TD Sequential and TD Combo Entry

TD SEQUENTIAL AND TD COMBO ENTRY

Since TD Sequential and TD Combo illustrate zones where the market is prone to a significant price reversal, when position trading with these indicators, entry price is crucial. Therefore, once a completed TD Sequential and TD Combo indication is achieved, we recommend any one of four low-risk indicator readings occur to justify entry. When trading on a greater time frame, we will typically utilize indicators such as TD Open, TD Trap, TD CLOP, or TD CLOPWIN in order to initiate a price reversal and to justify a low-risk entry. Because these four indicators, when used as a TD Sequential or TD Combo entry technique, do not apply to day trading, we will only provide a cursory explanation of each. These indicators have all been described in greater detail in our previous written work.

TD Open. TD Open is designed to capitalize on the market’s tendency to fill in price gaps. In its simplest form, a low-risk TD Open buying (call-buying) opportunity occurs when the current price bar’s open is less than the prior price bar’s low

Figure 6.48. Chart A and B are presented to demonstrate TD Sequential and TD Combo’s versatile and effectiveness regardless of the time frame in which the indicators are used. In practice, TD Combo records a low-risk entry indication at the low-risk entry indication at the low or the high of a price move and TD Sequential further confirms that move by recording a low-risk indication at an interim high or low.

Figure 6.48 (continued).

Figure 6.49. These two charts also demonstrate how TD Sequential and TD Combo work together over the same period of time for the same contract. In both Chart A and chart B, the two indicators completed their buy Countdown phases with a 13 on the same price bar and were followed by a steady rally in price.

Figure 6.49 (continued).

Figure 6.50. These two charts utilize TD Sequential, TD Combo, and TDST on the OEX Index on a 10-minute basis. Over the course of a few trading days, TD Sequential and TD Combo identified a number of Setups, which formed a series of TDST lines. These TDST lines provided support and resistance when price traded to these levels.

Figure 6.50 (continued).

Figure 6.51. Charts A and B using TD Sequential and TD Combo, respectively, both completed low-risk selling (put-buying) opportunities near the high of the 15-minute S&P move. TD Combo gave a low-risk 13 sell (put-buying) indication on the high close price bar, and TD Sequential gave a low-risk 13 sell (put-buying) indication shortly afterward.

Figure 6.51 (continued).

Figure 6.52. Of these two examples, TD Sequential (Chart A) was more effective in identifying both a major high and a major low for Microsoft. Both 13s were followed by dramatic price reversals. TD Combo (Chart B), however, only identified the high move, which served as an excellent confirmation to the TD Sequential indication that occurred only one price bar earlier.

Figure 6.52(continued).

Figure 6.53. TD Sequential and TD Combo are applied to Charts A and B for Staples. Note that the 13 low-risk buy (call purchase) for TD Sequential in Chart A occurred at the low price bar, while the 13 low-risk buy (call purchase) for TD Combo in Chart B occurred at the low close price bar.

Figure 6.53 (continued).

Figure 6.54. In these two examples over the same period of time, TD Sequential gave two low-risk selling (put-buying) opportunities coincident with a 13 sell Countdown (Chart A), and TD Combo gave one low-risk selling (put-buying) opportunity coincident with a 13 sell Countdown (Chart B). In both instances, the market experienced a price reversal upon recording the 13 count.

Figure 6.54 (continued).

and then trades above that low by at least one tick. In other words, the current price bar’s opening price must open below the previous price bar’s range and then break into that range to the upside to justify entry upon the completion of the TD Sequential and TD Combo buy Countdown phase. Conversely, in its simplest form, a low- risk TD Open selling (put-buying) opportunity occurs when the current price bar’s open is greater than the prior price bar’s high and then trades below that high by at least one tick. In other words, the current price bar’s opening price must open above the previous price bar’s range and then break into that range to the downside to justify entry upon the completion of the TD Sequential and TD Combo sell Countdown phase.

