Summary

When the market hits a level where buyers and sellers balanced i.e. when there is equal upwards and downward and force, the PA will contract and the range will compress as every move up from the buyers is met by an equal move down from the sellers and visa-versa. This can appear as either a vibration (rectangle) or a compression (triangle).

I know that the market will eventually have to break out of the tight range and when it does, I want to be on board – there is a lot of pent-up energy in the market so the move out of vibration/compression can be fast. I trade this pattern on all time frames using TL (trendline) breaks.

Entry: take a straight break of the range if the set up is absolutely compelling, the default entry is a retest entry of the break of the supporting or capping TL
Exit: stop loss is 10pts and the stop is automatically moved to entry at +10pts.
Take profits: take 50% profits at 2:1 (+20) and the rest at 5:1 (+50)

Results

This trade used to be included with triangles but now it is recorded and journal separately, so there are no trades yet recorded for this setup even though I’ve traded it many times.

# of TradesTotal Actual PnL EUR ( %) R @ 900 risk/tradeActual Average R/winnerActual Losses # (%)Achieved =>1:1, <2:1 # (%)Achieved => 2:1 # (%)Achieved =>5:1 # (%)Achieved 10:1 +# (%)Pnl w BE at 1:1, 50% at 2:1 and 100% at 5:1 Theoretical PnL vs. Actual PnL
Compression/vibration at KLn/an/an/an/an/an/an/an/an/an/a

Results for triangles and compressions (trades opened between 9:00 and 11:00 mid-Oct 2018 to end-Feb2019)  together are

# of TradesTotal Actual PnL EUR ( %) R @ 900 risk/tradeActual Average R/winnerActual Losses # (%)Achieved =>1:1, <2:1 # (%)Achieved => 2:1 # (%)Achieved =>5:1 # (%)Achieved 10:1 +# (%)Pnl w BE at 1:1, 50% at 2:1 and 100% at 5:1 Theoretical PnL vs. Actual PnL
Triangles and R-B-Ts149,845 (10.5%) (+10.9R)1.86 (42%)4 (28%)7 (50%)5 (36%)2 (14%)-3+7+(2.5x5) = 16.5R5.6R*

Why it works

What is happening when we see this? There is no market imbalance, buyers and sellers are near perfectly matched so that every order that comes into the market gets filled without having to bid up or offer down. But eventually, one side will overpower the other and at that point, the market will move. The move will bring more entrants into the market which will add momentum to the break or stop it in its tracks, depending on how traders (and algos) view the validity of the breakout.

Skills and qualities required

• patience to wait for the structure to complete
• self-control to wait for the retest entry
• courage to re-enter stopped trades, especially if it’s in the opposite direction
• self-control to keep out of ranging, directionless, mean-reverting PA

Filters

PA context that supports the trade

• a break in the direction of the move into the vibration/compression
• a break in the opposite direction to the move into it if
• the compression/vibration is around an area of confluence of pivots, fibs etc. – especially if it is at an unfilled gap, and
•  the trade direction fits the longer-term trend

PA context or other factors that cancel the trade

This trade can turn into multiple stop outs if I get caught in the vibration/compression and this is more likely to happen if

• there is another level below or above the entry
• lunchtime or some other quiet time
• ranging, mean reverting PA

Open issues

• how to avoid poor PA context – what are the exact signals?
• I need to develop my skills and patience to trade retest entries
• how much does the direction of the move into the level affect the outcome of a break – in theory it should only make sense to trade breaks in the prevailing direction but is this true?
• using the triangles/compressions setup as a proxy, my results were twice as good as the theoretical PnL – what if anything should I do about this?