%C the market condition indicator part of TMT’s Advanced Trader’s Toolkit (ATP)
“Great men have not been concerned with fame. The joy of achievement that comes from finding something new in the universe is by far their greatest joy.”
Until now one of the longest lived and most popular trend indicators around has been ADX which stands for Average Directional Index. However this index has its shortcomings. One of its major shortcomings is that it is slow. For ADX to reflect the momentum of a trend this indicator needs to get above thirty or thirty five before a trader can have confidence in the trend’s ability to get carry over. Furthermore, if this indicator turns lower it doesn’t imply with a high degree of certainty that the trend has reversed. To the contrary, the trend can continue for an extended period of time.
What is the %C Indicator?
CBI’s %C indicator – the “C” stands for contraction – is much faster than ADX and has some boundaries. So it is rare for this indicator to get below thirty and rare for it to get above sixty. Besides having relative boundaries it also cycles faster than ADX for trading purposes. I captures the cycles from action to rest and back to action without over looking any of them. It is also suitable for top down approach to technical analysis on any market or shares.
Over time traders have compiled empirical studies that reveal breakouts – for some proportion of the time- lead to more trends in the direction of the breakout. Such a condition is called range or volatility expansion. The remainder of the time the breakouts are faded and the market should be viewed as reactionary. Such a “condition” can be called volatility contraction or a trading range. However, it is important to remember that ranges are not limited to a horizontal direction.
In addition to trading range and breakout markets, there is a third major market condition that can exist and should be avoided for a system to be profitable: a flat or a dead market. Pull up any chart of any bar size and place the “price channel” indicator, which is “standard” with TradeStation around the bar chart. Your empirical study should reveal that there are only three market conditions:
1) Flat or dead markets, a condition for floor traders in which prices rarely get to either side of the channel band and in which the pattern from open to close is seldom repeated in the next bar;
2) A trade-able range, in which each side of the channel is a touch off for a reversal of an inside trend, and suitable for desk traders. Direction from open to close and from bar to bar is consistent from one side of the channel to the other;
3) Volatility expansion, where breakouts outside the range get carryover in the direction of the breakout. This condition is suitable for desk traders to take advantage of.
Being able to predict what condition the market is in and when it is about to change allows you to implement rules of engagement for your various trading strategies. %C will tell you whether you should stand aside the market when it is dead / flat action, or to “fade” the breaks (enter on reactions) when the market is locked in a range or go in the direction of the breakouts when conditions have turned in an expansion of range.
So %C will tell you what the best tools are to use to trade and therefore how to trade.
If %C is in a position that calls for the trader is to fade the range, he will use an oscillator to pin point buying lows and selling highs. Alternately, if %C sets up for a dynamic trend to kick-off, the trader would use his best breakout bands or change of trend indicator.