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SP Levels Method more to follow including TS files Sp-Levels Website I have not looked into the method. I am posting as many have interest. NQoos SP-LEVELS MANUAL download the manualDisclaimer: Futures trading is risky and can result in
substantial loss. The use of stops may not limit losses to intended amounts. In
fact, because the valuation of futures and options may fluctuate, clients may
actually lose amounts greater than the original investment and may have to pay
more later.
The Sp-Levels is an advisory service for the prudent,
independent trader who desires to make consistent monthly profits by focusing on
the levels described in this manual. Please take a moment to review our trading
philosophy to ascertain whether or not it will help you reach your objectives.
Futures and Options trading involves risk. You should be well-prepared mentally,
emotionally, and financially before investing any capital in the markets. You
should therefore carefully consider whether such trading is suitable for you in
light of your financial condition. You may sustain a total loss of the initial
margin funds and any additional funds that you deposit with your broker to
establish or maintain a position in the commodity futures market. Past
results do not necessarily indicate future results. Readers are urged to utilize
their own judgment in trading. The
first feeling many people will get when they first study this manual and then
follow the Sp-Levels, is one of incredulous excitement. It is quite amazing to
them that there could indeed be such a simple, yet extremely profitable way of
trading. Indeed, I have had people call the Sp-Levels combined with the strategy
“revolutionary”. Now,
there are two kinds of traders who trade using the Sp-Levels. The first,
experienced traders, who (hopefully) already have an established, proven method
(or methods) to trade support and resistance. There are many ways to trade
successfully, and many ways to trade support and resistance successfully. To
them I offer the strategy outlined in this manual (henceforth SLS -SpLevels
Strategy-) as an addition to their own.. The second kind are traders who are new
to daytrading the S&P. To them I want to say the following: The strategy
outlined in this manual is one I developed after many years of studying the
markets. It is a simple, yet powerful method of capturing both big and small
moves off the Sp-Levels. Is it the
last word in trading? No. There’s always room to improve, to learn more and to
trade even better. Personal factors especially, define the best methodology for
every individual person. For the sake of simplicity, I’ve written the strategy
the way it is in this manual. But there are other patterns and strategies which
can be useful in trading the Sp-Levels. It
is for this reason that we are currently setting up a chatroom and forum where
we will discuss these other patterns and strategies, and where
subscribers can meet to exchange and voice comments, questions and ideas to
facilitate learning and trading the Sp-Levels. Now,
here I must caution you. One thing that SLS does not deal with is a traders’
emotions. On the one hand, some people find “pulling the trigger” extremely
difficult, on the other hand some traders can’t help “overtrading”. As you
will see, the Sp-Levels Strategy does NOT catch EVERY move off the Sp-Levels.
The main reason for this is that for the sake of simplicity we only use one
candlestick pattern as entry signal. This specific pattern, the way we trade it,
does account for the majority of the big moves, but not for all. The
result of this is that often, a trader will see price hit an Sp-Level, bounce
off it and make a big move, while we DIDN’T get our pattern, and therefore
weren’t in on the move. This may cause a trader to not wait for the pattern
the next time a Sp-Level is hit. Now, if you’re an experienced trader, then
that’s fine. But if your new at trading, I strongly advise you to stick to the
rules set out in this manual. Have
patience, and don’t worry about the moves you didn’t get. Just enjoy the
Sp-levels and the powerful strategy outlined in this manual. And while you’re
trading it profitably and confidently, you’ll be able to join the other
subscribers and myself in an open and valuable exchange of ideas. And if you
will end up trading with the feeling that you “know” this market, and have
it in your hand, I will feel that my goal with the Sp-Levels has truly been
reached… And
one more note to beginning traders: This manual contains many terms that may be
second nature to experienced traders, but are unintelligible to those less
familiar with trading terminology. I’ve tried to clarify such terms when they
occur, but it being second nature, I might have missed some. If so, please let
me know, so we can clarify those terms, and include the explanation in the
manual… 1.SUPPORT
AND RESISTANCE: Support
and resistance are two of the most important, if not THE most important, terms
in trading ANY market. Indeed, most trading methods are based, in one way or
another, on support and resistance. Bollinger Bands, Gann lines, Elliot waves,
Fibonacci, moving averages, trendlines, and even oscillators. What are
overbought and oversold levels on an oscillator, if not S&R levels where we
expect price to reverse course? And indeed, it is my opinion that each of the
aforementioned trading methods and indicators can be used to trade profitably,
if one but puts in the required amount of relentless study of each of them and
their specific relationship to the markets. Nevertheless,
it is a self-understood fact that no short-term level of support or resistance
can hold forever. If it would, the market wouldn’t go anywhere. It may
hold for minutes, hours or days, but eventually, price will push through.
Indeed many traders make their living from trading exactly those level
breakouts… After
a while, you will notice, however, that each level of support or resistance has
it’s own, unique characteristic. Some hold for minutes, hours, days or even
months, while some are broken without a second look back. Some act as a rock
barrier that cannot be penetrated in the least, repelling the market again and
again at the merest contact, while
some show elasticity, being willing to bend or stretch somewhat, letting price
push through briefly, but ultimately holding, causing price to jump back, like a
rubber band that stretches and jumps back, not breaking. Sometimes a bounce off
S&R can be “slow” and sometimes it causes a volatile, big move… Knowing
where strong levels of support and resistance are located, coupled with a method
of discerning how the level is affecting price, will enable the trader to trade
extremely profitably, in a simple and effective way. The
Sp-Levels are derived through a mathematical formula which, contrary to most
other levels of S&R in the S&P, does not only use the last days’
numbers. The formula incorporates and uses data from a large number of days to
derive the Levels. The accuracy this results in is exciting, to say the least.
