In this article, I'd like to share a technical indicator I've been developing off and on for the last year or so. I shared a little bit about it in a talk back in January, and thought I'd write an "official" version for those that weren't able to make that event. Below is a chart of the last two days of the ES, with four of the more popular indicators found in Wave59:
In brief, the four indicators are the 9-5 Count, Exhaustion Bars, Ultrasmooth Momentum, and Fractal Trend Index. As readers of these pages know, what you want to look for when trading using these tools is situations where 3-4 of the indicators come together at one point in time. The areas on the chart where this occurred are highlighted with green rectangles. In the first rectangle, we have a red Exhaustion signal, a gold 5 count, and the Fractal Trend topping off. Three out of our four signals are telling us to go short, which constitutes a valid sell signal. This one didn't quite work out, as the market dipped, then rallied quickly to break the last high. The next signal happened at the close of the 18th, with a red 9, red Exhaustion dot, and Fractal peak. It was the same signal, issued right at the close when the Fractal topped out. Had you taken it, you would have had a nice overnight drop and decline into the next signal on the 21st. That signal was a gold 5, blue Exhaustion dot, and bullish divergence signal, which caught the low of the day.
These signals are not anything new, and if you look back through the archives you'll find many trading examples that show you how to make this setup work for you on different markets and time frames. The indicator I'd like to talk about in this article is a combination of these four tools, and is shown below:
Take a look at the top of the chart. That indicator is a combination of the four indicators on the previous chart, and simply tracks how many of them are issuing buy or sell signals at a given point in time. So if we have no signals except an Exhaustion sell dot, that would count as an indicator reading of 1. If we had an Exhaustion dot, plus bearish momentum divergence going the same way, that would be a reading of 2, etc. The dashed lines above and below zero represent a count of 2. Anything above this level is considered to be a bona-fide technical signal, and should be paid attention to. A level of 2 itself is questionable, as it's not quite enough to trade off by itself, but still should not be ignored. You can see that the low on the 21st was accompanied by a strength 3 buy signal.
The purpose of this indicator is a simple one - to make life a bit easier. As reading the tools becomes mechanical after time, it's not a big deal to see whether they are overbought or oversold. The problem is that in the heat of the moment, you can oftentimes see things that aren't really there. A tool like this eliminates a lot of subjectivity, and brings us closer towards having a mechanical entry system as opposed to a discretionary one. I'm personally against pure mechanical systems, but I can see the benefit of mechanizing various portions of a trading plan. For example, I tend to use these tools to confirm or deny forecasts (such as the Natal Forecast, or some of the methods in Market Esoterica). So if I have a projected turn at 10:00 (which I did), then I'll look for the technical tools to line up in my direction to actually trigger me into the trade and deal with the slop that is part of every prediction.
The hard part is teaching the computer to read the tools with any degree of skill. If you are using moving averages, it's not difficult to have the computer watch for a crossover. But if you are looking for relative situations, like the Fractal Trend peaking after being "relatively high", or momentum divergence "near" a 9-5 signal, then things get tricky. This indicator is the result of some work along these lines, and while it's not perfect, it's still good enough for government work. ;-)
This chart is the output over the rest of last week. I've put arrows in where the indicator registered 3 signals in one direction or the other. We had a couple bad signals on the trending day of the 16th, but on the whole the indicator is tracking quite well. If you compare this output to what you'd arrive at by watching the four indicators separately, you'd see that it does a pretty good job of following them according to the rules.
I'm still tinkering, but expect to put out a version of this soon. Since so many Wave59ers use these tools, I thought it would be nice to give a preview of some coming attractions.
All for now. Happy Trading!
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