NinjaTrader #04 - War Stratergies [15thDec2017]

War Strategy: Entry Strategies in Trading

Overview of Today's Session

• The session focuses on "war strategy" or entry strategies in trading, emphasizing the importance of understanding various entry points.

• The speaker mentions previous classes covering concepts like Momentum Traders (MOT) and Volatility Traders (VOT), indicating a progression to more advanced topics.

Introduction to Triangle Breakouts

• The discussion shifts to triangle breakouts, specifically ascending and descending triangles, which are crucial during market index fluctuations.

• The speaker plans to explain how to trade these triangles effectively without delving into their definitions.

Trading Triangle Setups

• A triangle is illustrated as an equilateral shape; the focus will be on bullish setups first, with bearish setups being the reverse.

• When identifying a triangle during an upward trend, traders should set alarms for potential breakout points on both sides of the triangle.

Execution of Trades

• To trade a triangle, place buy orders at breakout points while setting stop-loss orders appropriately based on price movements.

• There is a 70% chance that a breakout will occur in the direction of the prevailing trend when trading triangles.

Managing Stop-Loss Orders

• Once a breakout occurs and triggers an alarm, traders should be prepared to execute trades immediately.

• As prices rise post-breakout, it’s advised to adjust stop-loss levels upwards to secure profits while minimizing risk exposure.

Final Thoughts on Triangle Trading

• Emphasis is placed on moving stop-loss orders as prices increase after breaking out from triangles for better risk management.

Understanding Triangle Patterns in Trading

Analyzing Equilateral Triangles

• The speaker discusses an equilateral triangle pattern, indicating a 70% chance of a breakout to the upside and a 30% chance of breaking down.

• Traders are advised to set alarms at key levels; if the price hits the alarm, they should trail their stop loss slightly below the upper end of the triangle.

• In case of a breakdown, it's crucial to adjust the stop loss to halfway between the breakout point and current price levels.

• The speaker emphasizes that even with a 70% breakout probability, there can be instances where prices drop before reversing back up.

• A reminder is given to keep these figures in mind for effective trading strategies.

Exploring Other Triangle Configurations

• When analyzing different triangle patterns, such as descending triangles, there's often a 50/50 chance for upward or downward movement.

• The importance of setting alarms at both potential breakout points is reiterated; this helps traders react quickly based on market movements.

• Traders should only enter trades above the 50% height level of the triangle for better risk management and entry timing.

• The speaker stresses understanding market dynamics when trading triangles, especially during upward trends where demand may cause temporary pullbacks.

• It’s noted that momentary drops can occur due to high demand zones before prices potentially rise again.

Practical Steps for Trading Triangles

• Once an alarm triggers after a breakout occurs, traders should immediately take action by entering trades at identified levels.

• After entering a trade, it’s essential to move stop losses accordingly to protect against sudden reversals or downturns in price.

• The speaker encourages viewers to revisit previous sections if they feel overwhelmed by information presented about trading triangles.

Trading Strategies and Risk Management

Stop Loss and Trade Execution

• The speaker discusses the importance of moving the stop loss to a strategic position when entering trades, emphasizing trailing stop-loss techniques for better risk management.

• A clear breakdown trade is highlighted as an example of effective trading strategy, with references to one-to-one trades and triangle formations.

Understanding Supply and Demand Zones

• The complexity of trading increases when identifying clean supply zones; the speaker notes that recognizing these zones is crucial for making informed trading decisions.

• A "shaven top" pattern is introduced, indicating a potential supply zone where traders can consider short trades if price returns to this area.

Confirmation in Demand Zones

• The speaker stresses the necessity of confirmation before taking trades in demand zones, contrasting it with more straightforward approaches in supply zones.

• It’s advised not to enter trades without confirmation in demand scenarios, highlighting the need for careful analysis before executing trades.

Trading Psychology and Strategy Considerations

• Even during an uptrend, traders may consider shorting at clear supply zones; however, caution is advised against doing so without proper reasoning or market conditions.

• The speaker warns against impulsive trading strategies in demand zones unless there’s solid confirmation due to inherent risks involved.

