Market Commentary for September 28, 2005: While speaking with floor traders at the CME that traded Eurodollar interest rate futures and also floor traders from the CBOT that traded both ten year notes and thirty year bond futures, it became clear that there were plenty of floor traders in those instruments looking to make the transition to "off floor" traders. Just as has happened in the other futures markets, the majority of the liquidity has moved to electronic trading--so they are no longer "paid" by the markets to provide liquidity. The problem with trading the eurodollar futures and the ten year notes and thirty year bonds off floor is that while they do make nice moves, they often have "dead periods," where the market stalls or "flat lines." So fifteen minute bar charts are generally filled with quite a few small range, directionless trading bars followed by a few large range trend bars [which generally comes after news in the morning] and then the market turns back to small rather directionless trading ranges. This lack of consistent movement means that traditional time-based bars are "skewed" by the dead periods. You can identify turning points, but if you use time based bars, tools like Median Lines are generally not as useful in these markets, because the dead periods cause price to "drift to the right" of any Median Line you might draw, even though price hasn't done a thing! So what can you do to trade these markets, using Median Lines?
I borrowed a technique from a long-time MedianLine forum member, ramon: Tick based bars. Tick bars are formed when you track the electronic traded markets and form each bar by telling the charting package you are using to use XXX number of ticks per bar, instead of a set time frame. So in the example I am showing today, I'll be using 352 tick bars, which means that the charting package will count from 1 to 352 as it draws a bar. It will show the high and low of those 352 ticks in the one bar and then when the 352nd tick hits, the next tick will start a new bar. It's important to note that these charts are much more useful now that the majority of the volume comes in the electronic markets, because in the electronic markets, each actual trade is recorded as a "tick," while in the pit traded markets, prices are sampled or "polled" and you only get a regularly timed representation that has been recorded on a machine by the "pit committee" in each of these markets. Polled prices are much less exact than seeing every price that trades being recorded as a tick. If you have further questions, I hope you'll ask on the forum--This is a great technique for these markets! Now let's look at the pre-opening chart with the dominant pitchforks I posted on the seminar web site before the opening: |
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| On the chart above, you can see that before the market opens at 7:20 am, it's not clear where price will break out of its current trading range. But if you look at the chart carefully, you can see that shortly after the open, price should be working its way towards what will be an area of confluence. Will I be interested in buying or selling at that area of confluence? I honestly won't know until the market gets to the confluence and then tells me where its likely heading. So I mentally mark the upcoming likely area of confluence and hope that price will be "in contact" with that area when the confluence of the up sloping and down sloping lines occur. Let's see what happens: |
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You can see that price broke above the down sloping blue Upper Median Line Parallel *before* price came to the area of confluence. This made me interested in getting long at the area of confluence, because the area of opposing forces[or oppositely sloping lines] is where price should find support now that it has broken above the Upper Median Line Parallel, as well as above the green Median Line.
I calculate that the confluence comes in at 114 19/32, so I work a limit buy order at that price. And note that just below that level, there are double bottoms [at 114 18/32]. I'll hide my stops below those double bottoms, far enough away that the "market noise" won't take me out of the market. In this case, I put my stops 5 ticks below the double bottoms, at 114 13/32.
And my profit target? Although the logical profit target is a move to test the red upsloping Upper Median Line Parallel, I generally find that bonds have one good solid point in them and if I can capture 20 ticks [out of the 32 ticks in one point], I'm doing pretty good. Although I sometimes will try to milk more out of day-only bond trades, especially if most of the trading day has passed, if I see 20 ticks, I grab them and book the profit. If the market lets me in on a test of the confluence area at 114 19/32, my 20 tick profit target would be at 115 7/32 and I'd gladly be out at that price.
Looking at the chart, you can see that price let me in at 114 19/32 and then slowly began to climb higher. This trade ran for a good chunk of the day, and I only found one area that allowed me to hide profit stops: Price left triple bottoms at 114 27/32, so once they formed, I snugged my stops to 3 ticks below them, to 114 24/32.
Once I snugged my stops, price continued to move slowly higher, finally hitting my profit target at 115 7/32, giving me my 20 ticks without much heat in the process. These are the types of bond trades I look for on a regular basis, though it is often more difficult to find areas of confluence in the bonds and notes using tick charts, so I'll then rely on the support or resistance formed by a Median Line or one of its parallels and then use an area of double tops/bottoms along with the particular line as "confluence" to form an entry area. I have now taught a handful of seminars devoted to trading bonds with this methodology and the traders that have taken the seminar and are regularly watching tick based charts and trading with this methodology are generally seeing three quality trade set ups like this a week, and then a handful of smaller moves that are tradable as well.
I hope this was an interesting example, with a different twist [tick based bars] that will give you all more to look at and think about. And I wish you all good trading!
Tim Morge
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