The Market Maker Method Study Guide Part 4

MMM Notes Also, when the EMA's are spread out and Level III can be identified, it is likely that the trend will be getting ready to collapse. The EMA's will follow rather than lead. It is very important that you accept and understand that no indicator will have the ability to identify when a trade should be entered. The pattern and the count remain the most important features. In fact, many people who use this method do not use the indicators at all. Identifying the count and the patterns is central and is enough to trade successfully. An exception exists though, if you are having difficulty identifying the count on a price chart because there is too much noise, then using a rapid EMA such as the EMA-5, can show the patterns quite clearly. MMM Notes CO L O U R-CO DED SE S S I O N S Two boxes can be drawn. The 1st is drawn around the Asian session and simply denotes the area of consolidation that is expected during this period. It does not mean that a range can only be broken outside of this box. It does not mean that you should not identify smaller ranges that occur during this period. It is just a guide. The 2nd is a smaller box and highlights a time when there is a high probability of the midsession reversal (the New York Reversal). It starts at the beginning of the NY open and runs for about 3 hours. If this period also encases the ADR high or low then the likelihood of reversal in or around this area is even more likely. However, as before this is not the only place that reversals can occur and should be treated as a guide only. During this period, it is most important that you maintain "the count" because this will be a key feature telling you whether or not a reversal is likely. MMM Notes P R EV I OU S H O D /L OD M A R K E R S The high and low prices from the previous day were used by the market maker to trap volume. It is therefore significant to know how price acts at these levels the following day. These levels will often line up with other support and resistance zones. When this occurs, it is not uncommon to see price approach the line, and "throw a spike" over the line. At other times price might approach but not quite reach the previous high or low. This tells you that the current price is already on the correct side. You will therefore expect the price to "bounce down” or “bounce up" as the case may be. This will most often occur around the time of the London open. You should recall that this is likely to be part of the market makers aim of keeping traders trapped. If they've already made a high for instance, and there are positions trapped here then they will not want to push price above it again but will then approach it, perhaps even spike with an enlarged spread and pull away again. So this becomes another piece of the puzzle to help identify where the "strike zones" are likely to be. AD R HIG H A N D L O W The ADR is normally plotted as an oscillator. It is however difficult to read in this format and Mauro has produced a version which is read on the price chart and provides a high and low value. Understanding the ADR and where the high and low targets might be on the basis of the ADR can help to determine areas where reversals might be likely to occur. As with other indicators the real strengths of the ADR occurs when its values coincide with other indicators being used. These would particularly include the pivot point or with a 50 or 200 moving average. MMM Notes PI V O TS Pivot points are a widely available indicator that provide a "grid" based on the previous day's range. As a grid, they can provide a clue about where today's high or low might sit. As with other indicators, their strength really appears when there is a confluence of signals. In effect, the pivot levels are a grid of the ADR because they are based on the high, low, and close of the previous day's candle. So, if the previous day's candle was red then this indicates that today might be an M1/M3 day. (This means that price will move between the M1 and M3 pivots) Alternately, if the previous day's candle was green then this indicates that the day might be an M2/M4 day. (This means that price will move between the M2 and M4 pivots). The Pivot Levels The Midpoint Pivots of The Midpoint Pivots of interest after a red day interest after a green day R2 M4 R1 M3 Central Pivot Point M2 S1 M1 S2 Looked at another way: 1. The HOD is more likely to be located at the M3 or M4 mid-pivot points 2. The LOD is more likely to be located at or near the M1 or M2 midpivot points Not surprisingly, when you consider these points on your charts you will often find that they are located 25 to 50 points above or below the Asian range. Similarly, if you are able to enter a trade at the HOD then it is possible that a reasonable target may be at the M1 or M2. This can help when you are following the trend and trying to avoid early exits on pullbacks. Note that understanding the count is probably more effective but the pivots provide further confirmation. MMM Notes There are some situations where pivots are inaccurate. If the previous day's range has been unusually large or unusually small then their predictive value is poor. It can be more accurate if it is coupled with an ADR indicator which tells us the average daily trading range of the last 2 weeks. So, for example, if the ADR high lines up with M3 and is then also happens to be an EMA 200 in the same place then this is a high probability area for a reversal. As with all the indicators, the trader has to act as a filter and be able to interpret that filter in the context of information being provided by the other indicators. And, be aware that the price action or chart patterns override everything else. The indicators are only there to provide a guide. MMM Notes RS I The RSI: 1. Is based on the close and does not tend to react to price spikes. 2. Helps to confirm shift in momentum. This is further demonstrated by crossover of the EMA 50 and this is a significant confirmation when you have seen the reversal (e.g. via an M pattern). 