Anthony Cascino is a professional engineer and trader with industry experience in signals and system analysis, data mining, statistical analysis, and machine learning.

Anthony Cascino.

How To Determine High Probability Entries

Anthony Cascino,

Traders regularly find themselves overwhelmed with complicated indicators and technical tools, so we are taking it “back to basics.” We will assess, in their purest state, Volume, Market Activity, and Price Action to demonstrate to traders the powerful analysis that comes to those who do not overcomplicate trading. To do this, we will analyze Crude Oil on a 1000 and 2000 tick chart.

Market Activity – Timeless BarType Selection

A conventional chart type, typically a time-based chart, will create a bar after a defined period of time. When the market is trading on low volume, time-based bars will be noisy and price action will be spurious. Conversely, during periods of high volume, time-based bars will be noiseless, but will also hide vital information inside each bar. When a trader applies an indicator to this (flawed) bartype, the information hidden inside each bar stays hidden and the indicator creates a false representation of market conditions and the indicator itself.

A tick chart, however, helps us unlock the information hidden inside time-based charts. A tick chart will create a new bar after a defined number of transactions. This means, instead of looking at price action based on an arbitrary passage of time, we can look at price action driven by supply and demand, which helps us unlock the secrets hidden inside time-based bars. Utilizing this market price model, an indicator will provide a better representation of its algorithm.

Price Action – Breakout Indicator Selection

The swing indicator is a simple tool designed to mark swing highs and lows, typically used to display when price breaks out of a range based on its strength setting. This strength setting is symmetrical in that the peak / trough marked will have the same depth / height on both sides. The higher the strength setting, the more relevant the swing point captured, however, more bars are required to mark the swing and therefore a potential breakout may be missed. To minimize this effect, we introduced two simple algorithmic changes in our version of the swing indicator.

1. First, we expanded the strength setting to include a left strength as well as a right strength. By setting the left strength to the desired (typically higher) strength setting, the more relevant swing points are captured. By setting the right strength to a lower value, the swing point will compute more quickly and be available for use in a breakout signal. Depending on the volatility of the instrument, this right strength value can be set to a fraction of the left strength so it is available near immediately.

2. Second, we expanded the indicator to allow its use on multiple time frames, which includes custom bartypes. In the following examples, we place the indicator on the larger frame tick chart (2000) and transpose the signals to the smaller frame tick chart (1000). This will help us identify the prominent swing points from the larger frame tick chart, while simultaneously getting a higher granularity, from the smaller frame tick chart, for entry points.

Volume – The Final Interpretation

Volume is a market fundamental – high volume signifies there is a large number of market participants involved in price action, whereas low volume indicates there are few market participants involved in price action. The Volume Swing indicator accumulates volume from each bar, computing the summation of volume for each swing. This information is then used to validate a breakout by identify market consolidation on low volume from the prior swing, followed by a breakout of higher volume on the building swing with the price breakout. In essence, the requirement is “new energy” at the swing point that is the breakout entry point.

Piecing it all Together
The below breakout signals are visualized with the The Indicator Club’s icSwing and icVolumeSwing tools, which are displayed on a 1000 tick chart. Each chart below demonstrates potential setups using the tools and concepts described above.

The image below denotes a setup with an arrow annotating a Long Entry at the break of the prior swing high.

As you can see in the above chart, the swing high and low are both stepping up (i.e. the market is creating higher highs and higher lows), signifying an upward sentiment. The entry point, which is at the break of the prior swing high, is confirmed as a valid setup / breakout when the cumulative volume of the current swing is greater than that of the prior swings.

When looking for a short entry, the same entry criteria apply, but the rules are simply reversed (as can be seen in the below image).

As you can see in the above chart, the swing high and low are both stepping down (i.e. the market is creating lower highs and lower lows), signifying a downward sentiment. The entry point, which is at the break of the prior swing low, is confirmed as a valid setup / breakout when the cumulative volume of the current swing is greater than that of the prior swings.

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