FuturesTechs Blog

The latest appearance by Clive on CNBC:

Market Profile (c) is a distinct way of charting and analysing price action. It has a very different feel to normal methods of charting, so be prepared to look at markets in a very different way after reading this tutorial! Hopefully you’ll see why there are so many traders who swear by it.

Let’s jump straight in and have a look at one of these creatures:

The above represents a single day’s trading in FTSE futures. It could equally be represented by 30-minute candlesticks like this:

So what’s going on here?

Each letter corresponds to a 30-minute period. “m” is 8:00-8:30, “n” is 8:30-9:00, etc. The m’s are drawn in each price interval where this contract traded during the first half hour of trading, the n’s for the second half hour, etc.

Each letter is called a Time Price Opportunity (TPO). These form the building blocks of Market Profile.

Looking at the FTSE Profile above, we can see that the letters are sat next to each other from left to right, forming a “heap” . Where the price bulges out the most tells us where the price traded in the most time intervals, giving a sense of “value” for the day.

With that said, let’s introduce some more terminology.

Initial Balance Period (IBP): this is the range of the first hour’s trading. In the FTSE, then, it is represented by the price range covered by the m’s and n’s. CQG draws a blue line to the left of the Profile to highlight this, and we’ll put it in bold below:

The IBP is often important, depending on which market you’re trading, since volatility on the open can sometimes bring about a “Comfort Zone” within which people will trade with a sense of safety for the rest of the day. Breaking out of the IBP then, is something that Profile watchers will keep an eye on.

Point of Control (POC): This is the price region with the most TPO’s, i.e. which has been traded during the most time periods. If there is a tie for which price has the most TPO’s then we choose the one closest to the middle of the day’s range.

In the above Profile, we see that 5220 and 5190 both have eight TPO’s. But 5190 is closest to the centre of the range, so it is the Point of Control.

This is a useful price because it tells us quite precisely where the market traded most frequently. Above there could be considered poor value for the day, while below there could be considered good value for the day.

This notion of “value” is expanded with the concept of the Value Area. This is the price range containing 70% of the TPO’s, split evenly around the Point of Control. (The reasoning behind this is that in the “Normal” distribution, around 70% of observations are contained within one standard deviation of the mean.)

This gives us a wider range of value for the day. This range can then be overlaid onto a candle or bar chart; we can use it to provide suggestions for support and resistance levels, or just to see how the market’s perception of value is evolving. Here’s an example:

In the above chart, we have the folowing key:

Green: High of Value Area

Blue: Point of Control

Brown: Low of Value Area

That completes our discussion of Profile construction. Now let’s consider some of the ways to intepret what’s happening (this will involve some extra terminology!)

Initiative and Responsive Price Action: we can classifying buying and selling as “Initiative” or “Responsive” depending on whether it takes place above or below the previous day’s value area.

So if the price is expanding above the previous day’s value area, then we can call that “Initiative” buying. And if those gains are being sold back down, that selling can be described as “responsive”.

Similary, selling down below the previous day’s value area is called “initiative” selling. As you might guess, gains back through those levels would be called “responsive” buying.

Much of the philosophy behind Market Profile is to do with the fact that different types of market participant move the market in different ways. On the one hand, there are “liquidity providers”, the local or proprietary traders, who profit by making small gains on lots of trades every day.  Their purpose is to facilitate the actions of the institutional traders.

The institutions are the ones who, thanks to their size, are truly capable of moving markets. In the context of  commodity futures, these would be the commercial hedgers.

For example, the below chart shows a market which was fairly stable on the first day, and then made a big shift on the second:

Without looking at the volume figures, we could surmise that much of the action in the first day took place with traders and a relatively small number of evenly matched institutions. The second day, though, took us out of that day’s range, with the gains being accepted by the market. That makes it Initiative Buying, and we can surmise that it was institutional demand which created it.

Single Print Tails: time periods with just a single TPO, mostly at the extremes of the Profile.

