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The concept of the Universal system is
simple:
- Look for areas of strong
support/resistance,
- Trade the bounces
from those points, and
- Maximize your exit.
That's it. The rest is just putting
together a set of indicators that allow you to use that concept in an
objective manner - one that takes all of the "fear" and "uncertainty" out of
trading. So let's build that. Here is a brief explanation.
We'll get to the specifics of settings up your charts, further down.
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- Look for areas
of strong support/resistance.
The best support/resistance I've found is the Market Profile, which some
charting programs call the
Price Histogram. Most MP charts are time based (not volume).
The most common chart is a 5-minute or 30-minute chart that builds a
histogram for each day. The bell-curve histogram that shows how much
time was spent at each price point. The price point at which the
market spent the most amount of time during the day is called the
Point of Control (POC).
It is illustrated here:
The POC formed
one one day, becomes strong support or resistance on the next day.
The logic is simple: it represents the price point where the market was
"most comfortable" or "most in balance" on a previous day. So if,
on the next day, the market opens below that
POC, and traders are long, they many will exit their trades at this
point. They will sell. We will buy from them, as selling pressure
exhausts.
It is also helpful to look back in time to the other
POC's that occured. It
is even more helpful to look at those POC's that are still "virgin,"
i.e. they have not yet been touched by prices. This next chart shows a
series of Virgin POC's, which we call
VPC's:
Each of these is a key support/resistance point. This may seem obvious,
but each day, the market opens with a VPC above, and a
VPC below (there are some
exceptions, for example when the market is breaking out to new
historical highs. This range range we call the Natural Trading Range ("NTR").
We mark this on our charts each morning. Here is an example:
In the above chart, the market will open somewhere between the lower VPC
(704.70) and the upper VPC (757.90). So that is our
NTR. We sit and wait for
the market to either come up to the 757.90 VPC, or down to the 704.70
VPC. When the market comes up to a
VPC from below, we look for a
short because we are expecting traders to be exiting their long trades.
When the market comes down to a VPC from above, we look for a long
because traders will be exiting their short trades.
That brings us to the second step of this simple method.
- Trade the
bounces from the support/resistance points.
How to do this? Well, in the above example, you could simply enter a
short limit trade at 757.9, and a long limit trade at 704.7. But
oscillator indicators can help us "make sure" that we are getting into
the trade at the right point in time. Common oscillator indicators
include Moving Average, CCI, Stochastic, and MACD. You can use any of
these. In the end, they are all the same because they oscillate.
I use a stochastic. But I combine two stochastics - a longer term
one, and a shorter term one. Why? The longer term one tells me that the
market, in the longer term, is overbought or oversold. The shorter
term one gives the entry point. It's like being double-safe.
Only take a short trade when both the long term stochastic, and the
short term stochastic, are in alignment.
The next chart shows the entry point. Three things have to happen:
(1) The long term stochastic must be above 80.
- When this occurs, as a visual aid, I have colored the panel
grey.
(2) The short term stochastic must be above 80, and must cross down.
- When this occurs, as a visual aid, I have colored the short term
stochastic. So here, the entry point is when it switches from green to
pink.
- Also, as a visual aid, I have small orange arrows. These are
automatically painted whenever (1) and (2) are in alignment. Note,
however, that you do not yet have a Universal trade until (3) is also
true:
(3) Prices have crossed above the VPC, from below. (Shown here as
a white line, 1344.75).
And that leads us to the final part:
- Maximize your
exit.
There are many methods one can use for maximizing an exit. Here I
use the Keltner bands (shown in orange, above) because they take simple
multiples of the average true range. That means, when prices move to the
other end of the band, they have reached the other end of the average
trading range. Good place to exit. At least, for half of your
trade.
How you minimize losses and stops is a completely different matter.
But one way to minimize a losing trade is to do exactly the same as
above: just exit at the other end of the Keltner. Here are two
examples, one is a winning trade and the other is a losing trade:
The losing trade example above also illustrates another trade maximizing
point: note how the trade became profitable, and almost touched
the lower Keltner band at about 11:15. Then prices moved away.
This is slightly subjective, but if I have a winning trade and
I've just missed the Keltner exit by only a tick or two, then I will
enter a break-even stop. Why? Because the "push" that gave
us the trade will be over, if it retraces back to the entry point.
