The more I practise the luckier I get

Famous phrase from golf legend Gary Player... I believe it (modestly) applies here too. Indeed while I can add postings from time to time to better explain the technique, Phase 1 of the indicator toolset is quite stable now, and will only warrant very minor updates from time to time. On the to-do list still lies the removal of the last 2 parameters in the MTFS to make the toolset 100% self-adaptive, but that's about it, so no pressure, no rush...

Practise makes perfect.
Yes, there is no documentation except for a document on the ForeTrade website, and the rest is left to users to read and analyse daily market snapshots to better grasp the trading technique.
It may take a short while as it is relatively unconventional, but it quickly becomes very natural. A few beta testers did not quite get it or have not been patient enough. I understand but I certainly regret that. Beta testing for Phase 1 is now closed. I am just pushing the 'release candidate' a bit because of other commitments like the forthcoming release of the Fuzzy Logic library (both generic and for TradeStation).
FL is not quite a distraction, as it will be an essential part of the Phase 2 of the toolset, with better decision making tools up to full trading automation. Its release is still scheduled for later this year.

Happy trading,
bv

Some common visual patterns

The trading technique being presented here uses a proprietary TradeStation toolset, but since it is still a discretionary trading method, why not adding some visual interpretation to it?
Here below is a description of very common patterns to look at, and one reason for posting this document today is that one may find an interesting pattern formation on NDX over the next few days.
PATTERN TYPES:
Wedges:

The wedge formation is also similar to a symmetrical triangle in appearance, in that they have converging trend lines that come together at an apex. However, wedges are distinguished by a noticeable slant, either to the upside or to the downside. (As with triangles, volume should diminish during its formation and increase on its resolve.).
A falling wedge is generally considered bullish and is usually found in up trends. But they can also be found in downtrends as well. The implication however is still generally bullish. This pattern is marked by a series of lower tops and lower bottoms.
A rising wedge is generally considered bearish and is usually found in downtrends. They can be found in up trends too, but would still generally be regarded as bearish. Rising wedges put in a series of higher tops and higher bottoms.

Price Structure Pattern Structure Result
Falling Wedge in Uptrend H, L, LH, LL, LH, LL Breakout to the Upside
Falling Wedge in Downtrend L, H, LL, LH, LL Breakout to the Upside
Rising Wedge in Uptrend H, L, HH, HL, HH Breakout to the Downside
Rising Wedge in Downtrend L, H, HL, HH, HL, HH Breakout to the Downside

Symmetrical Triangles:

Symmetrical triangles can be characterized as areas of indecision. A market pauses and future direction is questioned. Typically, the forces of supply and demand at that moment are considered nearly equal. Attempts to push higher are quickly met by selling, while dips are seen as bargains. Each new lower top and higher bottom becomes more shallow than the last, taking on the shape of a sideways triangle. (It's interesting to note that there is a tendency for volume to diminish during this period.) Eventually, this indecision is met with resolve and usually explodes out of this formation (often on heavy volume.) Research has shown that symmetrical triangles overwhelmingly resolve themselves in the direction of the trend. With this in mind, symmetrical triangles in my opinion, are great patterns to use and should be traded as continuation patterns.

Price Structure Pattern Structure Result
Symmetrical Triangle in Uptrend H, L, LH, LL Breakout to the Upside
Symmetrical Triangle in Downtrend L, H, LL, LH Breakout to the Downside

Ascending Triangles:

The ascending triangle is a variation of the symmetrical triangle. Ascending triangles are generally considered bullish and are most reliable when found in an uptrend. The top part of the triangle appears flat, while the bottom part of the triangle has an upward slant. In ascending triangles, the market becomes overbought and prices are turned back. Buying then re-enters the market and prices soon reach their old highs, where they are once again turned back. Buying then resurfaces, although at a higher level than before. Prices eventually break through the old highs and are propelled even higher as new buying comes in. (As in the case of the symmetrical triangle, the breakout is generally accompanied by a marked increase in volume.)