In the above Profile, we can see that this market had two such tails: for period “D” at 5300, and period “E” at 5440. The price moved into those regions, but the move was rejected. The move back from 5300 is probably “responsive buying”, while the move back from 5440 is probably “responsive selling”.

In the next article on this topic, we’ll categorise different types of trading day according to their Market Profile. There’s lots more to be covered here, so stay tuned!

Graham Neary MSTA (graham@futurestechs.co.uk)

This is a quick summary of important candlestick patterns. It’s presumed that you know the basics of candles: if you don’t, see the article links in our Members Area.

Without further ado, let’s begin.

1. Bullish Marabuzo

Number of candles: 1.

Description: long green candle which opens near its low, and closes near its high.

Implications: BULLISH.

2. Bearish Marabuzo

Number of candles: 1.

Description: long red candle which opens near its high, and closes near its close.

Implications: BEARISH.

3. Doji

Number of candles: 1.

Description: candle which closes near where it opened.

Implications: REVERSAL.

4. Shooting Star

Number of candles: 1.

Description: candle which closes near where it opened, at the bottom of the period’s range.

Implications: BEARISH REVERSAL (in an uptrend).

5. Hammer

Number of candles: 1.

Description: candle which closes near where it opened, at the top of the period’s range.

Implications: BULLISH REVERSAL (in a downtrend).

6. Hanging Man

Number of candles: 1.

Description: candle which closes near where it opened, at the top of the period’s range.

Implications: BEARISH REVERSAL (in an uptrend) (only weak effectiveness)

7. Inverted Hammer

Number of candles: 1.

Description: candle which closes near where it opened, at the bottom of the period’s range.

Implications: BULLISH REVERSAL (in a downtrend) (only weak effectiveness)

8. Bullish Engulfing Pattern

Number of candles: 2.

Description: green candle with a lower open and a higher close than the previous candle.

Implications: BULLISH REVERSAL (in a downtrend)

9. Bearish Engulfing Pattern

Number of candles: 2.

Description: red candle with a higher open and a lower close than the previous candle.

Implications: BEARISH REVERSAL (in an uptrend)

10. Harami

Number of candles: 2.

Description: candle with a real body contained within the range of the prior real body (which must have moved in the direction of the prior trend).

Implications: REVERSAL (only weak effectiveness)

11. Dark Cloud Cover

Number of candles: 2.

Description: red candle with a higher open than the previous candle, but a close in the bottom half of that prior candle.

Implications: BEARISH REVERSAL (in an uptrend)

12. Piercing Pattern

Number of candles: 2.

Description: green candle with a lower open than the previous candle, but a close in the top half of that prior candle.

Implications: BULLISH REVERSAL (in a downtrend)

13. Morning Star

Number of candles: 3.

Description: long red candle followed by a small-bodied candle which gaps lower. The third candle closes in the top half of the first candle.

Implications: BULLISH REVERSAL (in a downtrend)

14. Evening Star

Number of candles: 3.

Description: long green candle followed by a small-bodied candle which gaps higher. The third candle closes in the bottom half of the first candle.

Implications: BEARISH REVERSAL (in a downtrend)

Graham Neary MSTA (graham@futurestechs.co.uk)

WHAT DO WE THINK NOW?

At FuturesTechs we analyse 28 different markets each day and give our trading clients regular up to date analysis on the current thinking and market’s state of mind. We look at Bonds, Forex, Commodities and Equities. At the moment Stock Markets are the most interesting, providing the biggest conundrum for traders and operators.

We believe that Fundamental analysis is flawed (by not taking into account sentimenrt), and that most Economists get it wrong. A far more sensible way to look at the markets is to work out what the trend is, and stick with the trend, then do your best to spot (as early as possible!) any changes in trend.

One thing we’ve learnt over the years is that the market usually tops out when most people are getting bullish, and dashing in to get long, afraid to miss out. In other words when people are getting greedy. This could definitely be applied to Gold at present, and probably also to Equities!