Here, a break-even stop would have saved us a losing trade.
However, the Keltner exit - even at a loss - saved us from potentially
losing even more.
If you trade larger quantities, you may want to divide your trade into
two halves. In that case, you can exit half at the Keltner and
hold the second half. At the point where you exit the first have,
it makes sense to enter a break-even stop on teh second half.
A good place to exit the second half of the trade is when both the slow
and fast stochastics have completed a full oscillation, as illustrated
here:
There are other ways to maximize the second half of the trade. Another
way is to use Fibonacci to determine the ideal Wave 3 exit point. Refer
to my book, or to the sections on this web site, about Fibonacci
trading.
That's it!
Settings in Ensign
We use two charts for each instrument that
we trade: a 5 or 30-minute Price Histogram chart, and a Range chart with the
Stochastic and Keltner studies. You can download the chart templates here.
For more detail on how the charts work, see our separate section below. The recommended charts and templates to use are shown below.
Right-click, download, save in your Ensign Templates folder.
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2/22/2008 Update:
We have made several
changes to the template. In summary:
- Moved the trade
entry and exit prices next to the actual price bars.
Benefit: Easier to see entry and exit prices, and confirm
them with your own results.
- Changed the
colors of the price bars to reflect the fast stochastic.
Benefit: Easier to prepare for a trade, as the current
price bar will flash a color change as the stochastic is
preparing to cross
- Added range bar
prices for current price bar.
Benefit: This shows the price that is one tick above and
below the current bar. In conjunction with (2) above, this
allows you to prepare for the trade by entering your Stop Limit
price before-hand. Works great with IB's Book Trader,
Bracket Trader, or Ninja Trader.
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Ensign Sound Set
templates/sounds.zip
Unzip this file into your folder
c:/ensign/sounds
If you don't have a Sounds folder, create one.
Manual Settings for Other Traders
Remember that this is a
two-chart system:
- Market-Profile
or Price Histogram (Preferably 5 min, or 30min if you need to "look
back" farther
It is easy to set up the charts yourself,
assuming your charting program has a Market Profile or Price Histogram indicator. If not, you
can still mark your charts manually by checking our blogs each morning:
http://www.enthios.com/blogs/esblog.htm
http://www.enthios.com/blogs/er2blog.htm
http://www.enthios.com/blogs/ymblog.htm
- Universal Chart
with oscillators and exit targets. (Preferably 50-range for es and
er2).
- Fast Stochastic: 9,3,3 with an
adaptive average. In Ensign, we use Howard's special version.
- Slow Stochastic: 81,27,27 with an
adaptive average. Note this is 9x the faster stochastic.
- Keltner: 3, 60 for es;
3.8, 60 for ER2; 3, 60 for ym; with an adaptive
average.
We have had many requests
from users of other charting programs that do not use Range charts,
for how to "port" the settings over. The most important chart for
intraday trading is the Market Profile or Price Histogram. Of lesser
importance is the Univeral. Instead it is important to understand what
the Universal does: it simply uses oscillators (one short term, one longer
term for confirmation) to help you get into the trade. It then uses a
Keltner band, which is an average of the trading range, to target the exit.
You can use any oscillator, including MACD, CCI, RSI, or even two
moving averages.
As for time frames, if your
charting program does not have Range bars then we would suggest you use tick
charts (start with 100~300 tick), or a 1-minute chart. You can "map"
the time frame to ours by observing the charts that we post to the blogs.
That's it!
How the Universal Template works in
Ensign.
Price Histogram
You don't really need to download the Price
Histogram template, just set your PH study as shown. Here are the
settings in Ensign for the Price Histogram indicator that show only the
Virgin POC's. This was created specifically for us by Howard! It is
yet another reason why I prefer to use Ensign - Howard is very receptive to
traders' needs.
Universal Template
The first thing you must do is set the
VPC's
manually each morning, based on the lines from the Price Histogram study or
whatever other source you may use. For this we use the DPL (Daily
Price Lines) study. On your Universal Template, it is the second study
from the top:
This is what you should see:
Note that I have it set to sound an alert
when prices hit any of the VPC lines. Quite helpful. Be sure to set your own
alerts to your own sound files, as they may not match mine. You can
turn it off by clicking "silent."
What Are All Those Arrows?
