Breakout Trade
Contents
1. Definitions
CISCO Futures
using
Trader Control Database Visual Graphic
2. Basic Breakout Trading Strategy
3. Sample Overlay Demand Curve(tm), with Reference Points
4. Overlay Demand Curve
5. Check for Alert to trend.
6. Commercial Support/resistance.
7. Interpretation of the data
8. Market Action on May 9, 1996
9. Questions
10. Answers
11. The day of the trade, using reference points from May 9.
12. Legend for Visual Graphic
13. Getting Visual Graphics from the internet
1-303 306 1521 1-800 800 7227 Fax 1-303 306 1572
Internet http//www.cisco-futures.com
Email
1. Definitions
We start with some definitions and then a few guidelines.
Auction Market Analysis Basic Day Trading Rules
1. To be considered, a market must be in a bracket.
100:00 x
Markets can be either
Data base: half-hourly, creating about ten 'mini-days' in each
day.
Periods are labeled: A = 8 to 8:30 AM, B = 8:30
to 9,...
A 'profile' is the sum of one days' trading, with volume identified
at each price, constructed on half-hourly time
frames.
An Overlay Demand Curve (tm) is composed of
a number of profiles,
becoming, in effect, a 'super profile'.
A 'bracket' is a trading range market, defined by a price range
and an Overlay (tm) time period (5 days, 10 days,
etc.).
Price rotates throughout the range, over the
time period.
An 'Octant' is one-eighth of a brackets' price range.
'Value' is the region of 'fair' prices, the area of most trading.
It is at least an octant (1/8 of bracket range)
in extent.
A 'responsive' trade is one based on market offered opportunity,
i.e., when price has moved away from value.
A 'breakout' occurs when price exceeds the limit of its' bracket.
2. Breakouts occur when price moves past the bracket limit.
Stop price is the near octant.
If stop is not hit, then exit on close.
3. A responsive long is triggered when price has entered the
lower octant and then turns up,
crossing through the lower octant.
Target price is the middle of the distribution.
Stop price is the near bracket limit.
If neither target nor stop is hit, then exit
on close.
4. A responsive short is triggered when price has entered the
upper
octant and then turns down, crossing through
the upper octant.
Target price is the middle of the distribution.
Stop price is the near bracket limit.
If neither target nor stop is hit, then exit
on close.
99:31 xx
99:30 xxx <== Upper bracket limit: Breakout point.
99:29 xxxx
99:28 xxxxx <== Octant: One-eighth of bracket range.
99:27 xxxxxx
99:26 xxxxxxx (<== Quadrant: One-quarter of bracket range.)
99:25 xxxxxxxx
99:24 xxxxxxxxx
99:23 xxxxxxxxxx
99:22 xxxxxxxxxxx (<== Middle of distribution.)
99:21 xxxxxxxxxx
99:20 xxxxxxxxx
99:19 xxxxxxxx
99:18 xxxxxxx (<== Quadrant: One-quarter of bracket range.)
99:17 xxxxxx
99:16 xxxxx <== Octant: One-eighth of bracket range.
99:15 xxxx
99:14 xxx <== Lower bracket limit: Breakout point.
99:13 xx Trading below the lower limit alerts to start of down-trend
99:12 x
(1) balanced or bracketing,
(2) testing the bracket for breakout,
(3) trending, or
(4) ending a trend.
These four conditions comprise the market cycle.
A balanced condition is the starting point for understanding the market generated data; i.e. for providing the answer to 'who is doing what, where, and when they are doing it', the reference points. Note that market generated data incorporates any news that drives the market, so you have the effect of the news without the uncertainty of trying to forecast, or second guess reports.
Prior to the open, we prepare for the market by analyzing the information
accrued up through the previous day:
1. Examine the Overlay Demand Curve for reference
points
Bracket limits
Octants
Middle of Overlay (tm)
2. Check the Rotation Index for
Alert-to-breakout.