The opposite situation creates bottoms and emerged in March when Equities bottomed out  -

Fear gripped the market and everyone ran for the door. We didn’t. We took a step back, and realised that many in the market had given up, that there were plenty of doomsayers talking the FTSE down to 2500. Our analysts said at the time that the market was nearing a bottom. In fact we said it on CNBC, so if you don’t believe us click below link to have a look.

There is a saying that “Harry Hindsight is the best trader in the world”, and we would suggest that if anyone says “I got long back in March” ask them to prove it!

In recent weeks we have been concerned that this up move is coming to an end, and despite the fact there is usually a “Santa Claus rally” we are still erring on the side of worrying about downside risk. We really haven’t gone very far since September, if you take a step back and look at things.

I used a Warren Buffett line last week in one of our reports and it sums up quite well everything I’ve said above.

“Be fearful when others are greedy and be greedy when others are fearful”.

He’s done quite well out of it!

We follow the trend, but are always looking out for when the market’s psychology gets to an extreme.

Feel free to ask for a Free Trial by clicking the link below. Don’t forget to click below as well to view our comment on CNBC back in March.

Trial FuturesTechs here.

Check out Clive Lambert’s March 4th CNBC appearance here.

Here at FuturesTechs we are constantly evolving our product, and in recent years we have added a merry band of private customers and ‘at home’ traders to our following via our website members area.

One request from a good few of our less experienced members is for a bit more clarity as to our current thinking about short term trend, and preferably something visual. So we have devised the coloured bar that you can see next to our levels on the left. We will release this new innovation on Monday 16th November.

You can see there are three colours on display: Green, Grey and Red.

If we are in the green zone the market is bullish technically. In the grey zone the technical outlook for the markets is neutral or uncertain. In the red zone the technicals are bearish.

These “skews” are short term outlooks. The medium and long term pictures may differ. We have decided that the profile of our average customer is short term, so this is the most useful timeframe for a tool of this type.

So let’s think about how different looking SkewBars should be treated.

To the left is an example of a SkewBar that’s more or less all green, with only a dash of red at the bottom. This means that the market is very bullish, and that you probably want to be buying it! We suggest that you trade “to the long side”, looking to try and buy dips to support levels, or buy breakouts through resistance levels. If you were scanning through each of our reports looking for something that might be worth a buy this is the sort of SkewBar you’d be looking for.

Stops can be placed below any support level, of course, but it’s only when we move out of the Green area that the short term skew changes from bullish.

In this case there is no Neutral Zone, the market flips straight to bearish below 120.98.

In this SkewBar the market is pretty neutral, only turning bearish if we break below bold support at 121.63. The neutral skew stays in place until we get all the way up to 123.04. It is only above here that the bulls regain control of things.

In Neutral markets you should can trade in either direction but don’t hold too much conviction. Many traders like neutral conditions as they can do plenty of lower risk “range” trades, trying to do more trades but take smaller amounts of money each time.

You may want to try and “play the range” by buying at the bottom end of the grey band, selling if and when the market gets near the top.

If we then break out of the range by moving into the red or green zones then things have changed and playing the range is no longer the game in town.

Our last example SkewBar is a bear market, and this doesn’t change unless we get above 123.04. Even above here the market only turns neutral. There is no green portion on our SkewBar at all, which means the bulls don’t even get as look in!

We hope this new innovation is a helpful visual addition to our reports. It has been suggested to us that sometimes the reports can be a little ambiguous, and while we try not to send mixed messages sometimes that’s just what the market conditions are. Hopefully the SkewBars will give a little more clarity.

To all our long term readers we’d like to point out that nothing’s changed with this innovation with respect to how we analyse the markets, we’ve just added a bit of colour, if you like!

As always your feedback would be most welcome. info@futurestechs.co.uk

In this article we’re going to have a look at continuation patterns. These are in contrast to the reversal patterns we’ve already treated in a previous blog post here. My main source is the comprehensive Technical Analysis of the Financial Markets by John J. Murphy (purchase here in association with FuturesTechs).

As the name suggests, continuation patterns imply that the prevailing trend will be maintained, not reversed. They occur as relatively short phases of consolidation or uncertainty within a longer-term trend.