3. The crossing of its baseline represents a cross shift in momentum. So this pattern confirms what you are seeing on the price and on the EMA's. 4. The overbought and oversold conditions of the RSI are seen at the extremes. When this occurs, in the right context of course, then you will be expecting to see M or W formations in the RSI itself. 5. Is also excellent for spotting divergence. This means that when the market maker is throwing an extra spike to entice traders to continue further into that direction, the RSI filters this out because it is based on the close. Consequently, a trend line on the price may show an increasing movement because it is based on the highs, while the RSI may be flat or even reducing. This is the divergence. MMM Notes TD I ( T RA D ER S DYN A MI C I N D E X) The TDI is an improved version of the RSI and is really a hybrid of a number of different indicators. It incorporates a number of lines: 1. A basic RSI line 2. A trade signal line which provides entry signals when the RSI crosses over and this tends to be much earlier than would be possible if you waited for the RSI to cross the midline 3. A market baseline which replaces in many respects the usual midline of the RSI except that it is a dynamic line and so the crossover also occurs earlier. 4. Volatility bands which are similar to a Bollinger band but applied to the market baseline of the indicator instead of price. The volatility bands have a number of uses: 1. They act as support and resistance lines based on the close which is much stronger 2. When the bands re-contain the RSI line after breakout, it is a sign of weakening and an impending reversal. This represents a stop hunt. 3. When viewed in the proper context, they can identify stop hunts, entries and exits Mauro's specific use of this indicator identifies the following indicator patterns which, when looked at in the context of the price action, provide an even more accurate means of triggering trades. The patterns are: 1. Shark Fin Short. Look for the following features: ⋅ The volatility bands have been tight. consolidation of the Asian range ⋅ The RSI line breaks out of the volatility bands. Provided the price is in the right area (25 to 50 pips above the Asian range), then this indicates that price is in the stop hunt area. ⋅ ⋅ If it reaches an overbought state and the price action is in agreement this can be an ideal place to sell. The RSI line will then cross back below the signal line so that it ⋅ looks like a shark fin. Entering the trade at this point would still be valid. The RSI then crosses the red signal line. Entering a trade at this ⋅ ⋅ They show the point would still be valid. Note that these secondary places for entry would also represent potential places for adding to your position. As the trade progresses, you would normally be trying to identify the count from the price data. However you get further MMM Notes ⋅ confirmation of this when you review the shape/pattern of the RSI in its journey back to the other side of the volatility bands. An exit is suggested when the RSI gets the opposite Volatility band and recrosses the Signal line again. Again, this is only valid when it is occurring at the correct place. If it occurs during the consolidation phase for instance, it is meaningless. It is meant to be used in the same area that price action would identify the stop hunt (where the M/W pattern is). 2. ⋅ 3. Shark Fin Long. Is the same as the Shark Fin Short, but upside down Scaling-in positions Use each of the entry locations noted above ie ⋅ the appearance of the shark fin (1st) ⋅ the Market base line cross (referred to as Blood in the Water) (2nd) ⋅ break out of the opposite volatility band during the trend run (3rd) MMM Notes CON F L UE NC E O F SI G N A L S Some patterns and signals when seen in combination provide very high probability setups. Overall though you must consider: 1. Price action and the patterns ⋅ ⋅ M/W Half Batman ⋅ Straightaway ⋅ RRT 2. The count ⋅ ⋅ The weekly cycle The three day cycle ⋅ The intraday cycle 3. The timing ⋅ Distance from the Asian range ⋅ Need for second move after accumulation 4. The indicators ⋅ EMA 5/13 ⋅ EMA 50/200 ⋅ ⋅ RSI/TDI Pivots MMM Notes T R EN D A SS E SS M E NT There are 2 types of trend in the market place. There is the MM Trend, or the True Trend and the Technical Trend. The true trend is set by the market maker and can be reversed at any time. Understanding this key issue in important because it allows you to be free of the trend bias that tends to keep people locked into wanting to trade in a fixed or single direction. The trend can move in both directions, and as the MM’s can change the trend at will, so should you. Identifying where you are in the count will help project the next move. It is important not to become married to this projection, because the MM is more than capable of changing trend several times in a short period of time. These moves will often have other roles with regard to triggering stops and having traders enter on the basis of a technical trend while the True Trend turns out to be different. The hourly chart will often remove some of the noise created by the faster 15 min chart and can be useful to review the trend. A 4 hourly chart will often highlight the peak formation highs and lows even more clearly as a pin bar or a RRT formation. But a daily chart is too slow to identify the patterns use fully. If you identify areas where the patterns all line up, for example, a 4 hourly pin bar, with an hourly RRT and a 15 min W/M then the indications are very strong for a reversal at this point. The intraday trend usually lines up with the higher time frames. It typically begins at the stop hunt (except in a straightaway when it starts out of the Asian session). While trading the intraday Sessions it is still important to step back and look at the bigger picture. For example, if, on the three-day cycle you are at a Level III move then you will expect the charts to demonstrate a Technical Trend. However because of the position in the cycle, you also know that the trend should be coming to an end and a collapse and reversal is imminent. BAS IC T R EN D A N AL YS I S W IT HALL I N FO R MA T IO N AV A I L A B LE Features identified in an uptrend are: 1. 2. 3. 4. 5. RSI in the 80 to 40 range Spike bottoms W bottoms The EMA 5 and EMA 13 are positive Price is above the EMA 50 and EMA 200