After spending 9+ yrs programming and back testing. Reading through large amounts of quality books written by established / successful traders. I discovered a certain condition that arises during the Auction Process that no one really explained to me before. I found it in a definitive form of Compression / Squeeze, yet I do acknowledge that W.D.Gann and Jesse Livermore also describe it in various ways.
First and foremost – The path of least resistance. Trend direction. Simply by trading in the direction of a defined trend you increase your odds to 60%+. Shares , commodities etc don’t go from A to B overnight, usually they take time months even years to get there, hence the forming of an established trend.
Second – Recognizing Compression / Squeeze Zone in the bid / ask price. What I have found is when a instrument is trending higher for example, it is bought and sold stops are put above and below the market. The supply and demand struggle then the price moves into the stop zone. The sellers get their stops hit and they help propel the price higher as they cover. Some of the buyers recognize the stop run and take profit, others hold on tight. Eventually the buyers are exhausted the stops are filled at new highs and we wait for a pull back.
Gann points out that if a stock etc is trending higher it’s Time & Price going up will be greater then coming down. Stops get hit, the price collapses and starts to move down with a couple of big days helped by some profit taking and new stops that have been trailed up under the lows. New short position stops accumulate above the market. The price continues to move lower then the short term long traders come to market and begin to buy. They slow down the decent but the price continues down as more shorts come to market and late profit takers / long stops get triggered etc.
Then after a few more days the medium term guys notice the price stabilizing at support so they begin to buy. Then the longer term guys see the shorter & medium term guys buying, because the time is going bye but the price is not falling. So after a short period we get compression / squeeze in the price where all 3 time frame groups are buying.
Now this does not mean the price will rise and it may fall. However I have found that if I buy in this compression zone I am with friends my odds for success can rise to 80%. The risk is the stop zone that has now formed under the market. My preferred entry is a signal bar in the compression / squeeze zone. So if I see the compression zone and I see a signal bar like a Narrow Range, MACD Divergence, Pin Bar, etc I have added to my odds because there are many other traders who also see the same signal bar and some one caused it to happen. I am entering a trade with confidence that I am with friends entering in the direction of the trend at the appropriate time.
Third – Managing the trade. Then comes the trade management. Even though the odds are on my side I also recognise the shorts have their reasons to sell. I usually aim for a double top because it has a much higher percent of success. The losing trades usually come from a trend change, so the trend is your friend till the end.
A good example of this is TLS over the last couple of years. As long as you were a buyer in the compression zone with a signal and took profit at the double top or trailed the stop you had a winning trade.
My thoughts only.
What raefonTrading does is program and back test with Ninja Trader. As you may or may not have heard before the best way to make a profit in the markets and keep it, is to come up with an idea, prove to yourself that it works, then go out there and do it. Dont get side tracked don’t give up at the first knock back have it all worked out before the day even starts. Know exactly what you are going to do where and when and then Do It!!!