3. Look for Commercial trader support/resistance
points.
(Commercial traders identified
on CBOT and CME only.)
Visual Graphic, T-Bonds, May 9, 1996
Legend for Visual Graphic is in the Appendix
On the Visual Graphic, just below the 5 day Overlay,
we find the three Overlay reference points: Limits
10801 & 10622; Octants 10728 & 10627;
Middle 10711.
5. Check for Alert to Trend.
Some bracketing markets develop Internal Trends. These may be recognized
by tracking the recent history of the closes. This is measured by the Rotation
Index, RI, which will be zero for a perfect internal trend and 1.0 for perfect
internal rotation. If RI is less than 0.6 a trend is recognized. QD, quadrant
of close tells which price quadrant the close as in, 1 for the upper and
4 for the lower.
In this case IT = n (none). That does not necessarily mean
that there is no chance for breakout; just that this particular reference
point has no information to impart on this day.
Date Upper Lower
Recap of Overlay reference points from May 9:
Middle of value: 10711
Bracket Limit: Upper 10801 Lower 10622
Octants:
Upper 10728 Lower 10627
Alert to trend: None
Comml Cap: Rising
Comml Base Not clear, probably rising
Instructions: Using these reference points, answer the following
questions (answers below).
1. Where would an upside breakout begin? __________
Locate the
protective stop. ______
What effect
would the commercial activity have on your answer?
2. If there was no upside breakout, where would you short? ________
If you (responsive)shorted the market where is
your protective stop? _______
If you (responsive)shorted the market where is
your target? _______
3. Where is price when the probability of either up or down is equal?
_____
4. Where would a downside breakout begin? __________
Locate the stop. ______
What effect would the commercial activity have on your
answer?
5. If there was no downside breakout, where would you go long? ________
If you (responsive) bought the market where is your stop?
_______
If you (responsive) bought the market where is your target?
_______
1. Where would an upside breakout begin? 10802 (1 tick past
Upper Limit)
Locate the stop. 10728 (Upper Octant)
What effect would the commercial activity have on your
answer?
Commercial action’s upward momentum encourages
me to go long.
2. If there was no upside breakout, where would you (responsive)
short? 10727
If you (responsive)shorted the market where is
your stop? 10801
If you (responsive)shorted the market where is
your target? 10711
3. Where is price when the probability of either up or down
is equal? 10711
4. Where would a downside breakout begin? 10621 (1 tick below
Lower Limit)
Locate the stop. 10627
What effect would the commercial activity have
on your answer?
I would be leery of a short.
5. If no downside breakout, where would you (responsive) go
long? 10628
If you (responsive) bought the market where is
your protective stop? 10622
If you (responsive) bought the market where is
your target? 10711
Legend for Visual Graphic is in the Appendix
From the half-hour bars on the r-h side of the VG, the market opened
at 10714, and drove straight up. We entered long at 10802.
A considerable amount of trading occurred right after the open, 21
ticks at 10715, 38 ticks at 10716 and 32 ticks
at 10717 (a tick on the quote machine comes only from a price change).
The stop of 10728, placed on entry, was not touched.
The market moved steadily up to 10902 in I period (12 noon to 12:30).
Then, some ground was given up, closing at 10821. Your gain on this trade,
before slip and commissions, is 19 price ticks ($31.25 each, or $593).
The 14 ticks that the close was down from the high is some $437 that you
might like to capture. Do not think about it! You have a
strategy. Follow it! Losing one's discipline is a fast way
to turn winners into losers.
But, imagine that you have been trading the basic strategy and you notice
that the give-up in this sort of situation is usually pretty large. And your
research tells you that you can recognize the stall point in open-drive days.
Now, you may modify the basic strategy to take account of your observations.
You now have a NEW strategy. First you test it by paper trading.
Once you begin trading the new strategy for real money, your discipline again
must be kept, but now with the new strategy.