TD Trap. TD Trap is designed to capitalize on the market’s tendency to gain momentum upon breaking out of the previous price bar’s range. A low-risk TD Trap buying (call-buying) opportunity occurs when the current price bar’s open is contained, or trapped, within the previous price bar’s high and low and then trades at least one tick greater than the prior bar’s high. In other words, the current price bar’s opening price must be contained within the prior bar’s price range and then break out above the previous price bar’s high to justify entry upon the completion of the TD Sequential and TD Combo buy Countdown phase. Conversely, a low-risk TD Trap selling (put-buying) opportunity occurs when the current price bar’s open is contained, or trapped, within the previous price bar’s high and low and then trades at least one tick less than the prior bar’s low. In other words, the current price bar’s opening price must be contained within the prior bar’s price range and then break out below the previous price bar’s low to justify entry upon the completion of the TD Sequential and TD Combo sell Countdown phase.

TD CLOP. TD CLOP is similar to TD Open and is designed to capitalize on a market’s momentum upon exceeding the prior bar’s close and open, either upside or downside. A low-risk TD CLOP buying (call-buying) opportunity occurs when the current price bar’s open is less than the prior price bar’s close and open, and then trades greater than both the previous bar’s close and open by at least one tick. In other words, the current price bar’s open must be below the prior price bar’s close and open and then must exceed both of these levels to the upside to justify entry upon completion of a TD Sequential and TD Combo buy Countdown phase. Conversely, a low-risk TD CLOP selling (put-buying) opportunity occurs when the current price bar’s open is greater than the prior price bar’s close and open, and then trades less than both the previous bar’s close and open by at least one tick. In other words, the current price bar’s open must be above the prior price bar’s close and open and then must exceed both of these levels to the downside to justify entry upon completion of a TD Sequential and TD Combo sell Countdown phase.

TD CLOPWIN. TD CLOPWIN is the most complicated of the four entry indicators and is designed to anticipate the following day’s price activity based upon a relationship between the current price bar’s close and open and the previous price bar’s close and open. A low-risk TD CLOPWIN buying (call-buying) opportunity occurs on the price bar following the current price bar, when the current price bar’s open and close are contained within the previous price bar’s open and close, and the current price bar’s close is greater than the prior price bar’s close. In other words, when the current bar’s close and open are contained within the previous bar’s close and open and this relationship is an up close, then the following bar should move higher—this would justify entry upon completion of a TD Sequential or TD Combo buy Countdown phase. Conversely, a low-risk TD CLOPWIN selling (put-buying) opportunity occurs on the price bar following the current price bar, when the current price bar’s open and close are contained within the previous price bar’s open and close, and the current price bar’s close is less than the prior price bar’s close. In other words, when the current bar’s close and open are contained within the previous bar’s close and open and this relationship is a down close, then the following bar should move lower—this would justify entry upon completion of a TD Sequential or TD Combo sell Countdown phase.

TD CLOP, TD CLOPWIN, TD Open, and TD Trap all appear in Fig. 6.55 of Cotton March 1999. The TD Open downside required an open above the prior trading day’s high and then a subsequent decline below that high by at least one tick. The TD Open upside required an open below the prior trading day’s low and then a subsequent advance above that low by at least one tick. The TD Trap downside displays an open above the prior trading day’s low and then records a low below the prior trading day’s low. The TD Trap upside displays an open below the prior trading day’s high and then records a high above the prior trading day’s high. The TD CLOP downside required an open above the prior trading day’s close and open and then a decline below both the same trading day. The TD CLOP upside required an open below both the prior trading day’s close and open and then an advance above both the close and the open. The TD CLOPWIN downside required a close and an open to be contained within the prior trading day’s close and open, a down close relative to the prior trading day’s close, and then on the following trading day, a low below the prior trading day’s close. The TD CLOPWIN upside required a close and an open to be contained within the prior trading day’s close and an open, an up close relative to the prior trading day’s close, and then on the following trading day, a high above the prior day’s close. This is a unique situation

Figure 6.55. This chart documents each of the four entry indicators, both upside and downside-TD Open, TD Trap TD CLOP, and TD CLOPWIN. The final entry technique is not an indicator so much as it is rule, and is therefore not highlighted this chart.

to have so many examples of these various short-term low-risk price pattern indications within such a short period of chart history. Also, keep in mind that some days exhibited more than one of these indicators in the same direction—on these trading days, the low-risk entry indications were much stronger than singular indicator readings. These situations, and their more effective results, are very common when applying these indicators to the markets. These four indicators are also extremely effective in and of themselves, and any low-risk upside indication in the underlying security could be utilized to purchase call options, and any low- risk downside indication in the underlying security could be utilized to purchase put options.

