MP Rule 1: Don't Fight A Coil Break -- 'Go-With' It

[Dogpile]

No matter what your bias, no matter what the pattern you see, no matter what your indicators say --- when a market has formed a tight equilibrium at the VWAP level: once a market has broken away from this level, keep your trades in the direction of the coil break.

http://bp2.blogger.com/_5h-SWVGx6Ms/...Coil+Break.bmp

[Soultrader]

Interesting, what classifies as a breakout from the VWAP level? Is it a break out of the bands? (btw, what bands are those?) Or perhaps I havent been following enough of the strategy threads? Thanks

[Dogpile]

The bands are there only to help visualize the coil - not necessarily to define the breakout. I cannot really state a universal definition for when the equilibrium level has been officially broken -- it is up to the trader to decide this. I just wanted to get a thread going to help launch this concept.

The point is really that when the market reaches a well-defined equilibrium point, you should recognize this and learn to kind of re-set your thinking that you had before the equilibrium point was established. That is, to get ready to 'go-with' the breakout as there will very likely be at least a short-term sustained directional 'auction' once the market exits its state of equilibrium. At the very least, you should try not to fight this early trend that develops after an equilibrium point has been established.

[jperl]

	Quote:	Dogpile
	No matter what your bias, no matter what the pattern you see, no matter what your indicators say --- when a market has formed a tight equilibrium at the VWAP level: once a market has broken away from this level, keep your trades in the direction of the coil break.

Sorry to have to disagree with you on this Dogpile, but there is more to it than just a break away from the VWAP, tight coil or otherwise. You would be correct if the skew was in the same direction as the breakout, that is < 0 for a short or > 0 for a long. Under any other conditions (skew =0 or breakout in the opposite direction to the skew) you could be in deep doo doo. I've have yet to discuss either of these two other situations, but they will be discussed in future threads of "Trading with Market Statistics"

[nickm001]

Dogpile, breakouts in general, are very difficult to trade. If you backtest them, you will find that they fail 60-70% of the time. Money can still be made, but you have to make sure that you lose a little when it doesn't work and stay with the trade for long shot when it does.

[Dogpile]

<< there is more to it than just a break away from the VWAP>>

Yes, there is ‘more to it’ --- which is really about how good your short-term trading (entry/exit) skills are, not about skew. Unlike most of my set-ups, this set-up is really about the lack of a directional bias for the set-up. As Linda Rashke says, you are better off without a directional bias on the exit of a coil.

The pattern here is narrow-range breakout entry – an excellent core technical concept that acknowledges a markets tendency to alternate between ‘trend’ and ‘range-trading’ and specifically, the consolidation that often occurs just prior to a trending move.

Trade location is advantageous because this set-up is all about being early-on in a potential trending situation. Proper entry should be somewhere not too far from the equilibrium point with risk defined as somewhere on the opposite side of the equilibrium point (after entry). With these as guideline rules, you simply cannot get into deep doo doo.

[Dogpile]

<< If you backtest them, you will find that they fail 60-70% of the time. >>

In many respects, a failed breakout is an even better set-up than a coil break since your 'location' will often be better and you may catch a very rapid rejection which puts you immediately into a profit position. The nice thing here is that you monitor the breakout early-on and either it goes or it doesn't. If playing for a failed breakout, then you can watch for failure as price attempts to breakaway from the equilibrium point and catch some of those times the coil does test one way and 'drive' the opposite way. Very similar to 'open-test-drive' concept from Daltons Market Profile books.

Yes, good entry/exit trading skills are needed here.

[Dogpile]

good example of this concept again today.

VWAP std dev bands compress creating conditions for short-term trending auction. look how there is a final test of the VWAP after a push down which gives traders excellent reward-risk location.

todays chart also shows how you can make good money in a coil break that eventually fails. a coil-break is a 'go-with' in the short-term. the failure of a coil-break can lead to a bigger move in the opposite direction (this is a Rashke concept -- not mine).

todays chart was not quite as clean as recent days in that price did not tighten exactly on the VWAP number -- only near it... but the VWAP number was still a very valid pivot.

the Dalton concept here is that there is usually a short-term opporunity to 'go-with' a break away from a balance. I traded a position scalping out 1/2 and putting it back on during pullbacks that didn't break the downtrend -- I also kept a core short that I eventually covered when the market petered out. just an awesome day to trade YM.

http://bp3.blogger.com/_5h-SWVGx6Ms/...oil+Break2.bmp

[Dogpile]

I am going to treat this as a blog space for coil-watching for a bit... Here is todays chart:

http://bp0.blogger.com/_5h-SWVGx6Ms/...oil+Break3.bmp

Note the differences in the 2 drawn rectangles. The second one is the one to remember to look for -- you have a triangle type of pattern at that point and you have low 5-min ADX -- the market has lost volatility and coiling for a potential trending move.

Today was a lower volume NR-7 day so not the best trading environment. I did try a short near point C on the chart and stopped out for a small loss. Note the magenta circle signals the failure of the a-b-c corrective pattern. There was a test down out of the abc up pattern that led to a 'higher low'.

Note that this was a 'bear trap' below the VWAP level -- similar to yesterday -- failure to trend in one direction after a coil break gives fuel (short-covering) for a move in the other direction. I did go long above the VWAP level and caught the quick move up. Thus, the small loss enabled me to catch a downside move, if one developed -- but the failure of that pattern enabled me to catch a good move up.

[Dogpile]

Price action relative to VWAP is an extremely important concept in trading, in my opinion.

As volatility contracts (bands compress) - successful trading strategies will be very different than when volatility is expanding (narrow bands getting wider).

Also, I have added an indicator that tracks NYSE volume (not futures volume) versus the previous day. You can see we had a hard early push down today but volume was much weaker than previous day. This was indicator that trending action lacked conviction. This set up compressing std dev bands -- which in turn set the stage for new trending action as the market sought out a new equilibrium level from the 1467.00 area. Note that VWAP was already down versus previous days closign VWAP -- indicating a 'heavy tape'. The market repeatedly failed to break decisively through the 1473.00-74.00 area that market most of yesterdays trading...