Key (number colors match to color of
arrow or indicator)
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(1) |
These small orange arrows appears
above the high, as a short indicator, each time BOTH (a) the slow
stochastic [13] is above 80, AND (b) the fast stochastic [14] is
above 80 and crosses down. It appears below the low, as a long
indicator, for longs. |
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(2) |
Unfiltered Universal Short Trade
(Automatic): A larger Yellow down arrow appears if it is the
beginning of a trade. That is, if the previous trade has exited and
we are 'flat.' Note this has nothing to with trades based on
the VPC's, it is just an 'open trade' system that trades the
Universal every time there is an entry signal. |
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(3) |
Unfiltered Universal Long Trade
(Automatic): same as above, but for a long. Notice that these
all have a (1) arrow with them. I hope you understand why. |
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(4) |
Unfiltered Universal Trade Exit
(Automatic): this large arrow indicates the exit from a long trade
as prices hit the opposite Keltner band. |
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(5) |
Unfiltered Universal Trade Exit
(Automatic): this large arrow indicates the exit from a short trade
as prices hit the opposite Keltner band. |
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(6) |
Unfiltered Universal Trade "In
Trade" color band. This simply indicates that you are in a trade -
green (long) or pink (short). |
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(7) |
Unfiltered Universal Trade: Entry
Price. You can use this to confirm how close you got to the optimum
entry price. |
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(8) |
Unfiltered Universal Trade: Exit
Price. This is the price at which the Keltner was hit.
Note you can actually look at the cumulative profit & loss of these
unfiltered trades by clicking on Charts > Trade Detail. |
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(9) |
Kelter band price. This is a DPL
study that I created to paint the Keltner band prices. That
makes it easier for you to set your limit sell price to exit your
trades. |
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(10) |
VWAP Price. This is worth watching.
It's similar to the intraday POC. |
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(11) |
These little dots indicate each
time the fast stochastic [14] is above 80 (or below 20) and does a
cross. |
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(12) |
The 80 band turns light grey when
the slow stochastic is above 80. This is means as a visual cue to
tell you that a short trade is setting up. Same applies if it is
below 20. You will notice a visual alert as well "Alert: Short
Condition" or "Alert: Long Condition" |
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(13) |
Slow stochastic |
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(14) |
Fast Stochastic |
How Do I Match Your Sounds?
Unzip this file into your folder
c:/ensign/sounds
templates/sounds.zip
Now Trade the Charts
Suggestions:
- Paper trade this system with each individual
instrument that you intend to trade on, for at least 50 trades (this could
take up to two months).
- Keep a record of every paper trade: entry, exit,
max and min of each trade. This way you can begin to optimize for
stops and exit targets.
- Once you have obtained objective information for
stops and targets, begin trading with only one contract.
- Bracket each trade with the optimized target and
stops, so that you do not have to worry about execution in case of an
internet disconnect. I use Ninja Trader with the IB platform.
- To study the methods, please refer to our
blog archives. Usual
disclaimers exist - these are only indications, etc.
- Read more about the
Market Profile and
Price Histogram, so you understand how they
work.
- Read more about
other pivots, which
you can also use with the Universal.
Templates are also available in
Investor/RT and eSignal. I did not create these, so if you
have any questions, please join our Yahoo Discussion Group and ask some of
our members there.
Where to Trade with us, Ask Questions, or just Chat
We have three places
you can trade the Universal, all free.
- Live Chat Room in
IRC
- Type "/server irc.othernet.org"
- Then type "/join #enthios"
- For more information,
click here.
- Enthios Group on
Yahoo (2,000+ members)
- Here you can discuss the Universal, and other methods, with
thousands of other traders.
- The Group is private to keep spammers out, so just send an email to
info@enthios.com with the words "Join Enthios Yahoo Group" in the
subject heading. (If you click the link, it will already be entered!)
- Yahoo! Instant
Messenger (limited to 300)
- Here we send out real-time alerts to the trades.
- Just send an email to
info@enthios.com with the words "JOIN ENTHIOS ALERT SERVICE" in the
headline.
- We will then send you a set of instructions.
A trade with the Universal
2/29/2008
Winning trades are easy, in
hindsight. I prefer to show how to do a losing trade. But the
beginning is always the same.
| First thing you
do each morning is check your Price Histogram chart. If
you don't have one, then you can just get the numbers manually
from our web site. We post the
NTR each morning on each of our blogs (ES,
ER2,
YM,
NQ).
