BumaSoft's Market Model - Free information on my core trading method

Freshness

Description

This is the last of the main factors (we will also discuss corelation, which is the optional factor, later) and one of the most important. It refers to the location of residual energy areas. Did they form mostly as a reaction to previous residual energy areas? Or did they form in relatively "fresh" areas, i.e. areas where price hasn't been consolidating for a very long time? If they are merely reactions, they aren't 100% fresh, so they will be lower probability than fresh areas. I tend to make an exception with demand areas that show up as a reaction to prior supply areas (or vice-versa), because lots of traders tend to setup limit orders there after the breakout, so that will be fresh energy (similar to the support turning into resistance / resistance turning into support concept in classic technical analysis).

Scoring

A fresh area will get a score of 5, while the other areas get zero.

Examples

http://toplessons.in/sites/default/f...freshness1.gif

http://toplessons.in/sites/default/f...freshness2.gif

An important tip:

http://toplessons.in/sites/default/f...freshness3.gif

High range candles wipe most of the residual energy in their range clean! This means that the first consolidations to form in the range of such candles are considered fresh.

Energy measurement factors summary

Let's go through a summary of what we discussed regarding residual energy measurements.

1. Angle of original imbalance (max score: 3)

GAP = 3 points
High Range Candles quasi-vertical drop/rally = 2 points
Gradual = 1 points
Weak = 0 points

2. Profit potential (max score: 3)

> 1:3 = 3 points
1:3 = 2 points
>= 1:2, < 1:3 = 1 point
< 1:2 = 0 points

3. Price-wise Absorption (max score: 3)

no tests = 3 points
one test = 2 points
two tests = 1 point
three or more tests = 0 points

4. Time-wise Absorption (max score: 2)

1-3 bars = 2 poitns
4-6 bars = 1 point
>6 bars = 0 points

5. Fractality (max score: 3)

For demand areas: If on a higher timeframe, price is moving from DEMAND to SUPPLY and it is closer to the DEMAND than to SUPPLY, then smaller timeframe DEMAND areas receive a score of 3. If, though moving from DEMAND to SUPPLY, price is closer to the SUPPLY, the smaller TF DEMAND areas will have a score of 2. If price on the higher timeframe is moving the other way (from supply to demand), but price is closer to demand, the lower timeframe demand areas get a score of 1. They score 0 when price moves from higher TF supply to higher TF demand and are closer to supply.

Similar logic goes for scoring supply areas.

6. Fresh obstacles (max score: 2)

Clean, sharp moves into our entry will get a score of 2. If price consolidates one or more times in our "profit margin" area, before reaching our entry point, then the area scores zero points.

7. Bricks upon bricks (max score: 3)

The area closest to price gets a score of 1, the next gets a 2 and the third (or higher) get a score of 3. If there aren't any bricks, it gets zero points.

8. Freshness (max score: 5)

A fresh area will get a score of 5, while the other areas get zero.

Maximum total score: 24 points
Minimum total to plan trade: 18 points (this is my limit, but you can set yours based on your own tests)

Thanks Bumasoft, complicated but interesting stuff the first time through. I'm curious, clearly you perform these calculations before every trade, but I'm not sure at what point you would choose to enter into a trade. Perhaps we're not there yet. Also, is there some way to simplify the energy measurment factor process?

Hi, ImagineFX,

Most trades are plannet hours or days before the trigger is actually hit (set and forget). It's actually pretty fast once you get the hang of it. I can score a level in under 2 minutes. Also, once you get more screen time, you won't have to make this "formal measurement", you will know by simply looking at the level and the higher timeframe if it is high probability or not. Anyway, yes, we're not there just yet, but we will discuss the various trade types. Hope that helps

Hi Bumasoft,

Very interesting perspective to see supply/ demand and order flow. Clear to measure the force. Very insightful!!!

Jason

Thank you, jason. There is more coming up

Corelation

Corelation can be used to boost odds. For example, when thinking of going short the EURUSD, you can check if USDCHF is in a demand area (they are about 98% counter-corelated) or see if the US Dollar Index is in a demand area on the same timeframe that you're trading (you can get a USDX chart on FxStreet). You can use positive corelation as well, like double checking USDCAD with Oil or AUDUSD with Gold.

For my own trading, I use corelation sometimes, along with some custom indicators I've coded, for astro (Gann) analysis, some advanced timing algorithms (see Top Lessons in Forex site )etc. But no matter what you use, the CORE is very important, i.e. the basic supply & demand model and energy measurements. The rest is just gravy .

Let's dive into some charts (mostly live trades I took recently). Next week, we'll plan some trades ahead of time.

In this post, we are going to look at a recent residual demand area on the EURUSD. It was visible from the H4 chart and lower timeframes. We will measure the energy on the H4 chart, then on the H1 chart and see if this trade is worth the risk (I actually scalped this one for a quick buck).

http://toplessons.in/sites/default/files/bp/energy1.gif

Here is what we have on the H4 chart:

1. Angle of imbalance

- this isn't a gap, but it is a high range candle coming out from a small area of energy consolidation; this gives the angle factor a score of 2.

