This was a maintenance release containing minor enhancements and fixes. Check the change log for details.
Today we’ve updated the entire Acme 8 suite for the general release of NinjaTrader 126.96.36.199, and we couldn’t be more proud.
Get NT8 here.
NinjaTrader released RC2 last week and we tested and updated the entire product catalog for it… it’s going swimmingly so far.
There’s also a new addition to the Acme line up, the Acme Trade Plan for NT8. It’s a better, stronger and faster take on the hugely popular Trade Plan for NT7.
Lordy… we here at the Ranch are completely drenched in sweat and every crevice is choked with dust. We finally corralled the big first wave of Acme 8 products, and just in time for the weekend too. Have a look at the Products menu above and see what’s in there. We’re gonna go have a beer and a shower, not necessarily in that order, and not necessarily together. Just sayin’.
Got another refreshed market study ready for all y’all, fresh out of the number cruncher.
Nerd alert number 2 for the week… and fresh off the data press.
Been a long time since I was able to blog much. But in the words of Jack Nicholson from The Shining, I’m baaaack!
For the last past few weeks on Twitter I’ve been posting a lot about the #powderkeg trade. I’ve tried to explain what it is, why it works, when its most likely to work. But tweets aren’t always the best way to get a series of points across, and I’ve had a ton of questions about it. It’s not practical or possible to explain it each time someone asks about it, so I thought I’d walk through the finer points here.
First, let me go though what it is NOT (in no particular order):
- The best trade ever. This isn’t a home-run type of trade. If you define it “right” it has small risk and generally good reward. By “good” I mean somewhere between 1 unit of risk for 2-3 units of reward. It’s a solid base hitter, though every now and then it cracks one out of the park.
- One pattern to rule them all. This trade works best on non-trending days or later in the day when any drives from the opening of the session have exhausted their fuel.
That said, it has a lot of good things going for it (again, in no particular order):
- It requires minimal tools, though as you’ll see I use a volume profile. VPs will help tremendously in defining the boundaries and quality of the setup. But truth be told this can be done without a profile.
- It requires minimal preparation.
- It requires no directional bias (it’ll be better if you suspend all bias, in fact). So in some ways, it’s the ultimate anti-revenge-trading tool (I’ll post about revenge trading another time).
- No need to catch a falling knife or catch the top tick.
- Works on pretty much any kind of short duration bar, ones that take 2-5 minutes on average to complete is best. The more bars there are the easier this pattern will be to identify. That said, many Renko bars will work against you here, they are designed to filter out exactly the kind of “chop” we’re after.
- It’s the same pattern every time (but the quality – the ease with which its recognized – and outcome varies, of course).
Why it Works
Markets ultimately have one purpose:
The theory behind this trade is simple. It works because it’s catching the end of a short-time-frame auction cycle… i.e. balance. Once a market achieves balance (supply/demand equilibrium, fair prices, etc.) on any time frame, its purpose has been fulfilled and it must start the cycle over again (see above). More about balance and other profiling concepts here. We want to be ready and waiting when it starts this cycle anew.
What to Look For
- Find an area where price stalls, preferably away from a recent area of balance.
- We want price to have left and returned to this “stall” (balance) area at least once on each side.
Now that we have the basic elements down let’s talk about a few characteristics which sweeten the quality of the setup:
- The more times price exits and reenters the balance area the more powerful the break. At least one excursion-and-return on each side is needed to validate the setup.
- The session VPOC’s included inside the balance area. Even better is when the VPOC’s in another location, you identify a new balance area, and before the balance breaks the VPOC moves into your forming balance area. This means volume’s being expended in this area and (probably) that stop loss orders are accumulating on either side of this balance area. These stops will serve to accelerate the move once it finally breaks the balance area.
Defining the Risk and Reward
There are multiple ways to do this, but ultimately your risk will be just over or under the center of your balance area. Preferably the highest-volume price in your balance area. Ideally it’s the session VPOC (point of control). You’ll want to define your reward at at least 100% of the size of your balance area. If for whatever reason it seems implausible that your target will be achieved, forget the setup and move on.
