Disorder Becomes Order

I choose my tick charts for each trading instrument based upon how the chart looks and the amount of open interest on that contract. The greater the open interest on that contract, the greater the number of ticks needed to give my charts the orderly appearance necessary for me to trade them.

For the S&P 500 Futures

Relative disorder at 50 ticks
Appears much more orderly at 150 ticks

In the 50 tick chart, the price movements appear much more erratic, disorganized, and are much more difficult to trade. However, when I change to the 150 tick chart, price movements appear much more orderly, clean, and with fewer doji candles and shorter wicks. When one trading instrument becomes disorderly and erratic on various tick charts and time intervals, I look for another trading instrument. Today, with corn charts looking somewhat erratic and both soybean and wheat prices at lock limit, I have been looking for another trading instrument. The S&P 500 index futures would fit this bill today, based upon the 2nd chart in this posting.

Order In the Charts!

I have found that in general, the higher the time frame one looks at the charts, the more orderly they become. Most charts appear much more orderly on the daily chart than on the 15 minute or 5 minute charts. The higher time frames appear with less market noise and have a more clean appearance. However, most traders don't have the stomach to trade the daily charts because their account sizes are insufficient to weather the storms of market noise that occur.

If I can't find a chart that looks orderly to trade, I look for another instrument to trade. It is a waste of money to attempt to trade charts that don't have an orderly appearance. I may as well go flush my money down the toilet rather than attempt to trade charts that don't show order.

Often, a chart that appears orderly today will not be orderly tomorrow. In fact, even the intra-day charts will show great order during one hour and great disorder in another hour of the same day. Grains tend to appear most orderly for the first and last hours of the day session, and become more erratic in the mid session time periods.

Different Ticks at Different Tocks

At different hours of the day, a different tick value may be necessary to achieve the orderly appearance that I need to trade effectively. For example, during evening trading, I will set my corn charts to a tick value of 30 ticks. During daytime session trading when most of the volume occurs, I will change to a 50 tick value. I also lower my tick values when I trade the 10-year US Treasury futures during evening trading. I will often do the same in trading currency futures.

How Do You Trade This?

This is the 15 minute chart for soybeans today. Needless to say, it would be nearly impossible to trade profitably. Under circumstances like today, only short-term trades can be taken. This is why I trade only using tick charts. Days like we have seen in the past few weeks, in which we repeatedly reach lock limits, put me at somewhat of a disadvantage, so I prefer trading like this.

However, this chart is still valuable to me. Note the very potent resistance to prices moving higher through the upper daily price limit. How many times have prices approached this limit today and been repelled? About seven times!

Also, the Bollinger Bands are relatively flat, so they suggest to me that short-term, swing trading will be the most profitable, and that longer-term trading, even intra-day, will be an exercise in futility. One would have to use extremely wide stops, and accept considerable risk, to trade this market on longer-term charts today.

The underlying fundamentals of soybeans remain strong, so prices should remain well supported, and perhaps continue to move higher, but a balance between buying and selling activity appears to have been restored.

Much of this we owe to the renewed weakness of the US Dollar this week. The chart for the US Dollar Index futures below shows the short-lived rally of the Dollar and the new sell-off over the past few days (left chart - daily, middle - 2 hr, right - 30 minute). The Dollar is once again very close to its all-time lows at 71.400. The price at the time of this posting is 71.910. If the US Dollar Index does not break through the previous low, then a consolidation pattern and range trading may be in the offing for the near-term future. It appears that the Fed's attempts to underpin and support the Dollar have failed.

Grains Mixed

Soybean and corn prices remain lock limit down, and probably will continue to remain in this condition the rest of the day. With more than 62,000 contracts pending for soybeans, and more than 13,000 contracts pending for corn, there is almost no possibility of these two grains trading again until Sunday evening. If this situation persists, margins will be increased and margin calls will cause even greater volatility in future days, as brokers are forced to liquidate trader positions to cover increased margins.

Wheat, however, continues to provide excellent trading opportunities, even though volume is somewhat thin today. Note the difference between the smooth, clean trading on the tick chart (right) versus the erratic conditions shown on the 3 minute chart (on the left). Both charts represent the same period of time. It is obvious why trading the tick chart is so much easier! During the trading session for wheat today, these trades have take place rather slowly. This makes for good trading conditions, because I don't feel as rushed to make decisions and execute my trades under pressure. What a great day to trade!

Wheat Begins to Sell Off Again!

This is a much more modest sell-off than those of the past few days, and are close to the prior session lows. Wheat prices have now nearly reached price levels approaching the pre-rally prices of last week. The tick chart is shown here, and the daily chart, showing the reversals of this week, is shown below.

And then the Sell-Off Afterward

It would be impossible to trade this with only time interval charts.

Meanwhile, the time interval charts show this:

Off to The Races!

Early in the session, soybeans are volatile. My trades this morning are marked with the arcs connected by dotted lines. Short trades are a necessity, but are very profitable. (You can open the chart in another window or tab to see a larger version.) That first peak reached within one tick of the all-time high price for soybeans. This bull is alive and well!

Imagine trying to trade this on the lower chart, where the 3 minute chart shows on the left. It would be almost impossible! Tick charts are a necessity for me because they count orders flowing through the exchange rather than counting arbitrarily by time. It makes sense to count orders rather than minutes, doesn't it?

Corn, Soybeans in Lockstep

Look at these two charts. Except for the prices, they could have been the same. The similarity in chart structure today is striking -- nearly identical! Corn and soybeans are trading in near lockstep with one another today. After yesterday's meteoric rise, they were both overbought and in need of a correction. This shouldn't be taken as a sign of bearishness. Perhaps the weakness in today's prices is influenced somewhat by the weak economic data today, which often leads speculative traders to liquidate long positions in anticipation of softening demand for commodities during recessionary cycles. The reason is really quite irrelevant; the only thing that matters is that price changes occur. The 3 minute charts shown here are erratic, but the tick charts (not shown) are much better for good trading today.

