Applying the 3-2-1 Approach to the ES

Discussion in 'Technical Analysis' started by bthomas, Feb 19, 2009.

  1. bthomas


    Moves Out of the Middle - MoM's

    Market Profile and the 3-2-1 Approach to Market Analysis work equally well in any market. This thread will focus exclusively on the ES.

    The ES came to a balance point over the last 3 days of trading at 789.50. All the business that had to be completed was completed and prices had to move out of the balance point area to create new interest in buying or selling the contract. Because the distribution was a "b" pattern, the most likely direction of the next move was lower. The contract did trade lower hitting 775.00 before closing at 777.25 on end of day short covering.

    The theory is simple, reliable and accurate. You can use the methodology to increase your bottom line through better directional forecasts and more precise entries and exits from these trades.

  2. bthomas


    Retest - Failure Trade Example

    The TIE software and research supports three basic trades: for trending markets, a setback trade; for bracketed markets, a retest failure trade; and for the end of the move/change, an exhaustion bar trade.

    Today's retest/failure trade (RTF) set up when the market probed and tested forecast support at 760/762 (from posted market research and chat room comments). The 115 bar's low was 760.25. The 1130 bar's low was 760.25 followed by a new low of one tick of 760.00 in the 1133 bar. The market tried to auction lower and failed. This set up the RTF trade and was signaled by the green circle in the 1130 bar. The market rallied to 768 in the 1209 bar. Depending upon your entry point this trade yielded 3 to 7 points. Not the biggest trade we see in the ES, but a good trade nonetheless.

    Our methodology, setups, triggers and entry/exit rules put you into the market at the edges. This increases profitability in two ways; bigger gains, when right, and, smaller losses, when wrong.

  3. bthomas



    The 3-2-1 Methodology is based on 3 rules, 2 patterns and 1 indicator. The 3rd Rule is new moves start at Balance Points. do not fade this move at your #1 support/resistance levels as they have the potential to break out of the current trading range and start a new directional move.

    Which way will the market move? The skewing in the distributions reveals the next most probable directional move of the market. The distributions in this screen capture are all skewed to the low side, or "b" patterns. And the market did break lower as per the theory and Rule #3 in the TIE methodology.

    Why don't you fade this move at your #1 support/resistance levels? The move has the potential to be a big move depending on how much time it took to form the Balance Point. If #1 support/resistance levels do hold, you will have time to enter the market at those levels with out taking the risk of fading a potentially big, new move.

  4. bthomas


    Example of MoM's - Moves Out of the Middle

    1. Today's screen capture shows two Rule #3 Moves out of the Middle (MoMs) and the moves expected from the Rule #3 set up.

    2. MoMs are created when all the business that needed to be completed in a price area is done. As the market comes into balance the price range narrows until it comes into balance at a specific price point, the Point of Control. The activity slows, then one commercial order hits the market and the balance is broken, and the market begins a new move.

    3. Many players are still thinking trading range and there are resting limit orders at the edges of the trading range. These orders are filled as the market moves through the old support/resistance areas and those players face ever increasing losses as the move continues.

    4. If you don't think the move will develop, you will have plenty of time to put in counter mover/fade orders.

    5. Rule #3 keeps you out of losing trades and makes you focus on the better trade, the emerging new move.

  5. bthomas


    1. Rule #1 is Low Volume numbers are support and resistance and stops activity. Can lean against these numbers to gain trade location. They offer high risk reward trading opportunities. The low volume numbers at 758 and 743.50 did stop the buying and selling. And the market did trade back to the High Volume number at 752.50.

    2. Rule #2 is High Volume numbers attract activity and can act as support/resistance the first time hit. The market is drawn to these numbers because they are what the market sees as value. Can't break support/resistance. Then the market will be pulled back to the High Volume number. When the Low Volume number at 743.50 held the market was pulled up to 752.50/753.00. When the Low Volume number at 75800 held, the market was pulled back to the High volume number at 752.50.

    3. You can use these High/Low Volume numbers to enter the market at the edges, which will automatically improve your bottom line. These numbers offer good high probability trading opportunities.

  6. bthomas


    Retest Failure Trade

    The Retest/Failure Trade (RTF) is one of our staple trades. As markets trade sideways/in a bracket about 70% of the time, the retest of support and resistance is the expected market reaction at the edge of a bracket. This trade capitalizes on this phenomena.

    1. The high at 74675 was set in the 1024 bar. The market retraced a portion of the range in the rally to 74675 and hit 74050. This set up the retest of 74675, which occurred at 1051.

    2. The 1048 bar had a square and diamond on top signaling that the buying was over. Markets go up until the buyers stop buying. Our proprietary indicators capture this condition real time allowing optimal entry into a RTF trade.

    3. The 1051 bar had a green dot, which signals a retest of a previous high. Resistance held and the market reversed eventually hitting 73850.

    4. Depending upon one’s entry and exit strategy, the trade yielded 3-7 points

    Trading is taking calculated risks for expected returns. Bracketed markets trade between support and resistance. This software captures the retest of support/resistance allowing optimal entry into high risk/reward trades, better yet, high probability trades. Isn’t this what trading should be?

  7. mlackner


    Bill, thats a great example of the RTF trade you and Charley preach in the room. Thanks for posting on the ES as well as the bonds. Patience ie.(letting trade setup develop) seems to be the key for the RTF trade especially in the ES.
  8. bthomas


    The 3-2-1 Methodology is based on 3 Rules, 2 Patterns and 1 Indicator.

    1. Rule#1 – Low Volume numbers ( LV #’s) are support/resistance and should be traded as such. LV #’s stop the buying/selling and can be leaned against for trade entry. If the LV # does hold, the market should be pulled back to the next HV# in the Long Term Distribution.

    2. The HV# did pulled the market to it and briefly slowed the activity.

    3. The LV # at 703 stopped the market and the market retraced back to 706.

    You can use these HV/LV#’s to improve trade location and improved the profitability of your trading

  9. bthomas


    The Retest Failure Trade (RTF) is designed to trade in bracketed market conditions. The market is in a bracketed state about 70% of the time and one has to know how to trade a bracketed market to add to their bottom line on a regular basis.

    1. The first low was set at 691.25 at 1154 AM. The RTF of 691.25 took place at 1336 PM setting up a buy, when support was retested and held.

    2. In auction market theory markets go down until the last seller has sold. The blue square captures that deceleration in the selling. The long entry came off the blue square in bar 1348, which signaled that the selling had dropped off enough to buy.

    3. The market rallied from 695 to 709+ with a profit potential of 10 to 14 points.

  10. bthomas


    Exhaustion Bar Trade

    Exhaustion bar trades signal the end of the move and occur when the buyers or sellers throw in the towel on their bad trades or hesitancy to enter the market on a trade they saw. The key to this possible exhaustion is the increase in volume compared to the volume in the preceding bars. The key is the reversal from these bar’s high or low.

    1. The setup was the market had rallied in three waves from 69750 to 71050 and the move ended on higher volume than in the preceding bars.

    2. The buying volume decreased in the succeeding bar.

    3. Trade entry was on the subsequent bar’s close or upon penetration of the exhaustion bar’s low. Entry price was 70750 to 70850.

    4. The market hit 703 on the first wave of selling and 699 on the second wave of selling.

    5. This trade yielded 4 to 9 points in profits depending upon entry and exit prices.

    #10     Mar 4, 2009