ES Trading Filter – When Not to Trade and Trading TICK Divergence

ES Trading Filter – The TICK Filter Strategy

One of the advantages of ZoneTraderPro is its powerful and useful filter strategies involving the TICK.  The ES Trading Filter TICK filter strategy simply says that we are going to look for a higher tick high and a higher tick low when going into along trade, and vice versa for a short trade. ZoneTraderPro displays the TICK in real time along the bottom of the chart, and it displays the highs and the lows above the currently traded price.  Additionally ZoneTraderPro has an indicator settings that allows a red dot to be painted onto the chart at the exact location when a higher high or a lower low has been made.  This setting has a default of 100 meaning that the previous value can be exceeded by 100 before the dot is painted. The advantages to using this TICK filter also demonstrate when there is a divergence in the tick to create a tradable pattern. Let’s look at the following chart from 10 /25/13.  On the left-hand side of the chart we see if successful exhaustion trade followed by a successful exhaustion trend trade.  At the conclusion of the exhaustion trend trade there is a high tick of 541 and the red dot indicator indicating that the previous five 324 was exceeded.  The price then drops 11 ticks stopping at a blue counter trend zone.  At the blue counter trend zone we see a tick divergence of -396 which is a higher tick low.

10/25/13 Trading Filter Example
10/25/13 Trading Filter Example which demonstrates TICK filter strategy

The reversal trade is then indicated, however all of the ZoneTraderPro filters are advising against the trade.  The background is green indicating the euro is bullish for stocks.  There was a higher tick high and a higher tick low going into the trade. The market trades through the reversal and again to a blue counter trend zone making a lower tick high of 399.  Again we see tick divergence and an unfavorable euro position at this high.  When the reversal is indicated the fact that the tick could not make a higher high going into the trade would create a filter condition which would negate the trade, even though the background is now green.

Trading TICK Divergence

As the market traded to each of the blue counter trend zones that provided a low risk trading opportunity to trade the TICK divergence using the ES Trading Filter and the blue counter trend zones. The tick and the euro were both favorable to the outcome of the trades.

This Post Has 2 Comments

  1. amin

    I am impressed with the zones, and how they are calculated ahead of time. The use of the Euro as a filter is interesting. Never noted to be used by anyone. I wonder how would a typical day in crude oil would look like using the ZonetraderPro ? Also, any other correlated markets could be used ??

    1. Chris

      HI Amin,

      ZoneTraderPro works well on all markets but I personally only use it on the ES. Here is why. The ES has the bonds as a very tightly correlated market, and it has Volume information, the Euro and $TICK filters. In markets like gold and oil all you have is volume information and indicators that everybody uses. These markets are also more illiquid. In 2007 I created a term called illiquidity volatility. Illiquidity volatility says this – the more illiquid a market is the less logical it is.

      ZoneTraderPro looks to find patterns and in an illiquid market, a small number of contracts can be used to run stops and thus break a pattern. In the ES when there is illiquidity volatility, it is due to a news event and there is no advantage to taking a position in a news event. With the strong correlation to the bonds, the ES also has numerous market internals (E-mini Premium, $TICK, volume) that can be easily obtained to filter and place trades based on patterns.

      In answer to your second question, the zones form ahead of time based on the patterns that are being created. In the most interesting statistic there is, when the price reaches a blue countertrend zone, 50% of the time the market does not go through that zone, and then retraces at least 6 ticks. Now if I know that 50% of the time price will only touch the zone, and I know that price in advance, where do you think I will exit my trade? Look again at the picture in this post. In 7 trades that reached a blue zone, 6 of those trades traded to the zone, and retraced. This becomes even more important on a bond chart, as it provides a strong reason to trade the ES.

      I will post a few charts this weekend of bonds, gold, and oil and look for any correlation.

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