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Trade Setups using the TTR Action Levels Indicator

By Trading Tools Research

 

What is a Market? For our purposes, a Market is a tool that interested parties use to determine the fair price for an item or commodity over a given time period. That time period could be the next 10 seconds, the next week, or a 6 hour trading day. Now that we have defined the term Market, how do we define “fair price”? For our purposes as Traders, we will define “fair price” as the price at which the most volume occurs during regular trading hours. We can get more flexible with the time period, but for now we will just consider the regular trading session.  That definition of “fair price” is important to us because the best trading opportunities will occur away from the fair price for the day.

The Trading Tools Research Action Levels Indicator calculates the fair price for the regular trading session for the E-mini S&P(ES), the Euro(EURUSD), and for any US traded stock or ETF that trades from 0830CST to 1500CST. Once we have the fair price, we can use the volume traded at price to determine when the odds are in our favor for a winning trade. To that point, have a look at Figure 1.1 below.

Figure 1.1

Notice how the number of contracts traded is listed at each price level. Most DOM(Depth of Market) Trading Platforms can display volume at price in this fashion. The location of the current price level and it’s orientation to fair price are what we need to consider before we can determine what the volume being traded at the current price level is telling us. If the current price level is above the Inflection Point(fair price), then the Buyers are in control. If the current price level is below the Inflection Point, then the Sellers are in control. This information is of vital importance to us. For example, when the Buyers are in control and bidding the Market higher, we are waiting for the point where Sellers, considering price levels too high for the time being, will step in with force and take the price level lower. When we identify this point, this Price Battleground, we want to get short(sell) with a tight stop, and ride the selling wave back down.

How do we identify such a level? To begin with, we have to think about how the Market is moving higher in the first place. Conservative Buyers place limit orders to buy at the bid. Aggressive Buyers hit the asking price. When there is a wave of Aggressive Buyers constantly hitting higher and higher asking prices, price levels will move higher. As price levels move higher, eventually, a price level will be hit that Aggressive Sellers feel is too far away from what they believe is fair price. When that happens, Aggressive Sellers will step in with force, and begin hitting the bids. At that point, the rise in price levels will stop dead, and we will see a volume battle develop. That will be our Price Battleground. How we will know it? Take a look at Figure 1.2 below.

Figure 1.2

Figure 1.2 is from 0834CST on November 28, 2011. This is an ideal trade setup. First, we have the Price Battleground that is shown by the volume activity. A Price Battleground occurs at either a high or low for the day when the volume at the extreme price level is greater than half the volume traded at the next closest price level. See Figure 1.3 below.

Figure 1.3

Notice how the volume traded at 1190.00, 5,135 contracts, is greater than half the volume traded at 1189.75, 4,158 contracts.(8,316/2). Combine that fact with the open above the Inflection Point for the day, 1159.47, and we have a perfect, low risk selling opportunity. In addition, we have further confirmation in that the current price level is right around our Reistance3 Action Level, the dark green line in Figure 1.4, and we have a hanging man followed by a doji on the same chart.

Figure 1.4

When we take a trade such as this one, our stop will be one tick beyond the extreme price level, 1190.25 in this case. If the setup is going to work, 1190.25 WILL NOT be touched.

Images 1.2, 1.3, and 1.4 were all from 0834CST on November 28, 2011. The next two images show what happened prior to 0834CST on that day.

Figure 1.5 – 0831CST – November 28, 2011

Figure 1.6 – 0832CST – November 28, 2011

As we can see, the volume began building from 1189.50 to 1190.00 right from the open until the setup was complete at 0834CST. Figure 1.7 is the screenshot from 0837CST on November 28, 2011. It shows the aftermath of the 0834CST setup.

Figure 1.7 – 0837CST – November 28, 2011

This is only one of many possible setups that can be derived using our Action Level Indicator and volume at price. On our blog, we will be going over several excellent setups in the coming weeks for Futures, Forex, Stocks, and ETF’s. Please feel free to email us if you have any questions. Thank You for your time.

DISCLAIMER

Past performance is not necessarily indicative of future results. The data and graphs above are intended to be mere examples and exhibits of the educational topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

Copyright © 2012 Trading Tools Research

 


Disclaimer

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