2. Profit potential

- we can win twice the risk, so it's a score of 1.

3. Price-wise absorption

- there are no tests yet, so it's a max score of 3.

4. Time-wise absorption

- 4 bars in the consolidation, so a score of 1.

5. Fractality

- going from demand to supply on the daily, but closer to supply: score 2.

6. Fresh obstacles

- we won't know this until close to our entry point, so it's either 0 or 2 points, depending on what happens.

7. Bricks upon bricks

- it's just one level, no more levels stacked close below it, so it's a 0.

8. Freshness

Even though it's a reaction to past highs (look to the left), we can consider it fresh, because breakout traders surely entered long in that area and pullback traders have their limit orders set up to go long on the next test, so it wasn't just a case of absorbing supply, but fresh demand also entered the market. To put it shortly, it is usually ok to consider past supply as fresh demand and past demand as fresh supply. Hence, we can award 5 points here.

If we add all these points together, we get 14 points if fresh obstacles scores 0 or a maximum of 16 points if we get a clean test and the fresh obstacles factor gets 2 points. It doesn't meet our minimum requirement of 18 points. Further more, if price first tests daily supply in the area of 1.3430 - 1.3480 before testing this demand area, the fractality score will change to 0, so we will have to substract another two points from the total. This means that this area is not really a good one to trade, based on H4.

For the sake of exercise, let's measure the same area on an H1 chart. Always measure all factors based on ONE timeframe, don't mix them up!

http://toplessons.in/sites/default/files/bp/energy2.gif

1. Angle of imbalance

- scores 2 points, same logic as on the H4 chart.

2. Profit potential

- scores 1 point, same as on H4.

3. Price-wise absorption

- there are no tests yet, so it's a max score of 3 (same as H4).

4. Time-wise absorption

- around 19 bars in the consolidation, so a score of 0 (different from H4).

5. Fractality

- going from demand to supply on the daily, but closer to supply: score 2 (same as H4).

6. Fresh obstacles

- we won't know this until close to our entry point, so it's either 0 or 2 points, depending on what happens (same as H4).

7. Bricks upon bricks

- it's just one level, no more levels stacked close below it, so it's a 0 (same as H4).

8. Freshness

- 5 points, as on H4.

So, the factors most likely to change when you switch from a higher to a lower timeframe are: time-wise absorption (there will be more bars on lower timeframes), fresh obstacles (smaller timeframe obstacles might not be visible on the higher timeframe) and bricks upon bricks (smaller timeframe areas not visible on higher timeframes). In this example, only the time-wise absorption differed so far (fresh obstacles might be different, we will have to see as we progress towards our entry point).

The total score here is 13 points if fresh obstacles scores 0, or a maximum of 15 points if it scores 2. Again, an area not worth the risk.

If you really want to enter a trade here, you could do one of two things:

A. trade half your normal trade size, so you won't have much to lose if you're wrong.
B. use a 1:1 profit target instead, which will greatly increase your odds of price hitting the target before the stop loss (this is what I did - if you look in your charts, you will see that it actually bounced a heck of a lot more)
C. stick to your bloody rules and look for a good opportunity?

Incorporating volume as an optional way to identify the areas more easily

http://i45.tinypic.com/15duatd.gif

Above is a chart of the volume bars I use in my Brilliant Charts system. The price bars are coloured according to very low, low, average, high, very high and ultra high volume. The red bars mark ultra high volume activity and they are a quick way of spotting huge imbalances in the markets. Then we just mark the consolidation representing the origin of the move and we have our high probability residual energy areas. Of course, we still have to score them to make sure they are worth the risk, but this already filters out most of the weak zones already. You can use a regular volume indicator to spot this also or my free volume indicator, which gives you the same information as the coloured bars above, but on the bottom of the chart.

Important tips based on a recent residual energy area

Let's take a look at this screenshot of an USDJPY hourly chart:

http://toplessons.in/sites/default/f...h1_example.gif

First of all, the level I highlighted in that red ellipse wasn't really fresh. Even though it wasn't just a test of a previous demand level, but more an absorption of prior supply, there are about 21 candles in that area, which means everyone pretty much had their chance of getting on the train, either long or short, before the bubble burst. Secondly, price couldn't go down to test that small level I highlighted below it. It slowly chewed up the supply by moving up in a tight channel. That gives you an important clue that the real origin of the huge imbalance is below the gradual supply absorption. It's hiding there and you fail to see it because you don't see the high range candles. That doesn't always mean that there's no big imbalance. The reason why there are no huge candles there is because there was a big amount of supply to be absorbed. In spite of that, price still shot up from there to the core supply zone and slowly but surely sloped up, chewing every bit of it, which produced that big red bar up on ultra high volume above the supply. If that does not make sense to you, just ask and I will try to explain better. When you score these kind of levels, you ignore that gradual chew-up of supply/demand, so the first target would be the first residual area above the highlighted ellipse level. The angle of imbalance would be based on the huge red bar coming out of the ellipse. Profit margin would be highly increased (in this case, you had 1:4), the level is fresh, price-wise absorption is 3, time-wise is 2, pretty much everything is improved (compared to taking a trade based on the ellipse area).