In addition to the occurrence of any of these four indicators, we could also use one other technique following a completed Countdown series to justify entry into a market. This fifth entry technique requires that a price bar’s close following the 13 count of a buy Countdown must be greater than its open in order to obtain a low- risk buying (call-purchasing) opportunity; or that a price bar’s close following the 13 count of a sell Countdown must be less than its open in order to obtain a low- risk selling (put-purchasing) opportunity. Any of these five indicators can be used to initiate one’s entry into the market in the case of a long-term, specifically a daily, TD Sequential and TD Combo low-risk buying, selling, call-buying, or put-buying opportunity.

However, when day trading options or securities with TD Sequential and TI? Combo, these entry techniques are less stringent. In these cases, we place the greatest emphasis upon the fifth entry indicator mentioned previously. What we will typically look for in the case of a shorter-term TD Sequential low-risk entry opportunity is for a price bar’s close following the 13 count of a buy Countdown to be greater than that price bar’s open; or for a price bar’s close following the 13 count of a sell Countdown to be less than that price bar’s open. This requirement indicates that the market’s sentiment is slowly beginning to change and that price should commence its price reversal coincident with its completed TD Sequential and TD Combo Countdown phase.

Stop Loss Levels

The stop loss level that we choose to utilize with TD Sequential and TD Combo depends upon the timescale on which we are trading. When day trading options on a longer time frame, such as an hourly chart, or when position trading, our stop loss levels are more defined. What we are looking for in the case of a TD Sequential or TD Combo stop level is the extreme price high or price low over the duration of the Countdown phase. In the case of a stop loss for a buy Countdown, we first identify the lowest price bar of the Countdown phase. Once this bar is identified, we calculate the true range of this price bar—the price bar’s low subtracted from the price bar’s high or the previous price bar’s close, whichever is greater—and subtract this value from the low of that price bar. In other words, the true range of the price bar is subtracted from that price bar’s low price. This establishes a support line and our stop loss level. However, this stop loss level must be penetrated to the downside on a closing basis and then must follow through the next price bar by opening below this level, in order to justify exiting the position. This breakout indicates that the market is not able to support the downward pressure and that price should continue to decline. Conversely, in the case of a stop loss for a sell Countdown, we first identify the highest price bar of the Countdown phase. Once this bar is identified, we calculate the true range of this price bar—the price bar’s high minus the price bar’s low or the previous price bar’s close, whichever is lower—and add this value to the high of that price bar. In other words, the true range of the price bar is added to that price bar’s high price. This establishes a resistance line and our stop loss level. However, this stop loss level must be penetrated to the upside on a closing basis and then must follow through the next price bar by opening above this level, in order to justify exiting the position. This breakout indicates that the market is not able to contain the upward pressure and that price should continue to rally.

On the other hand, when day trading options on a shorter-term basis, things are handled differently. Obviously, when trading on a one-minute basis, our stop level will be much tighter than when trading on a daily basis. When we are day trading options, we typically implement a stop loss that is representative of the most we would like to lose on the trade. However, if the cost of the option is lower than this loss threshold, a stop is oftentimes unnecessary. In addition, when day trading, we can also use stop loss levels close to points of market resistance and support, identified on price charts or calculated by the process just mentioned for position trading.

Taking Profits

Since TD Sequential and TD Combo are not systems and do not identify specific entry and exit points, knowing when to take profits with these indicators can be difficult. A large portion of this decision-making process is contingent upon the situation at hand and one’s profit targets. What we recommend is that traders follow at least a portion of their TD Sequential or TD Combo positions with stop losses and profit targets and to stick to these levels rigidly, especially when day trading. Also, when we record an indicator reading with TD Sequential, TD Combo, TDST, TD Lines, TD REI, or TD Relative Retracements that is contrary to our TD Sequential or TD Combo position, we liquidate at least a portion of our position. This second method of profit taking is a little more difficult to perfect, but it can often increase one’s profits realized on the trade.