We’ll start by looking at triangles. These come in three varieties: symmetrical, ascending and descending.

The symmetrical triangle occurs in the situation when we can draw trendlines above and below the price action (connecting at least two, and preferably three points for each line). Its forecasting implication depends on the prior trend. Here’s an example during a major rally in Corn in 1996:

The prevailing uptrend ran into a little bit of resistance. We dropped back, proceeded to find some support, and then created a lower high and a higher low. This narrowing consolidation was resolved to the upside with a clean break through the down-sloping trendline, when the uptrend continued strongly. The pattern is complete and the prior trend has resumed.

Next up is the ascending triangle. This is when we have a flat trendline at the top of the pattern, but a rising trendline at the bottom. It shows that demand is getting firmer, causing shorter pull-backs, but with the same resistance level being tested at the top of the pattern. So buyers are gaining in strength sufficiently to produce higher lows, but sellers are failing to do likewise by producing lower highs.

This is psychologically bullish and thus gives the positive forecastings implications for the pattern. We generally see this pattern during bull markets, and expect it to be resolved to the upside. Here’s an ascending triangle for BAY:

Now let’s look at the descending triangle. As you might imagine, we’ve got a descending upper line and a flat lower line with this one, and bearish forecasting implications. We see it in a downtrend, and we expect the trend to be maintained, just as we should have with TWOD:

There are measuring targets with all of these, which are simple to calculate: find the vertical distance between the lines at the first high or low being used for a trendline (this is the length of the base) and project that distance up or down from the breakout point.

Note that none of the forecasting implications described here are cast-iron certainties, merely tendencies. Sometimes, a triangle will turn out to be a reversal and not a continuation pattern. We are only ever dealing in probabilities when we try to forecast using price patterns.

Next, let’s look at the flag. We’ll look at an example which occurred during a downtrend in Natural Gas:

The flag is generally a shorter-term pattern than the ones we’ve already mentioned. It is really just a “blip” within a long-term bull or bear market, when the price briefly trades in the opposite direction to the prevailing trend. In the above bear market, then, we see a series of sessions when the price showed a bit of strength. We get parallel trendlines above and below the price, and the pattern was resolved when we were seen conclusively through one of the lines (this should be the lower line in a bear market, or the upper line in a bull market).

Here’s a flag visible on the 180-minute chart of a bull market in Copper:

Finally, let’s look at the pennant, a closely related pattern.

This could be possibly be described as a “small symmetrical triangle”. Like the flag, it appears as a short period when the prevailing trend loses its vigour. However, instead of seeing highs and lows in an opposite direction to that prevailing trend, we see the range narrow with higher lows and lower highs. Here’s an example in the CAC:

Flags and pennants should occur during a strong up or down move, and these patterns should just be a minor pause in that move. One method of projecting targets is to measure the length of the prior move and to project that far from the breakout point (i.e. assuming that the pattern happened roughly halfway along a bull or bear run).

As far as volume considerations for all of these patterns are concerned, the general principle is that volume goes with the major trends: that means it should initially be at normal levels for bulls or bear markets, calm down as the market consolidates, and than increase again when the pattern is resolved. Within the pattern, we would be encouraged to see the volume relatively larger during the small movements aligned with the major trend.

That rounds up our discussion of continuation patterns. None of them are fool-proof, but they can help to map out short term corrections and sideways movements. For more detail, and for other patterns, I recommend Murphy’s book.

To read our daily technical analysis of the futures markets, please sign up for a free trial.

Graham Neary MSTA (graham@futurestechs.co.uk)

With this article I will introduce Point and Figure charts: how to understand them, and how to recognise some simple patterns. My main source will be Jeremy du Plessis’ The Definitive Guide to Point and Figure, which you might be interested to purchase from the Global Investor Bookshop (in association with FuturesTechs).

Point and Figure is a very old method of charting price action, which originated when traders were simply recording the prices as they saw them happen: 14.50, 14.55, 14.60, 14.55, etc.