Now, let's look at H4:

http://toplessons.in/sites/default/f...h4_example.gif

There are three levels on the H4 and if you took the level from here, it would have reached the first target also. The second one I highlighted on H1 has a bricks upon bricks score of 2 on H4, so it's higher probability than the upper one (plus smaller time-wise absorption).

I'll end this post with another valuable piece of info. Residual areas come in 4 patterns, as some of you might know if you followed Sam Seiden's materials:

1. RBD - Rally-Base-Drop, i.e. Move up in price - Consolidation - Big move to the downside
2. DBR - Drop-Base-Rally, i.e. Move down in price - Consolidation - Big move to the upside
3. RBR - Rally-Base-Rally, i.e. Move up in price - Consolidation - Continuation of the move up
4. DBD - Drop-Base-Drop, i.e. Move down in price - Consolidation - Continuation of the move down

RBD's and DBR's usually hold more energy than DBD's and RBR's. The level I picked on H1, just below the red ellipse, is a DBR. The red ellipse is a RBR.

Errata: the H4 top level (containing the H1 ellipse area) has a bricks score of 1, not 0, as per the bricks upon bricks rules we discussed in the previous posts. Sorry for that screenshot typo

Example of corelation use

I mentioned corelation a while ago as a means of improving odds. Here is a H8 (8 hours) chart of the US Dollar Index over the last 40 days. We're at demand, low on the curve, with good odds of price going up to 80.50. There is some price absorption at this demand area (we had quite a few tests), but we didn't get too deep in it, which shows that there's still a good chunk of buy orders in there. As long as 79.50 holds, we should see some downtrends in the counter-dollar pairs (EURUSD, GBPUSD etc.) and some uptrends in the dollar vs. other currency pairs (like the USDJPY long I am in).

Attachment

Trade progress (above 1:1 profit so far):

Attachment

Beautifull thread Bumasoft. Magnifiscent blending of philosophy,sceince and physics to trade the market to the ultimate!. I really liked each of the concepts described by you. No doubt they are eternal truths. I ould like to be a regular participant in this thread.

To just check my understanding of the concept please advice whether my comments in the chart attched herein are valind or not?

Thank you.

inditrader, thank you for your feedback and welcome to the thread! I will reply to you with my own chart analysis of GBPJPY H1 in a minute.

Hope this clears things up a bit. Let me know if you have questions or something is not clear in the screenshot.

Intro to psychology of trading

In buddhist practice, there is something called the "four great efforts". These deal with progress on the path, towards the goal of enlightenment. The same buddhist four great efforts are those a trader has to work with in order to overcome his emotional problems and consistently execute his trading plan:

1. Preventing destructive actions which have not yet arisen -> try to follow your plan (read it every morning until it sinks into your subconscious).
2. Ceasing destructive actions which have already arisen. -> when you make a mistake, write that down in your trading journal, BE AWARE of it and vow not to repeat it.
3. Cultivating constructive actions which have not yet arisen. -> follow plan
4. Maintaining constructive actions which have already arisen. -> write in trading journal and vow to repeat

The two key things that we use to work on our self-discipline and emotional management are the trading plan and trading journal. The trading plan defines our goals, our ideal behaviour as successful traders. The trading journal measures our progress on the path and helps us go in the right direction again when we do stray from the path. It also keeps us motivated

Thank you Bumasoft. Of course I have made a note of all of it. I will come back with fresh set of questions very soon.

With each of your post you are adding great value to my trading.

Thank you

Thank you. Good luck!

EURUSD Daily Supply/Demand picture

http://toplessons.in/sites/default/f...5_jan_2013.gif

Supply will most likely be absorbed.

EURUSD Weekly Supply/Demand Picture

So, we are expecting EURUSD to absorb supply on the daily. Where could price be heading then? For that, we turn to the higher timeframe: the weekly:

http://toplessons.in/sites/default/f...5_jan_2013.gif

Probable first target is 1.3880.

EURUSD Hourly Supply/Demand Picture

Now, based on fractality (higher timeframes), we are expecting price to move up. So let's see what we have on the lower timeframes: hourly chart.

http://toplessons.in/sites/default/f...5_jan_2013.gif

We have demand building up, the green demand areas should be good places to try some longs. In case price wants to break to the downside, it first has to absorb these areas. They haven't been tested yet and this gives us a clue that the uptrend is still strong and this trend will hold on for a while, at least until both those green levels are tested at least once.