Soybeans - Much Improved Trading Conditions Today

Note from this chart that while the larger market remains somewhat erratic and indecisive (see 3 min chart on the left), the tick chart (right side and below) shows good movement that can yield strong profits by swing trading back and forth. These are good conditions for day trading. The past two days, I had begun to worry that market conditions and liquidity had been permanently altered that would make daily swing trading difficult.

Markets, charts look erratic today

There appears to be some uncertainty in the market that is leading to a slightly erratic appearance in the charts today. This may represent just a temporary consolidation until buyers or sellers win out. The initial strong buying has dissipated, and a malaise has settled in for the time being.

Note that in this chart (tick chart), the Bollinger Bands have turned flat, so trading is not warranted. These conditions are a good one to lose money for traders. I will wait it out!

Trading dies down - I wait

Note in the blue rectangle that the Bollinger Squeeze indicator has manifested to me that trading volatility has fallen too low to trade. Even the tick chart has become erratic and risky to place new trades. I must now wait until volatility rises again.

I will look for trading opportunities in other financial instruments. Treasuries and gold are the best choices for me. At about 12:00 pm EST, it is typical for trading volumes to taper off and volatility to drop. This is true of grains, but is especially true of gold, since the European business day ends at 12:00 pm EST. This is fully expected, and activity will increase again about 1 hour before close of the session.

Time to take the dog out!

Tick charts a necessity today

If I didn't use tick charts, trading today would be impossible. Tick charts, instead of being oriented toward time intervals, print across the screen based upon the orders coming through the exchange. Imagine trying to trade this chart (3 min chart) without the tick charts shown in my first posting today. Those charts, based upon orders flowing through the system rather than time intervals, were very smooth and clear. This chart, based upon 3 min time intervals, is very erratic and would be almost impossible to trade profitably.

Great Grains! A Tick in Time Saves Money!

Good volatility in grains in the opening minutes of trading today makes for healthy profits for traders. Volatility provides for profitable trading. These are superb conditions for profitable trading! However, it wouldn't be possible for me if I was using only the traditional time-based interval charts. Today's trading helps to make this point very well!

Contract-Based vs. Tick -Based Charts

As I have mentioned in previous postings in this blog, I trade primarily using tick charts, which are drawn by counting orders moving through the exchange system, rather than based upon time intervals, as most traders do.

There is also a third alternative -- volume-based charts. Volume charts don't count orders, but rather, the volume of contracts themselves that are being processed through the system. They tend to have an appearance similar to the tick charts. Volume chart candles are based upon the number of contracts being bought and sold, whereas tick charts count the orders being processed. There is very little difference in these two charts, and if I fine-tuned the volume chart on the left just slightly, the difference might very well disappear and slide into meaningless oblivion.

Time Interval Charts vs. Tick Charts

In my triptych, I use time intervals as well, but my trading is done primarily on tick charts. Perhaps it would be more accurate to say that I use both time interval charts and tick charts. If I was forced to choose one or the other, however, I would choose the tick charts because they are immediately responsive and sensitive to the markets, and instantly respond to subtle changes in market sentiments.

The chart shown at right shows a 3 minute time interval chart on the left, and a 30 tick chart on the right. Clearly, the tick chart shows much greater clarity when the shift in sentiment occurred, and allowed me enter and exit the market with much greater accuracy in my timing, and thus, better execution of my trading strategy.

The tick chart permitted me to place two trades -- one quick short trade at market open (just 2 minutes in length), and a much longer long (and even more profitable) trade a few minutes later -- whereas the time interval chart on the left would have only permitted me to place one long trade. If I had traded using only the 3 minute chart on the left, I might have lost money by going short and holding my position too long, and I would have certainly entered my long trade much too late.

Using the tick chart on the right, I was able to exit my short trade at the bottom of the trough as shown (note that, as usual, the Klinger Volume indicator gave me advance notice of the change), and prepare to go long only seconds later. This change in market sentiment occurred literally within a one-minute time period. This increased my profits and gave me the opportunity to respond to almost instantaneous shifts in market sentiment from bearish to bullish! Only the tick chart permits me to accomplish this!

Soybean sell-off at the end!

There is almost always a reversal in soybeans at the end of the day as traders take their profits. Many people, including me, don't like to carry trades over the weekend. Many others are day-traders, and liquidate all trades before the close of the day's market session. I like to use this as a way to make additional profits. Thus, I usually execute my last trades between 12:00-12:05 MDT (my local time zone in the Salt Lake City vicinity).

Today, the market began its sell-off about 17 minutes before the market close. That's when I made my last trade. This is prime trading time, since market moves at this time are almost always very smooth and uni-directional. These are some of my best and most reliable trades, too. This is also a time when large funds and hedgers must liquidate quickly to take their profits, so small traders like me can use this to our advantage. I take advantage of these opportunities, closing out my last trades only 2-3 minutes before the session ends at 2:15 EDT. The pictured trade was worth almost $200 per contract, and occurred in only 15 minutes. Just look at how clean that trade was!

I might add, however, that I have NOT found that the market open is equally profitable. The market often moves so rapidly and erratically that it is difficult to trade profitably. I usually wait 5-10 minutes into the trading session before placing my first trade. This is not always the case, but is a general rule for me.

Evening trading can also be profitable between 7:30 - 9:30 pm EST. I ONLY trade using tick charts during these hours. Unfortunately, however, spreads also widen; the bid/ask spread is usually 2-3 ticks during these hours, so they can entail higher risk as well.