But as with every market and every method, there is no one factor that will make
a trader wealthy. Using S&R with the required additional, confirming factors
can, which is where this manual, or any proven strategy you have, comes
in… 2. ELECTRONIC TRADING: The
past few years have seen a virtual revolution in the trading world in general,
and the day trading world in particular. The internet has indeed created a
global marketplace like never before. As computers become more powerful, and
data transfers become more rapid, almost instantaneous (!), the effects have
been very clear for traders. Being able to enter orders electronically and not
having to call a broker (and that broker sometimes having to call yet another
broker), has made a tremendous
difference in execution time, and hence in potential profits. The number and
type of possible methods to day trade has grown accordingly. In addition, we now
have markets that are fully electronic, changing the way things were always done
even more. In Europe most of the major exchanges have gone fully electronic. In
light of all this, it is clear that the S&P futures day trader too, must
adapt to take advantage of all the changes. The
public perception is that it is but a matter of time before the “big”
S&P too, becomes fully electronic. Yet
even the execution time in that, as yet un-electronic market has become so much
quicker, as to make the old way of doing things look archaic. Whereas in the
past, you had to call your broker, who would call the floor broker, who would
have to signal the order to the pit broker, a process that could take anywhere
from one to several minutes, electronic order entry can now, with a touch of a
button, send the order directly to
a handheld computer held by the pit broker , who immediately executes the order
and transmits the fill back to you. This can take as much as ten to twelve
SECONDS…! Clearly,
there is no comparison. I
therefore urge you, if you have not done so yet, to call your broker and ask him
what electronic platforms he can offer you to trade with. Make sure that the
orders go straight to the pit broker, and not through an intermediary first… Can
the Spl-Strategy be traded non-electronically? Yes. But it will be more
difficult, more emotionally straining, and probably not as profitable. Whether
you end up trading the Sp-Levels or not, you owe it to yourself to find out what
your options are, as trading electronically has the potential of greatly
improving the bottom line of any methodology you may choose to trade with…
3.
CANDLESTICK CHARTS: Many
traders have learned to recognize the advantage of using candlestick charts of
“regular” charts. These charts have been used by Chinese commodity traders
for hundreds (!) of years. The visual information which the charts give you are
an edge which can help you recognize trends (or the lack thereof) quicker. Many
candlestick patterns, although scientifically readable on any chart, can be
instantly recognized on a candlestick chart, thanks to the added visual
information which these charts impart to us. We
only use one pattern in our trading, and it’s one of the simpler ones at that:
The Bullish or Bearish Dragonfly. A
dragonfly is a bar whose shadow is at least as long as the body of the bar, and
whose body is positioned towards one direction (opposed to it being in the
middle). It’s
a bullish dragonfly if the body is positioned towards the top: IMPORTANT:
the signal is bullish even if the bar closed down (the close was lower than the
open).
A bearish dragonfly is a bar whose open and close are both at least halfway down the bars’ length. IMPORTANT: the signal is bearish even if the bar closed up (the close was higher than the open).
(It
helps to remember that the dragonfly was called that way because it resembles a
dragonfly, which has a long tail…) The
Dragonfly can have a small shadow on the opposite side of the big one. See our
discussion for what constitutes a “continuation” bar as opposed to a
“retracing” bar in the chapter on trailing stops, as what we write there
applies equally here. 4.
SPL-STRATEGY: First
let me give you a general overview of the strategy, and then I'll go into
specifics. SLS
basically consists of 4 factors.
1.
Trade Setup The
Sp-Levels are areas of support and resistance where we expect the market to
reverse direction… So the initial trade setup is simple: we wait for price to
come close to our Sp-Levels. Now the market has “set itself up” for a
possible reversal. 2.
Trade signal The
word “signal” here does not mean actual entry. It merely indicates that
trade entry may be imminent. What we use as trade signal is the dragonfly. So,
once we come close to the Level (Trade Setup), we wait until we see a dragonfly
in the opposite direction of the current trend. This dragonfly is the trade
signal. 3.
Trade Entry Once
we’ve gotten our dragonfly, we place an entry stop at a certain distance
beyond the high/low of the dragonfly. 4.
Trade Exit. We
have two strategies for exiting trades: 1. to take off one contract at a certain
amount of profit (FIS) or 2. to trail both contracts (TRS). That,
in a nutshell, is how we trade.