Price Structure Pattern Structure Result
Ascending Triangle in Uptrend H, L, H, HL Breakout to the Upside

Descending Triangles:


The descending triangle, also a variation of the symmetrical triangle, is generally considered to be bearish and is usually found in downtrends. Unlike the ascending triangle, this time the bottom part of the triangle appears flat. The top part of the triangle has a downward slant. Prices drop to a point where they are oversold. Tentative buying comes in at the lows, and prices perk up. The higher price however attracts more sellers and prices re-test the old lows. Buyers then once again tentatively re-enter the market. The better prices though, once again attract even more selling. Sellers are now in control and push through the old lows of this pattern, while the previous buyers rush to dump their positions. (And like the symmetrical triangle and the ascending triangle, volume tends to diminish during the formation of the pattern with an increase in volume on its resolve.)

Price Structure Pattern Structure Result
Descending Triangle in Uptrend L, H, L, LH Breakout to the Downside

Flags and Pennants:

Flags and pennants can be categorized as continuation patterns. They usually represent only brief pauses in a dynamic market. They are typically seen right after a big, quick move. The market then usually takes off again in the same direction. Research has shown that these patterns are some of the most reliable continuation patterns.
Bullish flags are characterized by lower tops and lower bottoms, with the pattern slanting against the trend. But unlike wedges, their trend lines run parallel.
Bearish flags are comprised of higher tops and higher bottoms. "Bear" flags also have a tendency to slope against the trend. Their trend lines run parallel as well.
Pennants look very much like symmetrical triangles but are typically smaller in size (volatility) and duration.
(Volume generally contracts during the pause with an increase on the breakout.)

Rectangles:

Rectangles should generally be traded as continuation patterns. They are indecision areas that are usually resolved in the direction of the trend. Research has shown that this is true far more often than not. Of course, the trendlines run parallel in a rectangle. Supply and demand seems evenly balanced at the moment. Buyers and sellers also seem equally matched. The same 'highs' are constantly tested as are the same 'lows'. The market vacillates between two clearly set parameters. (While volume doesn't seem to suffer like it does in other patterns, there usually is a lessening of activity within the pattern. But like the others, volume should noticeably increase on the breakout.)

Head and Shoulders:

The head and shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends. It is also most reliable when found in an uptrend as well. Eventually, the market begins to slow down and the forces of supply and demand are generally considered in balance. Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.) Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again. Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline. (Volume has a greater importance in the head and shoulders pattern in comparison to other patterns. Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were. And on the last rallying attempt-the left shoulder-volume is even lighter than on the head, signalling that the buyers may have exhausted themselves.) New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline. (Volume should increase on the breakout.)

Inverted Head and Shoulders:

The head and shoulders pattern can sometimes be inverted. The inverted head and shoulders is typically seen in downtrends. (What's noteworthy about the inverted head and shoulders is the volume aspect. The inverted left shoulder should be accompanied by an increase in volume. The inverted head should be made on lighter volume. The rally from the head however, should show greater volume than the rally from the left shoulder. Ultimately, the inverted right shoulder should register the lightest volume of all. When the market then rallies through the neckline, a big increase in volume should be seen.)

Fuzzy Logic for TradeStation

Some may have seen the "Simple FLC 3" library presented on our main ForeTrade site (http://www.foretrade.com/fuzzy.htm)

The sFLC DLL has now been ported to TradeStation and is ready for beta release (in fact RC status already). Please contact me if you wish to test it before it is released (March 2008)

A shareware version will be available (3 concurrent FL controllers on TS charts), then more FL controllers can be enabled in the DLL per pack of ten costing US$250 each. The DLL like the indicator toolset is linked to the unique TradeStation customer number.

Update

Looking at the post below, we now know in hindsight that SPY dropped further to reach a bottom on Jan 22nd and 23rd... at least for now...

Changing subject, i have decided to postpone the commercial release of the toolset, not so much for technical reasons than because of the lack of support and training resources. I'll have to train a few more users then make sure the knowledge can be passed on etc. Phase 2 beta (signal generator) is still planned for 4th quarter 2008.

For the time being, market snapshots will continue being posted daily on http://marketsnapshot.blogspot.com

Are we close to a bottom on SPY ?

