Daily Trade Plan Development in Action (Step 5)

Key Takeaways
• Condition #1: Mature Balance

o This is probably the most powerful factor in determining whether we’re likely to get a
trend day or not. ‘Mature’ is a relative term that is based on the time-frame and
context. On the smallest level we’re looking at for our purposes here, you need to see at
least a tight 2 day balance to have increased odds of a trend day. Three or more days is
better. When you’re looking at a larger time-frame, the balance could stretch out for
weeks, and what determines whether it’s mature is really just a visual thing that you get
better at seeing with experience.

o You can speed up your accumulation of experience by reviewing historical charts and
finding balance areas of all sizes and seeing what they looked like when the market
broke out of them. But in general, the more time that a balance area develops, the more
mature it becomes, and the more mature it becomes, the higher the odds of a trend day
forming when we break out of it.

o When you’re in a large (many days, or multi-week) mature balance area, the odds of a
trend day become larger the closer we are to one of the extremes, because at the point
of testing an extreme, we can readily see a breakout from the balance.

• Condition #2: Volatility Contraction

o If you compress a coil tightly, when you release it the coil will expand quickly. It works
the same way in the market. When volatility contracts and we have an extra small
range, it’s like compressing a coil. The odds of eventual expansion are higher, and the
greater the compression or contraction, the greater the likelihood that the market will
snap back with an expansion. And it also makes it more likely that we will see a larger
expansion in terms of size.

o From a practical standpoint, the reason we see a big volatility contraction is because the
market is usually waiting for some major economic number due out in the next day or
two, and the release of the report is usually the catalyst for the volatility expansion.

o In reality, almost any balance area technically represents volatility contraction. But
we’ve already covered balance areas in general, so the specific element we’re talking
about here is a volatility contraction during the latest market day.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.

 o A man by the name of Toby Crabel coined the terms NR4 and NR7. The ‘NR’ stands for
‘Narrow Range’ and the number represents the number of days. So an NR4 means that
the most recent market day had the narrowest range out of the last 4 days, and an NR7
means that the day had the narrowest range out of the last 7 days. In our trading, we
look at any NR day that is 4 or greater. The larger the number, the greater the volatility
contraction.

o A good free resource for checking if we have an NR4+ day is

http://www.mypivots.com/dailynotes . Simply find the market that you trade and in
that specific market page you’ll have the Crobel price patterns highlighted. If there is an
NR4+ day, it will be highlighted in green.

• Condition #3: Large gap through key reference area(s)

o When the market gaps right through one or more key reference areas, it means
something significant has happened during the overnight session and the value
perception of either the buyers or the sellers has changed. If this new perception is
accepted at the open, we can often get a trending move in the direction of the gap as
the momentum carries through. If it’s rejected, we can often get a trending move the
other way as the gap is filled and the whole overnight move is emphatically reversed
with conviction.

o In the first case of a trend with the gap, many longer-term market participants find
themselves caught on the wrong side of the market at the open, and as they scramble to
cut their losses, their buying or selling can often accelerate the move in the direction of
the gap. In the second case of a trend against the gap, the other side is aggressive in
rejecting the higher or lower prices, and as they reject the gap at the open, all the
buyers or sellers that moved the market overnight now find themselves in a losing
position losing and their exit accelerates the trend.

o Of course not every big gap through an important key reference area has to lead to a
trend. Like in all of these conditions, the odds for a trend day are simply improved.

o Note that if the gap is abnormally large (you have to study historical charts to know
what constitutes an abnormally large gap in your market), then the likelihood of having
an outright trend day is lower as compared to a normal large gap. This is because the
majority of the move would have come in the overnight session and the market is likely
to balance and consolidate the move during the day session. This is especially so if the
abnormally large gap is happening into a major key reference area. These days can chop
you up if you try to trade them directionally thinking that a trend day is likely.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.

• Condition #4: Market moving economic release

o If there is a major economic release due on this particular day, this increases the odds
that the new information could change the perception of value in the market and cause
a trending move up or down away from the current value area.

o If there is no economic release and there are some major ones due over the next day or
two, the odds of having a trend day on this particular day actually decrease to below
average.

• Condition #5: Generally elevated volatility environment

o If we’re seeing much higher than average market volatility, and especially if we’re in the
midst of a bigger picture strongly trending environment (particularly to the down side),
we’ll have more trend days occurring on average. And if trend days are more common
on average during any period, that means the odds of them happening on any particular
day you’re trading are higher, all things being equal. If you traded during 2008, you will
have experienced this directly, as we saw many more trending days than normal.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.