanguage.

For instance, the no-lag smoothed data series is recorded in an array which can be retrieved back from the DLL using:

RetrieveLagPrices (EasyLanguage)
BV_RetrieveLagPrices (VC++)

Same for swings with:

RetrieveSegPrices (EasyLanguage)
BV_RetrieveSegPrices (VC++)

For the time being, the EasyLanguage indicator only save the retrieved data to file, but all sorts of calculations can be done. In Part 1, we have shown how to calculate Fibonacci retracement and expansions.

The EL indicators are obviously not code protected, and are very simple to understand. They identify which is the calling chart using a common symbol identification (symbol + bartype + interval + TF multiplier). A loop is then used to extract prices individually.

Cycle detection

On some occasions, cycle detection which should always be done cautiously for reasons of non-stationarity, seems to be valid at a particular point in time. In this instance, the error level is close to our optimal Lag128 algorithm's error level. We then check dominant cycles (F1 and F2) both in periods and amplitude. F1 seems to have a reasonable amplitude relative to all other frequencies in the spectrum, and F2 can be considered as noise (no amplitude). There is virtually never more than 1 or 2 dominant frequencies in the L-S spectrum.

The usual caveat has been repeated over and over: there is no reason to believe the dominant cycle (period of 72 bars) will last very long. So we will only maybe project it for a short while using a phase advance mechanism, and confirm it with other indicators such as support/resistance levels, entropy, MTFS lines etc.


Answer in about 2 to 3 weeks...