Setting
Up Your Charts: There
are four charts that we use to trade: the 6 minute chart (6C), the 5 minute
chart (5C), the 75 tick chart (TC), and the 50 tick chart (50TC). Although
having to look at four charts might seem daunting, this number is actually a
result of the simplicity of trading SLS. Let me explain: while there are
many market patterns that indicate possible reversals, we use only one (as
mentioned earlier), and a simple one at that: the Dragonfly. The reason we use
only this one pattern is to make the strategy as simple as possible, and to
eliminate the trading discretion that invariably comes from trying to find
reversals which are based on the usage of multiple patterns. We want our trading
to be as objective as possible. Of
course, this does mean that we will miss trades. In order to minimize the number
of profitable trades that we miss, we look at multiple charts, looking for the
dragonfly at the Sp-Level. So basically, while we are watching four charts,
we’re only looking for one specific type of bar on them. You should
find this quite easy to do… Tick
charts, although much less used than regular time interval charts (many charting
platforms don’t even offer the option), are invaluable. In a way, they give a
much “truer” look at the market. For
instance, whereas a regular chart will often start showing sideways, choppy
action during lunch hour, which is the main reason many traders won’t trade
during that period, a tick chart will
remain smooth throughout. Indeed, the tick chart makes entering profitable
trades during those hours much easier. Time
interval charts, have their own advantage: the fact that most people use them.
This fact causes patterns to occur on a time chart which won’t show on a tick
chart, just because so many people are watching the time charts and are making
trading decisions off them. We
use a dragonfly on either of these charts to enter the market. Now, depending on
market volatility we will sometimes switch to different interval charts. To
measure volatility, I have created a simple indicator called BSA (BarSizeAverage).
We apply the BSA to the 6C only. Under normal market conditions, the BSA on the
6C fluctuates between 1.5 and 3. Should the BSA go down to 1.4, we switch to a 7
minute chart instead of the 5C. Note that at this point, we apply the BSA to
this chart as well, and should its value reach 1.4 as well, we switch to an 8
minute chart. Etc, until the 9 minute chart, which is the highest we trade with.
(It’s easiest if you always keep these charts
running in the background, so you can bring them up quickly if needed…) Once
the BSA on the 6C goes back above 1.4, we switch back to the 5C. Note
that in low BSA conditions we do not change any of the tick charts. There
are times of increased volatility, when the BSA goes above 3. We call such
trading periods HVT, which stands for High Volatility Trading. When we get HVT,
we have some minor changes in our trading strategy, which will be noted in their
proper place. 1.Trade
Setup: “The
Sp-Levels are areas of support and resistance where we expect the market to
reverse direction… So the initial trade setup is simple: we wait for price to
come close to our Sp-Levels. Now the market has “set itself up” for a
possible reversal.” Let
me give an example of trade setup. The
market has been trading above the Sp-Level, and then comes close to an Sp-Level.
We define “close” as within 1.5 points of a Level. In HVT, this changes to 2
points. Note
that if a Level’s value is at .05, we round the number to the side price is
closest to. A
picture is worth a thousand words, so…
Line
A is an Sp-Level at 1069.25. Therefore,
as soon as price hit 1067.75 (line B), we have our trade setup and start looking
for our bearish Dragonfly to signal a potential short trade. Line
C is an Sp-Level at 1054.60. Therefore,
as soon as price hit 1056.10 (line D), we have our trade setup and start looking
for a bullish Dragonfly to signal a potential long trade. There is one occurrence when the trade setup is a little different. Very often, the first bar of the day is right on one of the Levels. In this case, we don’t know if the Level is serving as support and resistance. To overcome this problem, in cases like this we take a look at the DAX futures market, and take our cue from there as to whether the Level is support or resistance. Is the DAX was falling down until the time when the S&P opens, then the Level is considered support. If the DAX was rising up until the open of the S&P, then the Level is considered resistance. (I
do not use S&P globex data for this purpose, as the lack of volume in the
globex very often does not give us clear enough moves to enable us to recognize
if the Sp-Level is support or resistance.) Note
that there will usually be an additional EUREX exchange charge to get real-time
DAX futures data, but it’s not a lot and well worth the price! 2.
Trade signal.
“The word
“signal” here does not mean actual entry. It merely indicates that trade
entry may be imminent. What we use as trade signal is the dragonfly. So, once we
come close to the Level (Trade Setup), we wait until we see a dragonfly in the
opposite direction of the current trend. This dragonfly is the trade signal.” See
earlier for our definition of a Dragonfly.
In
both cases indicated by the chart, we have both our entry setup (price coming
within 1.5 points of the Level) and then the traded signal (the Dragonflies
circled in blue). The
dragonfly is only a valid signal if it is at least 1.4 points big. 3.
Trade Entry: SRLs: I’d
like to introduce you to the terms “SRL“ and “attractors“. Anyone who
has watched the market for a while, knows that there are certain price levels
which the market seems to have a propensity for reaching during a retracement,
before turning back to the original direction. These are the attractors. The
attractors are whole numbers (1081.00, 1082.00, 1083.00, etc.) and half numbers
(1080.50, 1081.50, 1082.50, etc.). However, in the case of the whole numbers,
the market seems to often push a few ticks beyond. There are several theories of
why this happens. One that is widely accepted is that the floor traders are
“running stops”. Meaning, that the floor traders know at what numbers most
off-the-floor traders like to put their stops (right above or below the whole
numbers). So the floor traders push the market to those levels to “shake out
the weaker hands” and they then own the playing field, and let the market
continue in the direction it wants to go. I don’t know if this is correct
(I’m not even sure I UNDERSTAND it…) but the fact is that that’s what
price does. So as far as we’re concerned, the “attractors” in the case of
whole numbers are actually two ticks below the whole number (1082.80, 1081.80,
etc.) in a rising market, and two ticks above the whole number (1081.20,
1082.20,etc.) in a falling market. An
SRL is one tick above or below the attractor. For
example: If the market is falling and price is currently at 1079.70, and we then
see an intrabar retracement start, we have to assume that price might reach the
next attractor, which is 1080.20. Therefore, the SRL in this case is 1080.30. If
the market is rising, and price is currently 1080.70, then the attractor is
1080.50, and the SRL is at 1080.40. So
the SRL is always 3 ticks above the round number (.30) and 1 tick above the half
number (.60) in a falling market, and
3 ticks below the round number (.70) and one tick below the half number
(.40) in a rising market. SRLs
in a falling market: 1081.30, 1081.60, 1082.30,1082.60,etc… SRLs
in a rising market : 1082.70,1082.40,
1081.70,1081.40, etc… Our
stops are almost always on an SRL, whether it is a buy/sell stop, a
stop-loss, or a trailing stop. There are a few exceptions, which I will mention
later… For
trade entry purposes, we differentiate between two kinds of dragonflies:
1.