Example: if your balance area is 10 points across, your ideal 1st target will be 10 points on either side of the boundary of the balance area. Since you’re defining your risk as mas o menos the center of balance, if you enter at a break of the balance area that puts your risk:reward at ~1:2, assuming you only trade one contract or lot. It gets more a little more complex (but with a more favorable ratio) if you trade multiple lots or contracts because you can scale out along the way, booking profits and reducing your risk, while still having ammunition to take down further moves.
Once the reward zones are defined, I like to use a trend line to split the balance area in half. There are many ways to split it in half, but I find this helps keep me focused and in the flow. Use whatever works for you.
I use a bottom or a top trend line depending on which way I think the keg will blow. It really doesn’t matter whether you draw the trend sloping bottom left to bottom right or vice versa as long as it splits the middle of the balance area. If price breaks back through the trend line, no matter which way you draw it, you’ll want to get ready to try in that direction. In this case, based on price action, order flow and internals I think this balance is most likely to break to the upside. So that’s how I draw it.
Now that our risk and reward is defined, how to you know when to get in? What you’re looking for is an impulsive directional bar. You HAVE to be paying attention here. This means any bar that starts to move unusually fast in a direction, compared to other bars nearby. Remember, you’re in a balance area, which is generally slow, lazy “chop.” So a bar that starts to hustle should grab your attention. Ideally, you’ll have your entry order(s) ready to go and all you have to do is place it and let price trade through and thereby assure a good fill. If you can’t get filled on your entry it’s probably because you hesitated and chose a bad price. The best prices are always ones that you can actually get filled. The best way to assure a fill is to make sure your order is one that gets traded through while price is on its way somewhere else.
This “trade-through” strategy is my preference, is entry option A pictured below, and will give the best risk and reward. A more conservative entry is to let the impulsive move happen and then wait for a back-test of the balance area to hold. This is option B. You still have to act decisively, or you’ll blow your R:R. Be quick or be dead, as I say. So shoot to kill.
One of two things will happen at this point, and neither are in your control. First, price will move toward your target and you get ready to book your profits, or price comes back at you and enters your stop zone (see above). If it does it’s OK. It happens. Look at the risk here… if you got long at the impulse through 4400 and your sell stop was at 4396, your target was around 4415… that was a 1:4 trade. You can afford to try again or flip the other direction even twice and still profit on the trade. But you have to honor your stop.
OK, so, how’d this one turn out? As you can see below, the impulsive bar I thought would be the magic one was a head fake. But that’s OK, because our stop was never touched again. Price re-entered the balance area, giving it even more power, and a few minutes later it launched out in our direction all the way to and past the previous day’s high. If you have enough units to scale out along the way, the max favorable excursion (MFE) would have been about 25 points, while the max adverse excursion (MAE) was just 9 ticks.
Today gave more than its usual share of #powerkeg opportunities. Generally, there’s one or two a day. But today, thy cup overruneth,… so to speak.
Hope this was helpful, amigos. Until next time, trade ’em well…
I’ve just published a new data-focused market study on a bunch of futures contracts. Curious? You know you are.
Time’s in really short supply lately, just too many major projects in full swing. So I’m giving myself the summer off from long form market blogging. But I’m on Twitter (click the “t” button up in the top right corner) every day doing my thing… so… you know…
Trade ’em well and watch this space as summer winds down.
Given the what’s been happening in the US equities markets the last couple weeks I felt it only fitting to honor this week’s post with one of the best worst songs from one of the best worst bands in one of the best worst genres of rock and roll – “Same Old Situation” by Motley Crue. And also they are on their farewell tour this summer. So listen in while you read. If nothing else it’ll put a smile on your face with its ridiculous but nostalgic excess. The same could be said of the state of the markets right now, no?