Candlestick Patterns and Their Implications

• The discussion shifts towards candlestick patterns like head and shoulders; the speaker advises against trading these patterns without clear confirmations due to their often skewed appearances on charts.

• Double tops and bottoms are also mentioned as risky setups unless confirmed by additional market signals.

Index vs. Individual Stock Trading

Trading Strategies and Candlestick Patterns

Understanding Double Tops and Bottoms

• Investors should avoid trading double tops, as they can lead to confusion without clear confirmation.

• Double bottoms and head-and-shoulders patterns are also discouraged in index trading due to potential confusion.

Supply and Demand Zones

• A clear supply zone allows for short trades with manageable risk; however, caution is advised when approaching demand zones.

• Traders should wait for a "clear confirmation" before creating demand zones or making trades.

Candlestick Setup Insights

• The discussion shifts towards candlestick setups, emphasizing the importance of understanding various patterns like ascending/descending triangles.

• It’s crucial not to trade based on setups until observing the next candle's behavior after a signal.

Trading Hammer Patterns

• When encountering hammer patterns in stocks, traders often take immediate action; however, this approach is risky in index trading.

• Confirmation from the subsequent candle is essential before acting on any triangle formations or hammer signals.

Market Manipulation Awareness

• Indexes can be manipulated frequently, which contradicts common beliefs about their stability.

• Understanding market manipulation is vital for traders to navigate risks effectively.

Exit Velocity Concept

• The term "exit velocity" refers to how quickly a candle moves away from a specific zone in the intended direction after formation.

Understanding Exit Velocity in Trading Candles

Concept of Exit Velocity

• The exit velocity refers to the speed at which a candle moves after a confirmation candle is formed. It indicates the momentum following a specific price action.

• A hammer candle, when confirmed by subsequent movement in the expected direction, signifies potential upward momentum; this is where exit velocity becomes crucial.

• A clear-cut green candle following a hammer indicates strong exit velocity, suggesting rapid price movement upwards after confirmation.

Logical Expectations vs. Market Behavior

• An inverse hammer typically suggests that prices will decline; however, market behavior can defy logic due to manipulation and external factors affecting indices.

• In an index scenario, despite logical expectations from patterns like inverse hammers, actual market movements may not align due to various influences.

Identifying Exit Velocity

• If a red candle forms below an existing one and moves down quickly, it demonstrates high exit velocity. Conversely, if candles linger without significant movement, their exit velocity is considered zero.

• The analogy of fleeing from danger (like spotting a cobra) illustrates how different reactions can indicate varying levels of exit velocity based on context and perception.

High vs. Low Exit Velocity Scenarios

• Gaps up or down in price often correlate with high exit velocities; these scenarios are critical for traders to recognize as they signal strong market movements.

• Understanding whether candles move sideways or exhibit rapid changes helps traders assess the strength of the current trend and make informed decisions.

Practical Application: Hammer and Inverse Hammer Setups

• For trading strategies involving hammers or inverse hammers, waiting for confirmation through subsequent candles showing clear exit velocity is essential before making trades.

• If no significant movement occurs post-candle formation (i.e., sideways motion), it’s advisable not to engage in trading as it may lead to losses.

Introduction to Twin Towers Setup

• The Twin Towers setup involves observing two consecutive candles that indicate potential reversals; understanding this pattern aids in identifying entry points for trades.

Understanding Candlestick Patterns: Twin Towers and Dark Cloud Cover

Twin Towers Explained

• The concept of "Twin Towers" is introduced, where two candlesticks form a pattern over two different days. The first candle is green, followed by a second candle that may also be green or red.

• A scenario is described where the price rises, showing a red LRC (Last Relevant Candle) followed by a green LRC at the top, indicating potential reversal points in market trends.

• Clarification on the difference between Twin Towers and Hammer patterns; Twin Towers occur over two days while Hammers are formed within a single day.

• Emphasis on manipulation in trading; it’s easier to manipulate closing prices than opening prices, which affects how these patterns are interpreted.

• Traders can act on signals from Twin Tower setups without needing confirmation for the next day's trade.

Hammer and Inverse Hammer Patterns

• Discussion about Inverse Hammer patterns and their formation due to market manipulation or external news events. Coincidental formations of candles are deemed unlikely.