The close is 5 or more ticks away from the high/low (buy/sell signal) of the
bar. Sell
signal: Assume
price is rising and then hits an Sp-Level. We wait for a bearish dragonfly,
which is our sell signal. The dragonfly must be a swing high. For our purposes I
define a swing high as a high which is higher than the high of the bar before.
If its high is equal to the high before, the signal is valid as long as the bar
before is a swing high (although we consider this signal HR -Higher Risk. The
ramifications of this will be explained later in the manual.). We then enter a
sell stop for two SRL’s below the low of the bar. Example:
If the low of the DF is 1082.00 or .10 or .20 etc., we put in a sell-stop order
for 1081.40. Example:
If the low of the DF is 1073.60 or .70 or .80 etc., we put in a sell-stop order
for 1072.70. Although in the case of a .80 low we have an SRL right below, we
only count an SRL that’s at least 2 ticks away. Note:
under normal volatility conditions, if we get a signal bar that’s at least
three points big, we add another SRL to the entry. Buy
signal: Assume
price is falling and then hits an Sp-Level. We wait for a bullish dragonfly,
which is our buy signal. The dragonfly must be a swing low. For our purposes I
define a swing low as a low which is lower than the low of the bar before. If
its low is equal to the low before, the signal is valid as long as the bar
before is a swing low (although we consider this signal HR -Higher Risk. The
ramifications of this will be explained later in the manual.). We then enter a
buy stop for two SRL’s above the high of the bar. Example:
If the high of the DF is 1081.70 or .80 or .90 etc., we put in a buy-stop order
for 1082.60. There are a few exceptions to the rule: These
numbers may seem somewhat confusing at first, but once you get the principle,
getting the right number becomes automatic… In
order to make things easier, after the next paragraph I will have a list of
highs/lows and
their corresponding buy/sell stop levels. 2.
The close is less than 5 ticks away from the high/low (buy/sell signal) of the
bar. In
this case, we put the sell/buy stop at the SRL which is after the first SRL which
is at least 5 ticks (a half point) away from the low/high. Here’s
a list of all the possibilities: (I
don’t advise you to memorize these numbers. It’s much better for you to understand
the SRL concept and to be able to apply it automatically to the market when
looking at charts.) 5
ticks or more: 5
ticks or more:
short trades:
long
trades:
Less
than 5 ticks:
short trades:
long trades:
Now,
we often get several consecutive valid DF’s on the different charts. When that
happens, we adjust our entry according to the last DF. If you trade the minis
electronically, you can of course do this freely. In the big S&P, however,
where the order is going through a live person, I usually don’t change the
order if the difference is only 0.30 of a point. HVT
STOP RULES: When
we have HVT conditions we AUTOMATICALLY add at least one SRL to our stops
(whether entry stop, stop loss, or trailing stop).
“at
least”, Because HVT conditions can vary to a big degree. We can have 3-4p bars
on average, in which case one SRL is usually enough, and we can have 5-7p or
more (!) bars on average, in which case 2 or 3 SRL’s or more back is called
for. Should
we get a small signal bar during HVT conditions, we want to make sure that we
have at least 3 points between the low of the bar (in case of a buy) or of the
high of the bar (in case of a sell) and the entry point.
4. Trade Exit: Initial
stop loss: As
soon as our buy/sell stop is hit, we enter a stop loss at the second SRL above
the high of the bar (in case of a short trade) or below the low of the bar (in
case of a long trade). The rules and numbers for placement of this stop are
identical to those of the entry stop. Meaning, in the case of a sell, use the
same numbers for the stop loss as those of the buy stop. In case of a buy, use
the same numbers for the stop loss as those of the sell stop. Examples: if we just entered a short trade, and the high of the signal bar was at 1081.80, we put the initial stop loss at 1082.60. If we just entered a long trade, and the low of the signal bar was 1082.80, then
we put the stop loss at 1081.70. I
CANNOT OVEREMPHASIZE THE IMPORTANCE OF HAVING A STOP LOSS!!! DON’T RELY ON
YOUR “READING” OF THE MARKET TO GET OUT! I
always tell people, that if they want to change the rules of the strategy to
suit their own trading preferences, that’s fine, as long as they don’t
change this one! Profit
target & trailing stop: As
I mentioned earlier, we follow two different methods of profit taking. 1.