The basic trading strategy is very simple. It is designed to ease the
familiarization with trading New Market Analysis. Trading
practice(paper trading!) is a most important part of the Home
Study program. There is time enough later to consider modifications to
the basic model.
1). Go to the CISCO home page http://www.cisco-futures.com
2). Go down to "CISCO Futures Data".
3). Click on "paid-for-or-trial-data".
4). Click on "get summary bracket screen for today".
or "get regular bracket screen for today".
Examine the screen for markets in balance (5
day, 10 day, etc.).
Note: The 5 day balance is required for
a balanced market.
Select your list of trading candidates for this
day.
5). Enter your username (e.g. 499mmm) and password (e.g.
genie).
Select your first commodity from the
"Select One Commodity" box.
Click on "Send".
Click on the "Select delivery" box
for the delivery month.
Click on "Send".
Jot down your trading parameters
in your trading journal.
Print the graphic you have chosen.
You may want to make notes on it.
6). Go back to the page with your log-in information.
Select your next commodity from the "Select
One Commodity" box.
Click on "Send".
Click on the "Select delivery" box for
the delivery month.
Click on "Send".
Jot down your trading parameters in your trading
journal.
Print the graphic you have chosen.
Go through the 6). process for all futures you
selected.
7). When finished, exit.
CISCO Futures
1-303 306 1521 1-800 800 7227 Fax 1-303 306 1572
Internet http//www.cisco-futures.com
Email
dljones@cisco-futures.com
See (IT = alert to trend) on the VG in lower r-h corner.
See on the VG, r-h
side vertical dashed lines under the heading ‘cti2’.
The raw data is from last ten days
5 9 10806 -
5 8 10731 -
5 7 10712 -
5 6 10709 10628
5 1 -
10818
4 30 10924 10827
The Upper commercial action shows a cap on April 30 that signaled
a high mark. From April 30 to May 6 a trend of some 70 plus
ticks moved prices down. Then came a rebound on May 7, 8 and 9 of
30 or so ticks higher (about $1,000). Since the commercials
have been unusually active on rising tops, we would have to put some credence
in the move (they weren't selling because prices kept rising). We would
EXPECT higher prices, assuming the momentum continues.
The first line of the graphic gives the contract and the date of the data.
For example U206 05/19/98 is the June (06) T-bonds (day) (U2) contract
for the trading date May 19th 1998 (05/19/98).
The Visual Graphic is in two parts: UPPER graphics and LOWER tables.
The upper part of the VG consists of 6 graphics with a common price strip on the
extreme left.
From left to right, the 6 graphics are:
(U1) Last 20 day Rotation profile 'Rotprof'
symbols a thru t represent the prices traded during each day
a=20 days ago; k=10 days ago; p=5 days ago; t=current day
this is like a market profile with each period equal to one day
(U2) '20 day Overlay'
the histogram represents the # of TPOS's at each price
dashes enclose a distribution/bracket
RotProf symbols: a = 20 days back, t = latest day
a b c d e f g h i j k l m n o p q r s t
(U3) '10 day Overlay'
the histogram represents the # of TPOS's at each price
dashes enclose a distribution/bracket
RotProf symbols: k = 10 days back, t = latest day
k l m n o p q r s t
(U4) '5 day Overlay'
the histogram represents the # of TPOS's at each price
horizontal dashes pairs enclose a distribution/bracket
RotProf symbols: p = 5 days back, t = latest day
p q r s t
All three Overlay histograms have the same horizontal scale.
Note: (Balance defn: Single distribution, close inside dist.)
A balance starts in some day as a congestion. It grows day-by-day. We
only list 5, 10, 15 and 20 day Overlays on the TCP (5, 10 and 20 on
the VG). Clearly there can be a 6 day balance or a 19 day balance, etc.
A rule: If the latest 6 days are in balance, a 10 day Overlay will
report a balance, ignoring the old four days of the previous
distribution. 15 day Overlays must have at least the latest 11 days
in balance, 20 day Overlays must have at least the latest 16 days
in balance. 5 day Overlays must have 5 days in balance. However,
you can eyeball the 5 day display to find shorter balances.
