The charts below show a possible trading set-up and entry for initiating a short position trade for the S&P 500 index.
The first thing to do is to set up your screen so it looks like the one below. This is achieved by making sure that Auto is selected from the tiling toolbar. Now, load up the following three charts:
1. S&P 500 (1 minute) 2. S&P 500 (2 minute) 3. S&P 500 (5 minute)
Click the S&P 500 1 minute chart and press the Tile to Pattern button. Your screen should now be laid out like the one below.
Finally, synchronise the charts by select File > Synchronise from the menu.
Step 1 – Support & Resistance Checks
When trading in real-time, the last thing you want is a screen that is cluttered with lots of line studies and indicators, as this is tiring to watch over extended periods of time. Whatever tools we use for checking support and resistance areas, they need to be quick to set up and easy on the eye. Although not shown on the above chart, we recommend using the Pivot Points to show us where the key support and resistance areas are likely to be. See the Support & Resistance section on page 10 for more information on how to display and interpret the Pivot Points. These facilities will give you a good idea as to whether the price is trading in the vicinity of support or resistance.
Step 2 – Trending Checks
The next thing to do is to set up all your charts with the trending tools, so that it’s easy to see the trend direction across the different timeframes. In this example, we’ve set up the
Diamond Indicators and the Trend Bar Indicator to give a visual indication of the
short/medium term trend (see the Trends section on page 18 for more information.) You may want to switch on the blue trend indicators as a further visual cue to indicate a potential change in trend direction.
• In the example above, you can see that the both the 2 minute and 5 minute charts (on the left), are showing established down trends, indicated by the red diamonds and red bars.
Step 3 – Supply & Demand Checks
In the example on the previous page, all the charts have the red & green VSA indicators switched on. These indicators can be activated by clicking the VSA indicator button on the Analysis toolbar, shown on the left.
• Ideally, before initiating a trade, we’re looking for a consensus indication of strength (green indicators) or weakness (red indicators). In the example on the previous page, you can see that weakness is present at the same time on all of the different timeframes.
The next we can do is to check out the Relative Volume Gauge for the one minute S&P 500 chart, to see if there is more bullish or bearish volume at the moment (see the Supply
& Demand section on page 27.) You may also see red/green indicators in the vicinity,
which would represent latent imbalances of supply or demand in the background. You need to take particular note of rectangular symbols, or groups of triangular indicators, as these signs are often more significant. The “Master the Markets” book explains more about the various supply and demand indicators.
In Summary
So far, we have seen the following evidence for a short trade:
• The daily EOD S&P 500 chart for the previous day is in a downtrend situation (and weakness was also present.) This means that the intraday opportunities should be to the short side of the market.
• The Diamonds and Trend Bar indicators are red on the 2 and 5 minute timeframes, showing that a downtrend is in progress on the longer intraday charts.
• The Trend Bar is Red on the 1 minute chart, which matches the 2 & 5 minute timeframes. The Diamond is white, which means that the short term trend is now changing. The evidence is now looking good for a trend change across all three timeframes. We could wait to check for the diamond to change red on the 1 minute for further confirmation if required.
• There is a consensus of red VSA indicators (showing weakness present) across each timeframe. Based on these observations, we’re now expecting the market to drop. • The Relative Volume Gauge for the 1 minute S&P 500 is showing that there is far
more bearish volume in the market at the moment and the closing price is lower than the opening price.
Exiting the Position
Once you’ve decided to enter a trade, all you need to do is track the position with a stop- loss system until completion. The position can be tracked very satisfactorily with the ‘H’ Stop system, as shown on page 35. As seen below, the ‘H’ Stops remain above the market and keep you in the trade through a couple of adverse reactions.
The settings of the near and far ‘H’ stops can be adjusted in accordance with your preferences. This type of stop system is designed to keep you in the trade as long as possible, sticking like a ratchet at points where your trade is under most risk.
Most traders will liquidate a position under one of the following conditions: • Both ‘H’ Stops switch to the opposite side of the market
• The Near Stop is breached and the Diamond is white
• The Far Stop is breached and the Diamond is green (for a short position) • The ‘H’ Stops straddle the bar (one above and one below) and either stop is