First Strategy: When
we get into a trade, we immediately put in an order to exit one contract with a
certain amount of profit. The amount depends on the entry. For longs at .60 and
shorts at .40, the initial profit target is 1.9 points. For longs at .30 and
shorts at .70, the initial profit target is 1.7 points. The original idea was to
take 2p profit, however being that all our trades start at SRLs, two whole
points would be trying to get past an attractor, which is a level which we
DON‘T expect the market to go past. We therefore put the profit target at the
attractor itself, which comes out to 1.9 or 1.7 points. (Note that in this
instance we very often have POSITIVE slippage!). For
example, if we sell at 1802.40, then we put in an order to buy back one contract
at 1800.50 on a stop. If we buy at 1801.30, then we put in an order to sell one
contract at 1803.00. For
the second contract we use a trailing stop. Note:
if we get HVT (BarSizeAverage>3) then we trail BOTH contracts. This is due to
the bigger potential profits to be made during HVT. Of course, you may continue
taking one contract off if you prefer. The
way we trail a stop is the following: We move our stop to two SRL’s above (in
a falling market) or below (in a rising market) every bar that closes close to
its low in a short trade, or close to its high in a long trade. Now
“close” to its high or low obviously needs some definition. As a starting
rule, what we want is a bar that closes in its top or bottom quarter or third,
depending on market conditions. This is one place in which the visual aspect has
some importance; the way the bar “looks”. If the shadow of the bar looks
more like a beginning of a retracement of the trend, opposed to a regular
intrabar retracement, chances are that’s what it is. Under
normal market conditions, I’ve found that more than a half point from the low
to close or high to close, is usually a precursor for some retracement. But it
can be a little more or less. I’d
like to stress that in most cases, you shouldn’t have any trouble telling if a
bar is a continuation bar, or if it looks like it might have started retracing.
If you’re in doubt, move the stop back an SRL. Don’t worry, after a while,
trailing stops this way becomes second nature. (Note: I’ve started some
experimentation on using the Spl-Trend indicator for trailing stops (which is
one of the main functions that Asctrend uses their indicator for), and it
definitely shows promise, but there are many possible settings, and more time
and study will be needed…) We
do not start trailing our stop until price has reached the first contract profit
target. THIS IS ALSO TRUE FOR THE TWO CONTRACTS IN TRS. NOTE:
we trail our stops ONLY on the 6C and TC charts. The exception is if price has
reached the first contract profit target and we have nowhere to put our trailing
stop. In that case we check the 5C and 50TC as well to find an appropriate place
to put our stop. 2.
TRAILING STRATEGY (TRS): We
follow all the rules for the trailing stop on both contracts. For
HVT conditions, I’ll repeat what I wrote before: When
we have HVT conditions we AUTOMATICALLY add at least one SRL to our stops
(whether entry stop, stop loss, or trailing stop).
“at
least”, Because HVT conditions can vary to a big degree. We can have 3-4p bars
on average, in which case one SRL is usually enough, and we can have 5-7p or
more (!) bars on average, in which case 2 or 3 SRL’s or more back is called
for. BIG
BAR STOPS: In
low volatility conditions, if we get a bar which is at least four points big,
and its close is close to the low or high (this depends on the size of the bar.
If the bar is four points, the close shouldn’t be more than a half point from
the low or high. If it’s bigger, than you have to use some visual discretion.
See our discussion before for what constitutes a “continuation” bar as
opposed to a “retracing” bar), we put our trailing stop 3 points from the
low or high. In
HVT conditions, if we have a bar which is 8 points, then we put the stop 6
points from the low or high. Bailing
out: Sometimes
we get into a trade and the market then goes sideways, not hitting our initial
profit target for a while. As always, we have to look at such a situation with
logic. We got an as-expected bounce of a Level, but the market doesn’t carry
through. That tells us that this specific Level might only have been minor
support or resistance. The longer the market doesn’t hit the profit target,
the danger of a reversal becomes bigger. Then there’s something else that also
has to be factored in: emotions. The longer it takes for the market to start
showing a minimal amount of profit, the more our emotions are thrown into
turmoil. Remember, any emotional hardship during a trade is not only hard for
that trade; it is apt to cause trouble for the whole rest of the day! So
here’s how we deal with such a trade: If
a trade hasn’t reached the profit target by one hour after getting into the
trade, we bail out, unless in the last bar or two the market has started a big
push towards our profit target. Note
that this last condition is usually not going to happen when we have normal
market conditions, as the average size of the signal bar will not leave too much
leeway for the market to move in, and so chances are that any “big push”
will have reached the profit target already… In
case of a higher risk trade, we will bail a half hour after entry. The hour/half
hour is always counted on the 6C chart.
More about Trade Setups: Anyone
watching the Sp-Levels for just a while can see their precision. However, the
market does not always adhere to the precise numbers we call. This is evidenced
by the fact that we will accept a dragonfly pattern as a valid signal within 1.5
points of the Level. A common characteristic of support or resistance is its
“elasticity”. Sometimes, the S&R lets price break through for a short
while, but then “rebounds”, pushing the market back, sometimes with greater
strength than usual, like a rubber band which is stretched and then let go.
