I want to enter a market when it bounces off a support level. For example, let's say that support in ES is at 2000 and the current price is 2005. I want to see the market trade down to 2000 and no more than x ticks below it and then go long once the market trades x ticks above 2000. What is a meaningful way to calculate x? I need to define what kind of bounce is signifcant enough to go long and also define how far it can trade below 2000 and still consider it to be a valid support level. The market often breaks a support level and fails to continue so I'm trying to determine how far it can break below it and also determine how far it needs to go in the other direction before entering. Thoughts, ideas, suggestions?
Some tools you can use to refine entry are order flow (either jigsaw dom for nt/multicharts or xtrader DOM), or cumulative delta. With the DOM, you want to see the level break lower and either see people just not wanting to sell lower (participation just dies out) or have somebody buying the break in large size. First option is the safer bet. With cumulative delta, you can see the second scenario happen if theres a delta divergence. Anything that shows large sell market orders being absorbed (delta down, price not). Delta is just difference between buy and sell market orders, to clear that up. I dont trade ES, but you dont want to see it take out the low by too much. With crude oil (my specialty) I dont like to see particular level or low taken out by more than 10-15 ticks if I want to see it reverse.
I don't see that data as an available tool on the platform I'm using but that's interesting info, thanks. You said you don't want to see the low taken out by more than 10-15 ticks, what do you think is a meaningful way to calculate that amount on other markets? A certain fraction of the average daily range maybe?
Im not sure. maybe if you get a lot of historical data and just look through charts you will be able to get a feel for it.Have a look at volumes too maybe. If theres a buyer scooping up the stops/breakout traders you should see quite significant volume. I just a 1 min chart to pinpoint the moment of the break and look at the volume on that specific candle.
This is just another way of asking the age-old question: how do I find the bottom? (And complementarily, how do I find the top?) Anybody who has found the answer probably won't be sharing it so good luck figuring out what they figured out. This is why I prefer trend following. No need to guess what the market is going to do, just figure out what it is doing now and respond appropriately. I miss the tops and bottoms but I also avoid the false turning points.
There is no rigid rule to this. This is more to an intuition, discretion. The market does not work this way, think of the market as random walk. Let's say if your 'x' is 5 ticks, it may work for the current trade, but not necessarily the next.
In my experience, I've found that mean reversion appears to be easier at first glance but in reality, designing and trading a trend following strategy is simpler. Mean reversion has all kinds of details which you have to get right in order to trade it, for example the inevitable big drawdowns are part of it and those often make you question what you're doing.
Do statistical analysis with x ticks as your variable. Plot a distribution and find x for significance.