Tuesday, 26 January 2010

Let the Context be With You!

I had a comment asking about Context and what I look at.

It's a huge subject but a short answer is: I look at what the market is trying to do, likely to do, where it might do it, where we are now and where we are going. I do this looking at the profile as well as range bar chart and the indicators.

I'm writing this as I'm trading.

For example, at 14:31:11, a minute after RTH trading in the ES opened, there was a sell setup. A sell setup that Kiki's FloBot would surely have taken. Order flow was red, momentum was down. But I rejected the trade because we were at the bottom of the zipper, the gap trade boys were likely buyers, the 45CCI could easily bounce. Context. This is why I have a high win rate. I'm not looking at indicators as indicators. I looking at what is happening and processing the information. There is a big difference. It's a matter of what you focus on. I truly believe that unless you focus on context, your win rate will suffer.

OK, Kiki's FloBot would have taken the trade and she would have it on - short at 1087.00 - as she would have no choice, if FloBot was turned on.(We're still in testing mode) What happens next. Kiki would look at the CONTEXT. She sees its not a good short. Exits at either 1087.25 or 1088.25. Small loss - doesn't matter- but she doesn't miss trades. So if you're  not forced to take the trade by a FloBot, enter manually manually and take the trade, you evaluate your trade at the close of every bar. You then have a long at 1088.75. Context is right. Bottom of yesterday's profile, gap boys are buyers, you are responsive to VA above, VB is green, CVD had got to be lagging so ignore, momentum up as 45CCI bounces off zero.

This is what context is all about. You then had a replay of the previous swing. This time it was easier not to sell into the hole as you saw what happened last time. This was exactly the same. Then a buy at 1089.00. It shook your tree a little but hardly any heat. But even if you were shaken out, you didn't lose much and would surely re-enter 1090.25.

Market then motored up to the POC at 1096.00ish where you ran for cover at the Keltner extreme. Market pullsback and chops around with the 45CCI staying above zero, EMAs green - trend is still up. I'm looking to buy the market, just need a setup - trade location is what I want. Market 50% retraces and setup a buy at 1092.50. I'm looking for VAH at 1097.75.

So, I trade like a footballer plays or a tennis player. I have a "court" and I know where I am. If I didn't, how would I know when I am wrong?

OK, we hit 1098.25, just past the VAH. Nice trade and context told me where I was and where I could go. All I had to do was ride the order flow.

Click to enlarge


  1. Hello EL and K. What kept ypiu off the long at 15:44.
    Thanks andy

  2. Hi Tom,

    Do you place entry orders above or below the signal bar? For example, if you're going short, would you place an order one tick below the close of the short signal bar? Or do you enter with a limit order to get a better price?

    Thanks for your great website!

  3. Tom,

    Excellent blog today (as always). Your going over the context is very informative and makes for great learning. Thanks and I look forward to more such posts as your time permits. One question about the location 5 bars prior to your trade 3. It looks like the same context as in trade 3 is there except may be 50% retrace is not quite there and the market is moving up. How do you handle not jumping in there and wait for the location where you entered?

  4. Hell Boss,

    I think at this point we can agree that if my last name was Normal, my first name
    would be Abby. But seriously. I have always had a distaste for the word Context. For some reason the word does not serve justice to its whole meaning.

    I’ll show you, “context” see nothing. But looking at it in its defined state gives me
    its true context.

    Context: the interrelated conditions in which something exists or occurs. Better…

    Live long and prosper,


    Ps One of your best post.

  5. May I ask what your rules usually are for trading the open?

  6. Andy, I wanted to see thr momentum of the 6CCI go back over zero as otherwise the pullback did not look finished.
    Anon, I enter on close of bar.
    tickvix, see above, yes very similar and I could have entered there and not been stopped out. I really pay attention to momentum.
    Rino, thanks. Yes, hard to describe.
    Anon, no rules, different setups to fit the context - that word again. To find these I reverse engineered what I saw happen when the market moved and found tools to provide me with that information. Its all about price movement in context.

  7. Tom: Thanks - IMO your most helpfull post so far. Your long trade 3 entry appeared to be about 4 ticks below the MomDot. This is the first time I recall seeing this in your setups.