Picture3: The
Sp-Level is showing “elasticity”. The market somewhat “overshoots” the
Level, and then bounces back. On
the other hand, it is a self-understood fact that no level of support or
resistance can hold indefinitely. If they would, the market would never go
anywhere. So the question is: once price has gone through a Level, How do we
know if the
Level is still valid or if it’s been broken through? For our
purposes, I consider a price to have broken through the Level if we have five
consecutive 6C bars on the opposite side of the Level, which don’t
touch the Level. Until then, we take a trade on any of those five bars that is a
valid signal bar. However, if we’ve already entered a trade, and then get
the five bars, we still stay in the trade. If the DF was the fifth bar, we
wait one more bar for trade entry. Now,
should a Level be broken through or “taken out”, we apply the age-old rule
of
“support
becomes resistance, resistance becomes support”. The
Sp-Level retains its powerful characteristics, just to the reverse side. If
before we were under the Level, and were waiting for a bearish dragonfly to go
short, we are now above the Level, and watch for a bullish dragonfly to go long.
Picture 4: The market stayed under the Level for 5 bars, thus turning the Level from support into resistance
One
exception to the 5 bar rule is if we get a valid signal to the opposite side
we’re watching. For example, let’s say the market is rising and breaks
through a Level. We then have a few bars (even less than five) whose low is
higher than the Level. We then get a BULLISH dragonfly. If the dragonfly adheres
to all the entry signal rules, it is a valid signal…
Picture 5: We only had 3 bars above the Level, but we
then had a valid bullish DF. Y-TRADE: There
is one more kind of trade that we get, which is only valid for the first hour of
the day. When the market opens at a distance from any of today’s Levels, the
market nevertheless sometimes trries to find support or resistance. As a result
of this, it will often bounce off support and resistance from YESTERDAYS Levels.
Therefore, in that event (that the market opens far from any Level), we will
take trades off yesterdays Levels for the first hour of the day. We
have two rules for this trade:
EXTENSIONS: The
Sp-Levels are not only levels of support and resistance in their own right. They
are also an indicator of what the average strength of today’s move should be.
Therefore, in case price crosses the highest or lowest Sp-Levels, we add an
extension Sp-Level at the last Level plus or minus the difference between any
two adjacent Levels. However, should the price break through the extension Level
as well, we consider the market long-trending. We will still draw further
extensions, BUT ONLY FOR TRADES WITH THE TREND.
HR
(Higher Risk) CONDITIONS: There
are certain conditions we label as higher risk. Each one separately does usually
not affect the market for our purposes. But should we get several of them
together (usually at least three), we would have to take some measures. Here
is a list of those conditions I consider HR:
There
are different ways of dealing with HR conditions.
If
we had a signal bar right before this HR one, it’s of course the easiest to
just leave the entry stop where it was… Also,
in any situation where I have misgivings of any kind about a trade (for example
if there‘s only 1 HR condition, but it bothers me), I’ll move the stop from
.30 to .60 (long) or .70 to .40 (short). The potential small .30 less profit per
contract is worth the price for having some additional security. The
successful implementation of this chapter will grow exponentially with the
experience that comes from studying the S&P. I strongly urge you to sit down
on a comfortable chair, with a drink beside you, and to do nothing but go
through chart after chart, looking for these HR conditions. (Of course, all this
is only possible if you have a laptop. If you don’t, you’ll have to settle
for whatever chair you have in front of your computer.) The more experienced you
become in recognizing them, the more control you’ll have over the market.
5. Spl-Trend/Secondary Trades: Sometimes
the market bounces off a Level without having given us our Dragonfly. While it's
annoying, we have a backup: the Spl-Trend indicator. The Spl-Trend is an
extremely powerful indicator which has multiple potential uses. Within the SLS
framework, we use for two purposes; secondary trade entry and trend confirmation
during HR conditions (using the “Trend” setting, see later). For
secondary trade entry, what we do is wait until the market starts a retracement
in the opposite direction of the trend and hits the Spl-Trend. Once it has hit
it, we again wait for a Dragonfly and enter in the same manner as with primary,
Sp-Level trades.
Picture 6: Entering secondary trades with Spl-Trend. At
this point, the Spl-Trend indicator is only available for TradeStation. If you
don’t have TS, however, you have another way of catching secondary trades.
Instead of Spl-Trend, you can use a nine period exponential moving average.
It’s not as good as the Spl-Trend, but it will get you in on a lot of
those secondary trades. Picture 7: Entering secondary trades using a 9 period
XMA.
We
also use this entry method for getting back in the market in case we got stopped
out of a trade and the market then continues in the original directon. (The
Spl-Trend is an extremely powerful indicator. I’m trying to make time to build
a trading strategy that only uses the Spl-Trend…) Spl-Trend has three settings: Bullish, Bearish and Trend. Bullish
and Bearish are used for when we’re in a long or short trade, respectively.
Trend is for confirming HR conditions. Spl-Trend can be an extremely useful indicator also in non Sp-Level
trading. It offers an extremely accurate stop, and in Trend mode can be an
accurate indicator of trend reversal.
ADVANCED
SPL-TREND SECONDARY TRADE: I
hesitated in including this signal in the manual. It is a more advanced trade,
and it takes experience in recognizing S&P intraday market action. I decided
to include it, to let you know that such a trade exists, and to be able to study
it. However, I strongly urge you to not jump into making these trades
prematurely. As
we know, the Sp-Levels are areas of major support and resistance. The values of
the Spl-Trend, however, are areas of minor support and resistance. That's why we
look towards the Spl-Trend for continuations of the trend. There are times,
however, when any given Sp-Level is also only minor support or resistance. Like,
obviously, any time a Level ends up not holding. Now,
many times in such cases, the minor S&R of the Sp-Level will cause a
short-term retracement in the market. A few bars later, price will hit the Spl-Trend.
