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Divergence Trading Workshop Day One presented by Thomas Wood | MicroQuant SM High Probability Continuation and Reversal Patterns.

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Presentation on theme: "Divergence Trading Workshop Day One presented by Thomas Wood | MicroQuant SM High Probability Continuation and Reversal Patterns."— Presentation transcript:

1 Divergence Trading Workshop Day One presented by Thomas Wood | MicroQuant SM High Probability Continuation and Reversal Patterns

2 Risk Disclaimer Trading or investing carries a high level of risk, and is not suitable for all persons. Before deciding to trade or invest you should carefully consider your investment objectives, level of experience, and ability to tolerate risk. This content is subject to change at any time without notice, and is provided for the sole purpose of education and assistance in making independent investment decisions. ValueCharts.com has taken reasonable measures to ensure the accuracy of the information contained herein; however, ValueCharts.com does not guarantee its accuracy and is not liable for any loss or damage which may result directly or indirectly from such content or from an inability to access such information or any delay in or failure of the transmission or the receipt of any instruction or notification in connection therewith. Any past performance results are shown for illustration and example only, are hypothetical and as such have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Past performance is not necessarily indicative of future results.

3 CFTC Rule 4.41 (Hypothetical Disclaimer) U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR- OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED WITHIN THIS SITE, SUPPORT AND TEXTS. OUR COURSE(S), PRODUCTS AND SERVICES SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE USED TO INVEST REAL MONEY. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS SHOULD BE YOUR OWN.

4 Workshop Outline Simple Ways to Improve All of Your Trading Introduction to Indicators Used General Rules for Stop Placement Understanding Divergences Trading “No Returns” Knowing When a Market is Entering Consolidation Trading the “Golf Club” and “High Flying Flag” Identifying Momentum Inflections

5 Simple Ways to Improve Your Trading Success

6 Tips to Improve Trading Success “Most people will not wait for the environment to tip itself off. They will walk into the forest when it is still dark, while I wait until it gets light.” Mark Weinstein Never sell the highest high or buy the lowest low of momentum. Look at trading as a game. Do not focus on the dollar amounts gained or lost, that is just the way to keep track of your “score.” Only take the trades you have the highest amount of confidence in. If you ever find yourself saying “I am not really sure” then skip it and live to trade another day.

7 Tips to Improve Trading Success Watch what the price action tells you when highs/lows or support/resistance is broken. Is it behaving correctly? Think for yourself. Learn your analysis and follow it. Make sure you are willing to change your opinion if you are wrong. Every market has their own personality. Make sure you understand the markets you are trading

8 Tips to Improve Trading Success Make sure you are making more than your risking on your trades! You want a reward risk ratio of a minimum 1.5 to 1 Make sure you are actually exiting for a valid reason. Do not say “Oh I am up $400 I am going to close this out” Why settle for $400 when you could have held for $1500? You CAN go broke by taking profits! (I am guilty of this saying myself)

9 Tips to Improve Trading Success Review your trades and trading strategy EVERY DAY. Write on a piece of paper what you are going to do every day before you start trading. This will help you stick to your trading plan. Write a trading plan. Know when you are having an off day and quit. Don’t try to “dig yourself out” this is a losing proposition. Treat each day as a new day starting from zero.

10 Analyze Three Components of Technical Analysis

11 Questions on Tips to Improve Trading Success?

12 Introduction to Indicators Used

13 Cannot Use White Background =( Specifications of Natural Gas Moves in $10.00 per tick intervals Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1 Crude Oil (Volatility Adjusting) Impacted by Nat Gas Supply announcement every Thursday at 10:30 AM EST Announcement can cause major fluctuations Follows trendlines decently, not 100% though. Important to pay attention to the momentum when approaching a trendline. Can help you understand how it will react. Pit Hours: 9:00 AM EST – 2:30 PM EST Majority of good setups occur 30min-1 hour before pit open. Best Divergences: 240 min 60 min and 30 min Best Candlesticks: 240 min 60 min Trade Entries Based on 100, 250 and 500 tick