Let's have a look the current SPY chart, and review our indicators.

On the 60mins chart, we have a clear divergence of the MTFS indicator ("failed recovery"), which combined with the clearly down swing and low MTFS significance level did noto fool us at all. However in case some would have taken a long position on the MTFS line crossover, the downturn of the white line looks like a pseudo 'bell shape pattern' which we always use for a 'return to the main trend' trade.

What about Entropy? Entropy is undoubtedly very low, and one may be tempted to look for a reversal point. When Entropy is indeed close to its historic lows (LEntBin = -5), a bottom provides good reversal signals. Having said that, this is only a support indicator. Swing is still down, bars are red, and we do not have a good looking MTFS.

How can MTFS look better if line crossover occured a few days ago? One must not forget that MTFS is also self-adjusting, so it will redraw itself as new events come along. MTFS is essentially used for the pattern shapes (line crossovers, parallel lines, line gradients) and NOT for the end point value like with most conventional indicators.

End of story: the 60mins chart tells you to wait, hang on short or maybe take profits. That's all for now.

The daily chart is the dominant chart here. We now know that there is no entry point from the 60mins chart, but what is the daily chart telling us?

Entropy looks sad, just like on the 60mins chart, and MTFS has tempted a (bearish) crossover. The good thing is that the indicator will adjust to a better looking crossover in oversold territory. At the moment, the line gradients are far too bearish. Then and only then will we look at a Entropy bottoming out. As usual, the picture gets clearer and clearer and we shall probably see prices stall at a Fib/MM target, and the Swing indicator (the earliest of all) attempting to turn up.

Obviously, each trade is to be considered within the context given by the higher time frame, and at this point in time, the weekly chart is also in correction mode (MTFS, Entropy etc).

That's all for now. We know that we must just be patient and wait at least for MM stall level ~128, or more likely right down to 125 (Fib/MM target).

Bears still have some appetite indeed...


NB: I added the SQ indicator (Swing Quality)

Swing Quality

I have added a simple yet interesting indicator called Swing Quality. It is a correlation between swing legs and actual prices. Although visually obvious, it is interesting to notice that swings can sometimes be out of tune for a while, until the indicator adjusts itself again in realtime. SwingQuality can therefore be used to filter those transient situations.

Here above, we have a QQQQ chart with swings and Fibonacci calculated automatically. Swing legs are not always suitable for Fibonacci calculations, and here they clearly are. A Swing Quality above 30 is generally more than good enough. Again, since the algorithm continuously adjusts itself, SQ will very seldom drop to low levels.

As a reminder, Fibonacci expansion levels are displayed from L1 to L5 at the right of the chart. L1 and L5 are seldom used, but L2 (Fib COP), L3 (Fib OP) and L4 (Fib XOP) are quite commonly used. Here QQQQ is sitting on COP. Quite an easy short signal it was, wasn't it...? :)

The Lomb-Scargle cycle detection indicator

Another lesser used indicator in the toolbox is the Lomb-Scargle indicator. There is well-known controversy regarding existence of cycles in markets, and even a good cycle detection algorithm like L-S admittedly has flaws, i.e. does not guarantee any stability in cycles. It is merely a market snapshot over a number of bars, and the algorithm tries its best to determine the underlying frequencies at a point in time. Markets are erratic, markets are chaotic, hence the internal dynamics constantly change.
Having said that, such information can probably be used to the trader's advantage. For instance, one can detect when there is a sudden change in dynamics or on the contrary look for periods of time where cycles are relatively stable.

Here above, one can see that a single frequency emerges from the spectrum. The indicator can plot the top 2 frequencies as higher frequencies are generally detected with ridiculously low amplitudes, i.e. noise... In the picture, the top frequency is represented by yellow dots, with its amplitude plotted as a histogram.

Although I do not use it often, i look forward to reading any feedback you may have with this Lomb indicator.

NB: there are a few variations on the algorithm available on the Internet. This one is the EXACT replica from the MIT PhysioNet laboratory.
http://www.physionet.org/physiotools/software-index.shtml