What we have then, are two minor levels of S&R in opposite directions. In
that case, we could take positions in both directions in turn. Let
me give you an example of such a trade:
The
market is trading above a certain Level, and then trades down to it. Price
reaches the Level, we get our bullish dragonfly, and we enter a long trade. A
few bars later, we hit the Spl-Trend, and we then get a bearish dragonfly. We
could then reverse position and enter a short position.
E-Minis: 1997 was the year which saw a development which would have very far-reaching consequences for the futures daytrading world: the opening of the complete electronic mini S&P market. The e-mini was being hailed as the vehicle which would enable the "little guy", who couldn't afford the high margins of the big S&P, to make money while daytrading.
In this it has, in my opinion, failed. What has
mostly happened is that the little guy, who without the minis would never had
considered entering the high-risk arena of futures daytrading, has dabbled with
the eminis, and lost money. As a whole, traders have probably lost more money
since the introduction of the minis than before. True, they may have lost less
money per person, but many more people have lost that smaller amount of money!
There is a much quoted statistic which claims that 90% of daytraders lose money.
That statistic has not changed since the minis started trading. (Although I must
admit I don't fully believe this statistic. I think it is rather 90% of
day traders that are found in public forums that are losing money. But I may be
wrong...)
There are, admittedly, people who have gotten big use
out of the minis (except for the brokers). These include experienced traders who
switched from the big S&P to the equivalent number of minis in order to take
advantage from the almost instantaneous fills and almost non-existent slippage.
Or people who have wisely realized that trading the minis was an alternative in
between papertrading and actually investing a large sum of money to trade a new
method.
But for those who trade the minis for it's own sake,
there's a certain difficult psychological give-and-take. On the one hand, they
stand to lose less money. On the other hand, they stand to make less money. This
second point is much more dangerous for safe, profitable trading than most
people realize. Let's be honest: whenever people daytrade, whatever it is that
they're daytrading, they're doing it for one reason: they want to become rich.
At the very least, they want to make a GOOD living. This is something that is
very difficult to do when you're daytrading one or two minis. Let me give you an
example: Someone who trades the big S&P and manages to take an average two
points out of the market each day, is making $10000 a month. That is $120000 a
year.Most Americans, most ANYONE in the WORLD, would be more than happy with
such a living. In the minis, however, 2 points equal $100. This makes $2000 a
month, and $24000 a year. The difference is very big. The problem, is that the
mini trader wants to have the same profits as the big S&P trader is having,
and that can create a large amount of psychological pressure. The mini trader
doesn't have to be as good a trader as the big S&P trader. He has to be FIVE
TIMES as good a trader. He has to trade FIVE TIMES as LONG as the big S&P
trader.This pressure (which is often subconscious), creates impatience. This
impatience can easily cloud the judgement of the trader. It makes him get into
trades before he should. It makes him get out before he should, or after he
should. It makes him leave a method if it hasn't shown him immediate promise,
and makes him wander from method to method, from chatroom to chatroom...
Don't get me wrong. The same is often seen with those
starting out in the big S&P. But in a way, as I described before, the
pressure can be bigger on the mini trader...
So what does this mean? Am I telling all the
"small" mini traders to give it up? Absolutely not. Rather I’m
telling you the following: sit down and think. Make precise goals for yourself.
And above all, be realistic. Chances are you won’t make a living trading one
emini. You can get there, however, if you set your goal at making enough profit
to add another contract. And then another. Make it your goal to get to the point
where you can start thinking of making a living daytrading.
The Sp-Levels and the Eminis:
SLS was designed to trade the big S&P.
This is obvious from the way the entry and exit points were designed. The reason
it was designed this way was simply because the big S&P is what I’ve
daytraded for years. At a certain moment, however, I couldn’t ignore the large
amount of requests to have a SLS which is compatible with trading the eminis
Most, if not all, strategies that are profitable on the big S&P will be the
same on the mini S&P. Depending on the strategy, however, there will be
certain advantages and disadvantages in using the minis. The advantages are
speed-of-execution and lower risk. The disadvantages depend on the specific
strategy. In the case of SLS, the disadvantage lies in the inherent "impreciseness"
of the mini market. Specifically, its bigger tick value. The concept of SRL's
and attractors is an extremely fine-tuned one, drawn from years of experience in
the S&P. This type of fine-tuning is not possible in the minis. There are
two main reasons for this: 1. The difference in tick value. The tick value in
the minis is .25 of a point, while in the big S&P it is .10 of
a point. 2. The minis have a tendency to "overshoot" natural
price action, as is seen in the fact that they often take out the big S&P by
a quarter or even a half (!) point. So while most parts of SLS need no change,
as the concepts of trading of support and resistance is universal to all
markets, the precise entries and exits we use in the big S&P will need
adjustment.
There are two options you have for trading
the e-minis, which are somewhat dependent on your trading psychology.
Before we go into the details of these
options, there is something that must be stressed. Having gotten up to this
point in the manual, the reader will be aware that the specific shape and
direction of the bars plays an important role in SLS. Due, however, to the
differences we have just mentioned between the minis and the big S&P, the
shape and direction of the bars is not always the same in both markets. There
can be a dragonfly on the big S&P chart that does not show up on the minis
chart, and vice versa. For the reasons mentioned above, we consider the big
S&P data to be a more accurate reflection of true market sentiment.