14 ValueBars Specifications of Natural Gas Moves in $10.00 per tick intervals Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1 Crude Oil (Volatility Adjusting) Impacted by Nat Gas Supply announcement every Thursday at 10:30 AM EST Announcement can cause major fluctuations Follows trendlines decently, not 100% though. Important to pay attention to the momentum when approaching a trendline. Can help you understand how it will react. Pit Hours: 9:00 AM EST – 2:30 PM EST Majority of good setups occur 30min-1 hour before pit open. Best Divergences: 240 min 60 min and 30 min Best Candlesticks: 240 min 60 min Trade Entries Based on 100, 250 and 500 tick

15 MQ Momentum Specifications of Natural Gas Moves in $10.00 per tick intervals Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1 Crude Oil (Volatility Adjusting) Impacted by Nat Gas Supply announcement every Thursday at 10:30 AM EST Announcement can cause major fluctuations Follows trendlines decently, not 100% though. Important to pay attention to the momentum when approaching a trendline. Can help you understand how it will react. Pit Hours: 9:00 AM EST – 2:30 PM EST Majority of good setups occur 30min-1 hour before pit open. Best Divergences: 240 min 60 min and 30 min Best Candlesticks: 240 min 60 min Trade Entries Based on 100, 250 and 500 tick

16 MACD Specifications of Natural Gas Moves in $10.00 per tick intervals Volatility Adjustment: Trade 2 contracts of Nat Gas for every 1 Crude Oil (Volatility Adjusting) Impacted by Nat Gas Supply announcement every Thursday at 10:30 AM EST Announcement can cause major fluctuations Follows trendlines decently, not 100% though. Important to pay attention to the momentum when approaching a trendline. Can help you understand how it will react. Pit Hours: 9:00 AM EST – 2:30 PM EST Majority of good setups occur 30min-1 hour before pit open. Best Divergences: 240 min 60 min and 30 min Best Candlesticks: 240 min 60 min Trade Entries Based on 100, 250 and 500 tick

17 Questions on the Indicators?

18 General Rules for Stop Placement

19 You want to place your stop far enough away that if it is hit, you know you were wrong. But that if it is hit, your not going to break the bank. Typically I place stops above a high or low. Try to place stops beyond some type of support or resistance. Know when high volatility is expected because this can cause massive slippage on your stops.

20 General Rules for Stop Placement Watch what a market does if your stop is hit. Sometimes very easy to spot a “run on the stops” The market is designed to beat you. Make sure your stops are not getting hit at highs or lows. *Go back and analyze all the times you were stopped out. If you had given it 2-3 more ticks would you have stayed in? Review your trades, learn from your mistakes

21 Questions on General Rules for Stop Placement?

22 Understanding Divergences

23 What is a Divergence? When the price and indicator are no longer correlated (moving with each other) Price continues to equally high/low prices while indicator weakens There can be both bullish and bearish divergences Bullish divergence occurs when prices are equal to, or go lower than, previous price lows while indicator goes higher Bearish divergence occurs when prices are equal to, or go higher than, previous price highs while indicator goes lower

24 Trading Divergences You can trade divergences on both the MQ Momentum and the MACD MQ Momentum will identify smaller divergences as well as large divergences MACD will have less signals, but higher probability (More people watch MACD)

25 Trading Divergences You can trade divergences on both the MQ Momentum and the MACD MQ Momentum will identify smaller divergences as well as large divergences MACD will have less signals, but higher probability (More people watch MACD)

26 Trading Divergences You can trade divergences on both the MQ Momentum and the MACD MQ Momentum will identify smaller divergences as well as large divergences MACD will have less signals, but higher probability (More people watch MACD)

27 Trading Divergences You can trade divergences on both the MQ Momentum and the MACD MQ Momentum will identify smaller divergences as well as large divergences MACD will have less signals, but higher probability (More people watch MACD)

