Imagine bars of any duration. If Bar 2 closes higher than the high of Bar 1, we grade Bar 2 as a bullish bar, as we are accepting value higher. If Bar 2 closes lower than the low of Bar 1, we grade Bar 2 as a bearish bar, as we are accepting value lower. If Bar 2 closes within the range of Bar 1, we grade Bar 2 as a range bar.
Suppose now we grade each stock in a basket or average for its bull, bear, and range bars and sum those ratings, so that we know how many stocks in that group are bullish, bearish, and range bound for the period represented by the latest bar.
If, for example, we use 30-minute bars, the ratings of the second bar of the day across our universe of stocks would tell us something about the breadth of opening range breakouts.
If we use daily bars, we could assess short-term trending day over day: how many issues trade bullishly, bearishly, and range bound. That would be helpful in gauging the market environment for the coming day, particularly if we then assess the next day's open relative to the prior day's range.
One idea is to accept breakouts in an index when there is good breadth of stocks breaking out in bullish or bearish fashion; to expect reversals when there is poor breadth of stocks breaking out.
I'll have something assembled for this indicator by tomorrow.
.
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12 comments:
this i'd like to see!
Dr. Steenbarger,
That's an excellent idea. If I may offer a suggestion, I would include a volatility filter (p.e. based on a minimum range for the bars), or otherwise you risk getting false signals due to random movements during quiet periods.
Looking forward for the many new developments in traderfeed - although still no sign of those doughnuts, tsk, tsk ;D
Best trading,
Jorge
This is very intriguing, not to mention clever and creative.
Very smart!!!
Hi Brett,
Perhaps you could shed some light on what processes are behind "ah-ha" moments......Recently, I observed a chart behaviour which was previously catching me out.... This was such a basic observation yet took literally months to identify...any ideas why such obvious changes to trading strategies are not obvious to the trader? thanks Adam
That reminds me of a formula I use to use but keep forgetting- Previous day's close X's 2 + Previous days high + Previous day's lows divided by 3 then subtract yesterday's low for todays high of trading range and same thing with high to get today's low end of expected range- if either is penetrated then go with direction as trending otherwise day trade within established range.
I'm guessing the result will look something like this?
http://i32.tinypic.com/29zu9ec.png
Great Stuff. I am enjoying reading your trading coach book right now as well. Thanks again.
I think that is a very good idea. But for how long do we stay in such beakouts? The answer is found in statistics; the average of simular breakouts, or as long price is trending(new high/advance-decline), and here comes measurments and statistics in again.
I think the strenght of a breakout also has one more variable. If the price ha been working for long time in an narrow range, the breakout is stronger.
frode
Dr. Bret,
I am wondering if you considered that you are only taking into account price and not time for volume into this equation. As price is simply an advertising mechanism and is not an indication of bullish or bearish development without classifying the type of volume attached to it. Higher prices with weakening volume is a sign of poor trade facilitation. As price is advertising higher, it is attracting less buyers, thus demand is drying up. Or higher prices in a contracted relative range and on high relative volume would represent supply is halting demand. Thus, simply judging bullish/bearish sentiment by price I do not believe would the best way to track trend/breakout/range activity. I believe tracking day over day high volume nodes, or value areas, would be a better way to gauge this activity. You so often speak of the importance of tracking value, but I believe simply tracking Bar 2 is greater than Bar 1, with disregard to the what happened within each bar, is a bit superficial. I would love to hear your ideas in regard to my comments, agree or disagree it is always valuable to my education as a trader to hear feedback from you.
Thanks much for the supportive comments and feedback. There are a number of directions to take this work, both intraday and across different stock baskets. The basic concept, indeed, should apply to any kind of baskets, including commodities, currencies, etc.
Brett
Hi Matt,
No question, from the vantage point of Market Profile, this would be considered "superficial", as would advance-decline lines, new highs/lows, momentum indicators, etc. The question is whether or not such price-based measures contain actionable information. If so, that's what's important to me.
I do think adding volume to the pot provides incremental valuable information; hence my interest in such tools as Market Delta. But I've worked with new high/low data and the Demand/Supply numbers for years and have seen how valuable they are.
The key is staying simple without being simplistic. Thanks for the feedback--
Brett
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