Here we go…
S & P 500
Well, we got it. Yes, it. The elusive, exclusive initiative buying we needed to push back through the critical 2105-2107 area in the ES that’s been so difficult to break lately. Friday marked the 6th (count em’) attempt above this zone since the 3rd week in April. Of course, the question of the hour is whether it’s different this time. So… is it? What’s changed?
Let’s have a look and see what this week’s COT report says about how the important reportable categories are positioned. In the ES we see the Asset Manager/Institutional category is long 1,229,592 (change -43K) contracts and short 516,499 (change -22K) contracts with both sides decreasing exposure from 1 week ago. Levered funds are 422,587 (change -25K) long to 770,747 (change +38K) contracts short, while the “other” category exposure remains net short by more that 2:1.
Interestingly, the asset manager category increased long exposure last week in the big contract by more than 3.5K big S & P contracts while the levered and other categories remain net short the big contract.
So what the takeaway?
I’m thinking here’s really a couple of plausible explanations. First is that there is just plain disagreement between the biggest money and the aggressive money over market direction. If you lay the common narrative over the numbers, the aggressive money thinks the market is over-valued and is trying to get in position for a top. The other plausible explanation is that the increase in short exposure is actually hedging activity for long equity exposure and there is actually a belief new surge of money about come rushing into the market, tsunami style.
To be frank I find the former scenario the most plausible given how the story has unfolded over the last few months. In my view the range-bound sloshing of recent months is most credibly seen as participants disagreeing over the intermediate term market direction and battling to take control of it. But that’s not to say the latter scenario lacks all credibility. I think it does, but of course I have no visibility into what money is lurking on the sidelines and how much is there. But one thing I do know is that now that Q1 earnings season is over, and with interest rates remaining crazy low, there will be buybacks. Starting soon. This self-generated demand is kind of like a snake eating its tail in my view, but it is what it is. I have to account for its potential effects on the market writ large.
So… let’s start with the extremely solid channel built by the ES starting overnight on Thursday:
But when we start looking at the RTH only trading, we can see this march up was not without it’s structural flaws.
Since we’re focusing on the coming week let’s start with that monster gap up on Friday. Given the RTH volume on Friday (over 1M contracts) it would seem that someone was trying to send a message. There was a massive run of stops overnight Thursday all the way to 2107 and the bids just kept on coming. All day Friday there was selling into this move up, and this can be clearly seen in the order flow, the top bulge of the profile and in just in how compact the up-move was considering the volume.
Given this, my overall plan for the week is to watch for the same-old-same-old or for a significant character change in the tone of the market. Evidence of this change will be seen in a buying appetite for prices over the 2105-07 area. Such a change in tone would represent that buyers are now seeing value in large caps, where they haven’t recently, even so close to the all time highs. This is incredibly bullish, at least in the short term. On the other hand, you’d be crazy in my view not to expect a clean trend up free of the same range-bound sloshing.
So… first and foremost this week I’m going to be on the lookout first for a more of the same in the form of the kinds of repair shown below. In my plan that would call for at around a 50% retracement of the late week up-march from about 2060 to 2115 should we push back through that all-important 2105 area shown below.
This half-back area, sitting from about 2090-2083, would be where I’d expect assertive buyers to be found on any push lower. If they liked it above 2105, the same buyers should be ass-over-tea-kettle in love with it at 2085.
If, on the other hand, this push up on Friday was a successful attempt at gaining decisive control of the market direction, I’ll not only be targeting the 2120 area but looking at the area around 2128 and even 2147. I suspect a close above 2120 puts the fear of God in the leveraged shorts (position summarized above) and we may even see some sort of capitulation. With short positioning this high, it could lead to a rampant orgy of new highs.
But let’s not get too excited just yet. As I said, I think there would have to be a significant change in character in the market for this to happen… and I’m pretty sure I’ll know it when I see it.
Beyond this… who knows. I’ll be taking it one day at a time.
Not covering my other markets this week, folks, other projects beckon for time and attention. Trade ’em well this week, amigos…
News from the Back 40
We’re here, doing what we do, on all regular US market days unless otherwise noted.
Monday-Friday: 6am – 2pm Pacific