Using RotProf, you can tell exactly how many days are in balance.
(U5) Last 10 day Commercial Analysis 'cti2' for CBOT and CME only
high-low dashed vertical line bars cover the last 10 days
latest day is on right
* indicates commercial action at high and/or low
the single horizontal dashes on the vertical bars are the closes
(U6) 30 minute high-low bars for latest day '30m bars'
last period on right
(U7) Also, between the Rotation Profile and the 20 day Overlay:
Current day close 'cl'
Commercial action at current day high (if any) 'uc' for CBOT and CME only
Commercial action at current day low (if any) 'lc' for CBOT and CME only
(U8) Trading Units:
Markets are initiated by exchanges to serve a particular 'trade' or
area of commerce. Trading units selected are those in use by that trade.
While many units are decimal fractions, some are not, such as grains
which are traded in pennies and eighths per bushel. A price of 2406 for
corn means 240 and 6/8 cents for a bushel. Other exceptions are the
30 year bond in the Visual Graphic display, which trades in 32nds, 10
year notes and 5 year notes, in 64ths, and 2 year notes in 128ths.
Any questions can be resolved by visiting the exchange's Contract
Specifications.
Example: The 5 day Overlay limits are 12020 to 11930. Range in 32nds
is: 11930 - 11931 - 11200 - 11201 - 11202 ....... 112020 or 23 32nds.
Rounding off to 24 32nds, an octant is 3 32nds.
The LOWER (tabular) PART consists of 5 tables of data.
From left to right, these 5 tables are:
(L1) Below the Rotation Profile:
(L1.1 )'O' is the Open for latest and previous trading day*
(L1.2 )'H' is the High for latest and previous trading day*
(L1.3 )'L' is the Low for latest and previous trading day*
(L1.4 )'C' is the Close for latest and previous trading day*
(L1.5 )'Tf' is the Trade Facilitation Factor for latest and previous trading day*
Smaller TF implies better trade.
(L1.6 )'Vo' is the Price Tick Volatility for latest and previous trading day*
Very Low Volatility implies lack of interest
Very High Volatility implies overheating
(L1.7 )'Sf' is the Shape Factor for latest and previous trading day*
Smaller is better.
(L1.8 )'HL' for the two front months, gives the % of the current close from the 60 day low
also gives the days (in last 10 days) when new highs ('NH') or new lows ('NL')were established
* is a separator
e.g. 81* NH 3 4 means there was a new 60 day high established 3 (and 4 days) back
and close today is 81% of 60 day range (from 60 day low)
(L1.9 )'Tv' is the Total Contract Volume for latest and previous trading day*
(L1.10)'Cv' is the Commercial Contract Volume for latest and previous trading day*
(L1.11)'Pv' is the Public Contract Volume for latest and previous trading day*
(L1.12)'CUL' is the Commercial Action and Type for latest/previous trading day
First is the action at the current days high for each measure
Separating the high and low actions is a ':'
Second is the action at the current days low for each measure
Separating the current day from the previous day is a '/'
Third is the action at the previous days high for each measure
Separating the high and low actions is a ':'
Fourth is the action at the previous days low for each measure
Types: Q=quadrant measure, A=value-area measure, V=volume/price measure
For example: Q--:-A-/QAV:--- means:
Q-- commercial activity at latest days high with Q measure
: seperates activity at high from low
-A- commercial activity at latest days low with A measure
/ separates current from previous day
QAV commercial activity at previous days high with QAV measures
: seperates activity at high from low
--- NO commercial activity at previous day low
The Commercial, Public and Total Contract Volume and the Commercial Action
analysis is derived from the Liquidity Data Bank which is released
by the CBOT and CME exchanges only. It is same day cleared trading volume
and excludes spreads.