28 Trading Divergences You can trade divergences on both the MQ Momentum and the MACD MQ Momentum will identify smaller divergences as well as large divergences MACD will have less signals, but higher probability (More people watch MACD)

29 Divergence Identification Step 1 Higher High Prices with Lower High Indicator

30 Divergence Identification Step 2

31 Divergence Identification Step 3

32 Entry and Stop Placement Once the divergence has been identified, entry occurs at any of the following: – Equally high/low prices – Broken previous high/low – At Significantly Overvalued – Once Momentum Rolls Over Once Position has been entered, stop is placed at any of the following: – Just beyond previous high/low (5-10 ticks) – Just beyond support/resistance

33 Entry at Equally High Prices Higher High Prices with Lower High Indicator

34 Entry on Broken High/Low Prices Higher High Prices with Lower High Indicator

35 Entry on Significantly Overvalued Higher High Prices with Lower High Indicator

36 Entry After Momentum“Rolls Over”

37 When Do You Know Your Wrong? The best divergences move your direction within 1-2 bars of the interval you are trading. If momentum histogram spikes a significant amount on first up/down bar If momentum continues to climb/decline even if prices are significantly over/undervalued

38 Tips to Improve Success Make sure market reaches into the overvalued/undervalued price points Make sure the histogram AND indicator lines show the divergence Drill down for your entry. – Find a divergence on a smaller timeframe in the same direction of your larger timeframe. This will make your entry more precise. Try trade 2-3 times then quit.

39 Questions on Divergences?

40 No Returns

41 Trading the No Return A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction. Can be both bullish and bearish. Should reverse on same bar, if not, then the second bar at the latest. *Use 5 Bar Analysis Period for ValueCharts/ValueBars

42 Trading the No Return A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction. Can be both bullish and bearish. Should reverse on same bar, if not, then the second bar at the latest.

43 Trading the No Return A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction. Can be both bullish and bearish. Should reverse on same bar, if not, then the second bar at the latest.

44 Trading the No Return A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction. Can be both bullish and bearish. Should reverse on same bar, if not, then the second bar at the latest.

45 Trading the No Return A “No Return” occurs when a market reaches over or undervalued, but momentum histogram stays positive or negative in the opposite direction. Can be both bullish and bearish. Should reverse on same bar, if not, then the second bar at the latest.

46 Questions on No Returns?

47 Understanding When a Market is Entering Consolidation

48 When is Consolidation Occuring? Watch Higher Highs, Higher Lows / Lower Highs, Lower Lows Keep Track of Trendlines Watch for Break of Previous Bars High/Low Watch How Price Reacts to Break of Previous Bars High/Low Stop breaking and closing above previous high/low

49 When is Consolidation Occuring? Watch Higher Highs, Higher Lows / Lower Highs, Lower Lows Keep Track of Trendlines Watch for Break of Previous Bars High/Low Watch How Price Reacts to Break of Previous Bars High/Low

50 What to do with Consolidation? Consolidation is a setup for new trade. Know that intraday market is likely to be choppy Watch for breakout for higher intraday volatility Avoid the “chop” (Markets are harder to trade during consolidation) Mostly Based off daily price charts

51 Questions on When Markets are Entering Consolidation?

52 Trading the Golf Club and High Flying Flag

53 Golf Club and High Flying Flag Golf Club pattern is a bearish continuation pattern Down move, followed by 1-4 higher lows, then a break of previous bars low with strong momentum High Flying Flag is a bullish continuation pattern Up move, followed by 1-4 lower highs, then a break of previous high with strong momentum

54 Golf Club and High Flying Flag Trade is entered on break of previous bars high/low Stop is placed above/below broken bars high/low Should at a minimum see test of previous high/low Market should move in 1-2 bars max. If not, may be wrong on trade Want to see entry bar close in your direction. If not, may want to get out Want to see momentum stay in your direction the entire time