This leads us to the two options:
The first option is to watch the price on the
big S&P and enter a market order in the minis when the entry end exit stops
in the big S&P get hit. The
advantage in doing it this way is that the natural “overshooting” of the
minis will never enter you into a losing trade you wouldn’t have taken based
on the big S&P data. What some may look at as a disadvantage is the fact
that we’d be using market, as opposed to stop orders, thus potentially
resulting in one or two ticks of slippage. However, you must keep in mind that
1.the adjustments for stop orders in option 2
have their own “built-in” slippage and
2.at least when trading FIS, that same
slippage will be working in your favor.
The second option is to adjust the entry and
exit stops according to the minis themselves.
Even if you prefer this option, as a result
of the differences in shape and size of bars between the big SP and the minis as
mentioned above, my advice to you
is: if you have access to realtime data on the big S&P, use that to decide
appropriate entry and exit bars. If you don't have such access, try to get it.
Once you have identified the valid bars on the big S&P, you can enter the
orders on the minis.
Now, as far as the actual stop orders.
Entries and initial stops:
We add ONE tick to.20 and .80 attractors, and
TWO ticks for .50 attractors.
Therefore:
For Buys
(which can be either the initial long entry or a protective stop loss for a
short position),
round up to .50 and .00 in the minis from .30 and .60 in the big S&P.
For Sells
(which can either be the initial
short entry or a protective stop loss for a long position),
round down to .50 and .00 in the minis from .70 and .40 in the big S&P.
For trailing
stops, once we're in profit, we only add one tick for either attractor.
Please be aware
that the additional ticks can
sometimes cause a
pretty
big
point difference
between
entry and initial stop. If the risk is too big, consider not taking the trade,
or using your own discretionary initial stop.
Different
Strategies With The Sp-Levels: As I write in the foreword, no two traders are the same, just like no
two people are the same. We all have different emotional thresholds, which
translate into different views of the market. As a result, some trading methods
can be relatively easy for some traders, while others find the same methods
extremely difficult. SLS was developed from my own personal preferences and
thresholds. I always encourage traders to try to find a trading method that is
best for them for trading the Sp-Levels. Yet I also know that developing a valid
trading method takes a lot of time and effort, and not all traders have that
time, or can put in that effort. Yet, even within the constraints of SLS, there
is room for individuality, should you so choose. There are many small changes or
additions that one can make that can make SLS fit one's personality better.
Especially if you trade the eminis, you have more freedom to do so. I will give
you one example of a possible addition/change to SLS, which many find of big
value. As you know, SLS was originally designed for trading with two contracts (FIS),
where we take off one contract at 1.9/1.7 points profit. However, the idea of
trading SLS with THREE contracts has, in my opinion, great validity. In this
case, you would take one contract off at the initial profit target, the second
one, depending on where entry was and how far apart the two Levels are, at the
next Level or at the halfway point between them, and the third one on a trailing
stop. 6.
SPL INDICATORS: Barsize: As its name implies, this is a simple indicator that gives
you the size of the bar. BarSizeAverage (BSA): an indicator which gives you the average
price of x bars. Sp-Lines: an indicator that let’s you input the values of
today's
Sp-Levels, and then draws then on the chart.
TickCount: this indicator shows you how many ticks
there were in this bar and lets you get an alert at any number of ticks which
you specify. Dragonfly
Indicator: A showme that plots the DF’s that are valid for SLS.
Daily Logs: Every
trading day until we reach our 60 point monthly profit target, we send out a
short trading log which details the trades called by SLS that day. The format of
those trades is as follows: Trade
1: time of signal bar – chart
the bar was on – entry price -
exit price
FIS p&l/TRS p&l
Total of day: FIS/TRS
Total of day slippage adjusted FIS/TRS
Monthly profits to date FIS/TRS Next day’s Sp-Levels. Let
me show you a sample log: 11/15/02
We started off the day with a beautiful DAX move, but
unfortunately without an
entry signal…
Trade 1: 08:55-50TC-S@ 903.40
B@ 898.60 +9.6 This
was an interesting one. We dropped our trailing stop on the trade we we’re in
to the potential entry stop for a reversal trade at 898.60, but we THEN got the
higher entry signal on the TC at 09:48. As you know WE DO NOT RAISE TRAILING
STOPS IN A DOWN MOVE NOR DROP THEM IN AN UP MOVE.
And that was true here as well. So basically we changed buy 4 at 898.60 to buy
TWO at 898.60 and added a buy 2 at 899.30. Trade 2: 09:48 – TC – B@ 899.30 S@ 896.20 -6.2
Trade 3: 10:59 – TC – B@ 898.30
S@ 905.40 +9/14.2
Trade 4: 14:05- 5C - B@ 907.60
S@ 908.40 +2.7/1.6
Total: 15.1/19.2
Slip.Adj.: 12.1/16.2
mtd: 79.4/92.5
Monday’s Sp-Levels: 919.52-912.95-906.38-899.81
The Levels are pretty short-spaced for Monday, so
chances are that one or more of the Levels will only be minor support. We’ll
see…
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miracles,
they are everywhere.............. 