• Explanation of why Hammers require careful consideration regarding closing prices since they can be manipulated more easily than opening prices.

• Further elaboration on how Hammers can only be confirmed if closing prices align with expected movements in the market.

Dark Cloud Cover Patterns

• Introduction to trading strategies involving Hammers and Dark Cloud Covers; traders should not engage without negative confirmations for certain patterns like Shallow Dark Cloud Covers.

• Description of what constitutes a Dark Cloud Cover pattern; it begins with a green candle that then retraces past its midpoint into bearish territory.

• Distinction made between Shallow and Deep Dark Cloud Covers based on how far down the price moves after reaching 50% of the previous candle's height.

Rule of 79

• Introduction to the "Rule of 79," which helps determine stop-loss levels based on price movements relative to previous highs and lows during trading sessions.

• Application of this rule illustrated through examples using both green and red candles, emphasizing strategic placement for stop-loss orders.

Understanding Dark Cloud Cover and Trading Strategies

Dark Cloud Cover Explained

• The concept of dark cloud cover is introduced, indicating a significant market movement when the price drops below 79. This suggests a bearish trend.

• A scenario is presented where if the price crosses above 80 after being in a dark cloud cover, it indicates a strong bearish signal.

• Clarification on deep dark locusts and their relation to market trends; crossing the 79 mark signifies a deeper bearish sentiment.

• Introduction of "Twin Towers," which are two candles (one red and one green) that match in height, indicating potential market reversals or continuations.

Trading Strategies Based on Market Signals

• Discussion on bullish scenarios where prices open higher but still fall within the parameters of dark cloud cover; emphasizes understanding tail movements for better trading decisions.

• Explanation of trades that can be executed with or without confirmation based on observed patterns like deep dark cloud covers, highlighting high probability outcomes.

Rule of 79 in Trading

• The importance of the rule of 79 is emphasized; traders should look for specific candle formations such as hammers or haramis to make informed decisions.

• The rule applies to various trading signals including twin towers and deep dark cloud covers, reinforcing its significance in predicting market behavior.

Candle Patterns and Their Implications

• Description of different candle types (full kick vs. semi kick), illustrating how they relate to market trends and decision-making processes for traders.

• Traders are advised to act immediately when certain conditions are met (e.g., crossing the 79 mark), emphasizing timely execution based on established rules.

Confirmation Signals and Trade Execution

• Importance of recognizing engulfing patterns; traders should take action once these patterns cross critical levels like 79 for optimal results.

• Further elaboration on shallow versus deep dark cloud covers; only significant crossings warrant immediate trading actions due to increased probabilities.

Exit Velocity Considerations

• Discussion about exit velocity upon crossing key levels like 79, suggesting that this metric can guide traders' exit strategies effectively.

Understanding the Rule of 79 in Trading

Key Concepts and Insights

• The "Rule of 79" indicates that once a price crosses the level of 79, it is likely to experience significant upward momentum, rarely moving sideways.

• A red candle followed by a green candle crossing 79 suggests a high probability that the next day will open lower, leading to further declines.

• The importance of observing groups of candles crossing the 79 level is emphasized; for instance, if multiple candles align at this threshold, it signals potential trading opportunities.

• A decisive moment occurs when a red candle transitions to a green one above the 79 mark; this transition often leads to substantial upward movement.

• Once the price crosses 79, there is an estimated 99.9% chance that it will continue rising significantly rather than stopping or reversing.

Trading Strategies and Techniques

• Traders are advised to enter trades immediately after confirming that prices have crossed above the 79 level due to its historical reliability for upward trends.

• Various chart patterns such as triangles and head-and-shoulders formations were discussed as part of understanding market movements and making informed trading decisions.

• Emphasis on exit velocity was made; traders should be aware of how quickly prices can move after certain thresholds are crossed.

Course Structure and Future Learning

• The session concludes with an invitation for participants to practice what they learned about calculating levels like 79 in their trading strategies.

• Participants are encouraged to take their time learning these concepts thoroughly before applying them in real-world scenarios.

Limitations and Considerations

• It was noted that while the Rule of 79 applies primarily to index trading, caution should be exercised when applying it to individual stocks or other markets.