55 How to Trade the “Golf Club” Golf Club pattern is a bearish continuation pattern Down move, followed by 1-4 higher lows, then a break of previous bars low with strong momentum High Flying Flag is a bullish continuation pattern Up move, followed by 1-4 lower highs, then a break of previous high with strong momentum Trade is entered on break of previous bars high/low Stop is placed above/below broken bars high/low Market should at a minimum test the previous high/low

56 How to Trade the “Golf Club” Golf Club pattern is a bearish continuation pattern Down move, followed by 1-4 higher lows, then a break of previous bars low with strong momentum High Flying Flag is a bullish continuation pattern Up move, followed by 1-4 lower highs, then a break of previous high with strong momentum Trade is entered on break of previous bars high/low Stop is placed above/below broken bars high/low Market should at a minimum test the previous high/low

57 How to Trade the “High Flying Flag” Golf Club pattern is a bearish continuation pattern Down move, followed by 1-4 higher lows, then a break of previous bars low with strong momentum High Flying Flag is a bullish continuation pattern Up move, followed by 1-4 lower highs, then a break of previous high with strong momentum Trade is entered on break of previous bars high/low Stop is placed above/below broken bars high/low Market should at a minimum test the previous high/low

58 How to Trade the “High Flying Flag” Golf Club pattern is a bearish continuation pattern Down move, followed by 1-4 higher lows, then a break of previous bars low with strong momentum High Flying Flag is a bullish continuation pattern Up move, followed by 1-4 lower highs, then a break of previous high with strong momentum Trade is entered on break of previous bars high/low Stop is placed above/below broken bars high/low Market should at a minimum test the previous high/low

59 Questions on Trading the Golf Club and High Flying Flag?

60 Trading Momentum Inflections

61 Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are based on momentum indicator, not price action Enter when momentum histogram starts moving your direction again. Stop goes below the lowest low Need to see momentum steadily increase in your direction Momentum does not have to stay green/red

62 Trading Momentum Inflections Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are stretched out a little longer. Enter when momentum histogram starts moving your direction again. Stop goes below the lowest low Need to see momentum steadily increase in your direction

63 Trading Momentum Inflections Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are stretched out a little longer. Enter when momentum histogram starts moving your direction again. Stop goes below the lowest low Need to see momentum steadily increase in your direction

64 Trading Momentum Inflections Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are stretched out a little longer. Enter when momentum histogram starts moving your direction again. Stop goes below the lowest low Need to see momentum steadily increase in your direction

65 Trading Momentum Inflections Momentum Inflections are continuation patterns similar to Golf Clubs and High Flying Flag, except they are stretched out a little longer. Enter when momentum histogram starts moving your direction again. Stop goes below the lowest low Need to see momentum steadily increase in your direction

66 Trading Momentum Inflections Try to time inflections with divergences on a lower timeframe Make sure you are projecting out where a market can go to. I.E. it should move this far if it is going to go Watch price action as well as the momentum, inflection more likely to happen if there are higher highs, higher lows. Etc. Trade in the direction of the trend (Use a trend indicator like MQ Trend or Regression)

67 Questions on Trading Momentum Inflections?

68 Profit Targets

69 Where to Exit? Identify support or resistance levels for profit targets. When a market is close to a trendline/support or resistance, it is often times drawn to that level before reversing Watch for divergences or a signal that suggest a market is topping/bottoming No more higher high/higher low, entering into consolidation, divergence, candlestick reversal, etc. Use a value-target. I.E. Get out at significantly overvalued if your long. Make sure you are using a value target on same timeframe as original setup. Don’t go long on a 240min bar and exit because a 30min bar is overvalued.

70 Where to Exit? Watch how the momentum is moving. If momentum starts to move against you, get out. Watch for announcements. May be a good idea to get out before an announcement comes out. If you cover on a trendline/support resistance line, you can always get right back in if the market breaks that price. This saves your profits if it does reverse. Make sure you are maintaining a high reward to risk ratio I like to see mine >1.5 to 1

71 Putting it All Into Action: Chart Examples

72 Final Q&A

73 $7 One Month Trial of Platinum Membership


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