(L2) Below the 20 day Overlay is bracket/distribution info for this Overlay
(L3) " " 10 day
(L4) " " 5 day
If the Overlay IS bracketing:
'U ' is the upper limit
'UO' is the upper octant price; the number to the right is the $ gain for
a responsive short going from the octant to the center M
'UQ' is the upper quadrant price; the number to the right is the $ gain for
a responsive short going from the quadrant to the center M
'M ' is the bracket center
'LQ' is the lower quadrant price; the number to the right is the $ gain for
a responsive long going from the qudrant to the center M
'LO' is the lower octant price; the number to the right is the $ gain for
a responsive long going from the octant to the center M
'L ' is the lower limit
Below the U-UO-UQ-M-LQ-LO-L lines are the responsive trade gains (again) and
the $ risk of the responsive trades. The risk/reward ratio is 1 to 3
for the octant. The $ risk on the responsive trade is the same as the
$ risk for a breakout trade (octant is the stop).
Below is the $ gain and $ loss for the quadrant (The risk/reward ratio is 1 to 1.)
If the Overlay does NOT show bracketing:
The number of distributions is listed ('distr'; max 4 shown), with:
The Upper ('U') and Lower ('L') Prices for each distribution
(L5) Below the commercial analysis vertical dashed (if any) and 30 minute solid bars
(L5.1 )'VA U' is the Value Area high price for current and previous day*
(L5.2 )'VA C' is the Value Area center price for current and previous day (POC)*
(L5.3 )'VA L' is the Value Area low price for current and previous day*
(L5.4 )'VA R' is the Value Area range for current and previous day*
(L5.5 )'TPOT' is the # of TPO's total for current and previous day*
(L5.6 )'TPOA' is the # of TPO's above maximum TPO line for current/previous day*
(L5.7 )'TPOB' is the # of TPO's below maximum TPO line for current/previous day*
In a totally balanced market TPOA will equal TPOB
The TPO counts in a perfectly balanced market would be symmetrical, a perfect
bell shaped curve. There would be as many TPOs above the center as below.
If the market is just coming into balance the symmetry will not yet be there.
So long as the market stays in balance you would expect the TPO counts to
approach symmetry. If TPOA is greater than TPOB you would expect more trading
in the lower region to add TPOs.
For non-balanced markets, the TPO counts add little information.
(L5.8 )'Att Dir' is the attempted direction for current and previous day*
The possible values are: n for none, U for Up or D for Down. A rule of thumb for
Att Dir, after the close, measures F% (the close - POC distance) as a fraction of the day's
range. If F% is 20% or more above POC Att Dir = U, 20% below POC and Att Dir = D.
(L5.9 )'IB' is the high and low price of the Initial Balance for current day
The Initial Balance is the first two 30 minute trading periods
(L5.10)'IBR%C' is for the current trading day. It consists of:
'IBR' is the Initial Balance range
'%' is the Initial Balance range as a % of total range
'C' is Location of close relative to Initial Balance: ABV, BLO, INS
ABV when the close is above the Initial Balance
BLO when the close is below the Initial Balance
INS when the close is inside the Initial Balance
(L5.11)'RiQc' is todays Rotation Index/Quadrant of Close using last 4 and 8 days
For example: 0.67/1 .7/4 means Rotation Index for last 4 days is .67
Quadrant of Close for last 4 days is 1
Rotation Index for last 8 days is .7
Quadrant of Close for last 8 days is 4
(L5.12)'VADir' is the Value Area Direction for current day vs the previous day
The possible values are H, A, Z, L or n
'H '= higher
'A' = overlapping higher
'Z' = overlapping lower
'L' = lower
'n' = none (inside or outside)
Preferred direction is up if close above Overlay midpoint, down if below.
(L5.13)'ITDir' is the Internal Trend Direction based on RiQC for last 4 & 8 days.
The possible values are n for none, U for Up or D for Down
This is not in the text version of the TCP data- only on Visual Graphic
* The previous day data value is to the right of the '/'