The Price Histogram
chart is 5 or 30-minute, day session only.
Conditions for a Trade
Now, move to
your UNI chart. Mark the
VPC lines manually in your UNI chart. One you have done so,
you don't need to look at the Price Histogram chart again.
Make sure your UNI chart is set to "All Sessions" (not day
session only).
A long trade is
signaled when prices move down to the VPC from above, as shown
here.
We have two
indicators to alert you to a long trade setup. First, the
20 band panel will turn light grey when the slow stochastic is <
20. Also, a text alert will pop up in the upper right hand
corner:
Anticipating
the trade entry
Trade entry is
always difficult. I have set up the charts specifically to make
trade entry as easy as possible. After all, isn't that what
charts are for?
Once prices have
touched or moved below the
VPC line, and assuming (1) and (2) from the above chart are
also true, you are then looking for the %K to cross above %D on
the fast stochastic. The fast stochastic is the green and pink
spread line in the stochastic window. When the color
changes from red to green, that is a cross.
- Note you can
anticipate the color change because the spread bars get shorter
as they get closer to a cross.
- Note I have
colored the price bars in the main chart window to be the exact
same color as the stochastic spread bars. So you can see the
impending color change in the main window.
- Note the color
will start to change as the bar is in the process of being
created (from one or two minutes, to a few seconds). During this
time, you may see the color flash back and forth between pink
and green. Or you may see it hold green for a while.
Entering the Trade
You are now
waiting for the green price bar to complete. Once it is
complete, you can enter the trade.
Here we have
set up two price arrows that show you the price that is one tick
above, and below, the current price bar. So as the entry bar is
about to complete, (in this example) you can look and see that
12416 is one tick above the high. So you can prepare your stop
market long order using your broker, or an bracket trader.
Note that the
initial exit target is also shown, here 12469. So if you
use a bracket trader, you can input that information as well.
As soon as the
bar "prints" and a new price bar is started, you will see a Blue
Arrow confirming the entry bar. It will also print a
price, for reviewing later.
Why do you place
a market stop order? Sometimes, prices might continue to fall.
If so, you may want to trail your stop entry price downwards
with each successive bar, to give you a more advantages entry
price.
So what do you
do when the trade moves against you? Read on.
Following our Alerts for a Trade:
If you are in
our chat room or receiving our live alerts from Yahoo Messenger,
as prices approach the VPC, you will get an alert to go to the
blog page. It shows the trade signal is approaching. Note
how you can also see the target, which is the other end of the
Keltner band.
Trade Setup
This confirms
the VPC line and number, and shows roughly what the trade should
look like after it signals. It uses a curved dotted arrow.
Signal
Confirmation
The next chart
confirms the trade entry. It uses a straight dashed arrow,
and also shows the initial Keltner exit target.
Trade Exit and "Natural Stops"
We then use a
solid arrow to confirm the trade. The charts automatically
paint a yellow highlight around the exit bar as it touches the
Keltner.
Here the trade
moved against us. You can use stops or not; that is
totally up to you. However if you do not use stops, then the
Keltner exit provides an excellent Natural Stop. It is the
same target you would exit at on a winning trade. Note how
it minimizes the loss on this trade, which went as much as 63
points against us before exiting at -22.
Warning: Trading
without stops is dangerous. You should always do your
homework first, and be aware of 'worst case' situations where
the market makes sudden moves. A "9/11 failsafe stop" is a
good idea. Another good idea is a stop based on your own
liquidity, which of course your broker will do for you if you
are not careful. That's also known as an 'electronic
margin call.'
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Other Applications for
the Universal
You can use the UNI chart on
other time frames as well. For instance, you can use it filtered, or
unfiltered, on a 30-minute chart as a swing trading system. Be sure to
use Ensign's built-in back test function to give you a quick look at how the
trade would look on the instrument and time frame that you are considering.
Simply click Charts -> Trade Detail. Very handy, when used in conjunction
with the UNI chart!
- Note this gives you
'unfiltered' trades only, i.e. it assumes that you take all trades that have
the UNI setup, regardless of whether it occurs at a VPC line.
- Note if you use the method
on a 5 or 30-minute chart, you might want to consider 'upping' the
time-frame of the Natural Trading Range accordingly, to give you a nice
filter. Try a Weekly VPC, for example.
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