This gradually evolved to the point where traders were filling out boxes on a graph corresponding to price levels which the market had crossed, moving to the right each time that the price retraced over an old price level. Eventually, we got the modern Point and Figure chart.

Here’s the most recent NASDAQ chart:

As indicated, the X’s are drawn when the price has increased, while the O’s are drawn whenever the price has decreased.

In the example above the intervals used are just a point wide (the “box sixe”), meaning that we change from X to O (or O to X) and move to the next column whenever the price moves by just a point in the opposite direction to the previous move.

That makes this a very short-term chart, of course. With one-point reversals happening all the time, a couple of hours’ trading will quickly fill up the chart.

The two ways we can make it longer-term are:

• Increase the box size
• increase the reversal size

Increasing the box size should be obvious enough; instead of recording 1-point movements, we’ll record 10-point movements, for example. Here’s the first chart modified in this way:

These boxes stretch back a couple of weeks now, instead of a couple of hours.

Now let’s change the reversal size, the size of the reversal which needs to take place before we change between x’s and o’s and move into the next column. This is measured in terms of boxes, and is set to 3 in the below chart:

The above chart stretches back a couple of days. For a bigger picture view combining both changes, we could require 3-box reversals for 10-point boxes, i.e. requiring 30-points reversals before changing direction on the chart. The below chart represents the price action of a year:

One thing you might have noticed at this point is that we don’t really have a proper time axis. That’s true. While it’s true that time is progressing as we move from left to right on the chart, it’s not doing so on a constant basis. The chart only moves right when we get a sufficiently large change in direction (as defined by our parameters). The chart only changes when the price does. So, instead of being a traditional time vs. price chart, Point and Figure is instead an original way of drawing the price action.

We’re going to look at some patterns now, focusing on charts with 3-box reversal sizes. Any box reversal size can be used, and some care should generally be taken to choose the one that leads to the most favourable chart for the desired timeframe.

That said, we usually don’t like to use 1-box reversals. Charts look very different with 1-box reversals, being of a much shorter timeframe and with very different-looking patterns. Much of the difference is related to the fact that a 1-box reversal chart can have columns with just a single entry of , i.e. when we get two reversals in quick succession.

Check out the Difference between the CAC futures charts below. The top is a 10 x 1 (10 points, 1-box reversal) chart, while the bottom is 10 x 3.

Besides being of a much shorter timeframe in the same space, we can see that the one on the top does indeed have many columns with just a single X or O.

The advantage of sticking with reversal sizes of 2, 3 and more, is that we get to take advantage of the resulting asymmetric filter. The chart is biased to ignore movements in the opposite direction to the prevailing trend that do not satisfy the box size criterion. While a move of, say, 10 points in the prevailing trend will be charted, a move in the other direction won’t be plotted until it reached, say, 30 point.

So let’s have a look at some simple patterns.

The double-top buy is seen when the price reverses off a high, then comes back and breaks through it on the second attempt. It’s an awkward name since the Double Top bearish reversal pattern in mainstream bar/candlestick analysis, but the context is usually clear enough. Here’s an example of it in an uptrend:

Equally, the double-bottom sell occurs when we get the creation of a lower low:

These can be reversal or continuation patterns, depending on the previous trend. As continuation patterns, they tend to be a little more reliable (in accordance with the general principle that trends have a universal tendency to continue!)

In a similar vein to the above, we can have triple-top buy and triple-bottom sell signals. Indeed, we can have any number of tests before the breakout, with all manner of compound patterns.

The first of these buy signals comes after a failed attempt by the bulls to break through the previous highs (indeed, the correction causes a failed reversal triple-bottom sell signal. Our bias is to trade with the prevailing trend, so hopefully we would not have seized on that false signal):

In our next post on this topic, I’ll cover a selection of more advanced patterns and have a look at the price targets we can derive from them.

For now, this has been an introduction to Point and Figure charting. If you have any questions or comments, please don’t hesitate to get in touch. To subscribe to our daily technical analysis of the futures and FX markets, please sign up for a free trial.

Graham Neary MSTA (graham@futurestechs.co.uk)