Third Party Spotlight
eSignal Powers the “Lines” Approach
This advanced day trading strategy
combines eSignal linear regression channels (LRCs)
plus intermarket analysis (IA) and 10 day-trading lessons.
You can become a better NASDAQ 100 and S&P 500 day trader by following 30-year U.S. Treasury Bonds. You can become a better Forex day trader by watching the NASDAQ 100, S&P 500, bonds, gold and crude oil.
You can if you take advantage of the ways these markets connect each trading day. The “lines” approach specializes in tracking connections.
The Power of eSignal
The lines approach is not a software program in itself. It is a day trading strategy that is applied on top of two eSignal software capabilities.
These two eSignal capabilities give you the power to create:
- Automated linear regression channels (LRCs)
- A practically unlimited number of charts (The primary limiting factor is the inherent power of a user’s computer.)
The lines approach leverages these capabilities to construct a matrix of linear regression charts across multiple time periods and multiple futures and exchange-traded funds. (I use 42 charts.) As far as I know, eSignal is the only charting service that provides both automated LRCs and practically unlimited charts.
Do It Yourself
To reproduce the linear regression charts you are about to see, go to File on your eSignal toolbar, select New, then Standard Chart, then Daily. When your new chart appears, go to the Analytics button on the chart’s toolbar. Select Linear Regression.
The Logic behind the Strategy
The lines approach is designed to help you catch one-day trends and fast runs.
I follow the NASDAQ 100 and S&P 500, the semiconductor, regional bank, retail, basic materials and oil services equity sectors, 30-year U.S. Treasury Bonds, short-term U.S. rates, Eurodollars, plus Euro FX, gold and crude oil. You might follow the same mix or adapt the mix to suit your own preferences.
The logic is to track relationships and take advantage of the patterns revealed each trading day. The NASDAQ 100, for example, can drive the S&P 500 and vice versa. The semiconductor equity sector can drive the NASDAQ 100. The regional bank sector can drive the S&P 500. The semiconductor, regional bank, retail, basic materials and oil services equity sectors can move in unison to the upside or the downside. One or more sectors can lead to the upside or the downside.
On any given trading day, this articulation helps you know when to move to the long or short side of the NASDAQ 100 or S&P 500 or when to shift your money to the long or short side of a specific equity sector. This articulation can give you advanced warning of a move among equities in general or confirm a move.
The NASDAQ 100 and S&P 500 can help you day trade bonds. Bonds can help you day trade the NASDAQ 100 and S&P 500. For example, if the NASDAQ 100 and S&P 500 are moving in one direction and 30-year U.S. Treasury Bonds are moving in the opposite direction (an inverse relationship), bonds are confirming the move in equities and vice versa. If one leg of this relationship moves first, it can give you advance warning.
Sometimes, equity and debt will move in the same direction (a direct relationship). This sameness becomes a confirming signal.
Relationships can persist or suddenly change. Your job as a lines trader is to start each day market-mind neutral, wait for clarity and then trade that day’s relationships.
Forex, Gold, Energy
Euro FX can lead gold prices. Crude oil can lead gold prices. Euro FX and gold can move in unison. Crude oil and gold can move in unison. When you see a sharp move in one, it may be giving you advance warning of a sharp move in another.
Now, link it all together. On any given trading day, the relationships among equity, debt, Forex, metals and energy can help you identify and trade each day’s best trade(s). You need to be disciplined. You need to be practiced. The lines approach can help you.
Lines in the Sky
Have you ever seen a price turn sharply for no reason? Have you ever seen a price turn suddenly in “mid-air”? It can feel as if other traders are looking at invisible clues -- “lines in the sky”. They can see these invisible lines, but you, despite all of your indicators, can see nothing.
1) 6-month chart NASDAQ 100 (QQQQ: ETF)
On April 11, 2008, the NASDAQ 100 was turned back at 46.00. That much is obvious from the chart shown above. (QQQQ is an exchange-traded fund, or ETF, that tracks the NASDAQ 100.) Now, look at the same price action, this time, with an LRC in place.
2) 6-month chart NASDAQ 100 (QQQQ: ETF)
One of those “invisible lines” is revealed. See the slope of the upper channel line? The slope is approximately 45 degrees. See the December 2007 highs at approximately 52.00? Those December 2007 highs at 52.00 line up neatly with 46.00 in April 2008. Traders who saw this line in early April anticipated the significance of 46.00.
The frequency of a 45-degree inclination or declination is market reality. It happens over and over, regardless of the time period. The 1-day chart shown below has the NASDAQ 100 as it tracked lower on April 11, 2008. The period covers 9:30 a.m. to 4:00 p.m. Eastern Time. Each price bar covers 10 minutes. The slope is approximately 45 degrees.
3) 1-day chart NASDAQ 100 (QQQQ: ETF)
The lines approach dedicates multiple linear regression charts to each future, ETF and stock that it tracks. I use 6-month, 30-day, intraday 11-day, intraday 3-day and I-day charts. I follow 6 futures and 12 ETFs in total, plus, on occasion, newsworthy stocks. I use a total of 42 charts.
Sometimes, one or more charts will present noise; they will present vague clues about where a price will move next. At those times, the remaining charts will present a sharp signal. Sometimes, the majority of the charts I follow will present a sharp signal. Sometimes, all of the charts will present a sharp signal. Call it redundant charting.
Each day, I look for relationships among the futures and ETFs I regularly follow. I look for visual clues among the charts. I am aware of news, but I do not fixate on it. I look for market reaction to news.
What do you see in the next two charts?
 4) 6-month chart General Electric |
 5) 6-month chart regional bank equity sector (RKH: ETF) |
You see that General Electric collapsed on April 11. You see that the regional bank equity sector pushed lower. You see that sellers brought GE back into alignment with the regional bank sector. GE is effectively a financial services stock. Or, at least, on April 11, it was perceived as being a financial services stock. You realize that, on April 11, GE and the regional bank sector effectively drove the NASDAQ 100 (and the S&P 500) lower.
Fighter Pilots and Day Traders
Fighter pilots talk about “situational awareness”. The idea is that, to dogfight in a jet, you cannot allow your brain to fixate on just your immediate situation. You must see your immediate situation and maintain awareness of the general situation. The pilot who does this will usually kill the pilot who does not. The lines approach copies this paradigm. It provides a trader with a full view of the general situation while still allowing him / her to see specific situations.
In my experience to date, some traders are intensely uncomfortable with the lines approach. The level of detail and the level of situational awareness required repel them. Other traders understand the logic and are attracted.
I continue to hear that the difference in skill between one fighter pilot and another can be measured by the hours of flight time he / she has logged. More flight time = greater skill. What I take from this is that familiarity breeds skill. Markets follow finite patterns. This is especially true in day trading. The more familiar you become with the patterns by living through or studying actual trading days, the more skilled you will become as a day trader.
My Day Trading Diary
Pilots keep a flight log. I keep 2-page day trading diary entries. I use each diary entry to help me trade during the day and study at night and on the weekends. Actual day trading is one way to log “flight time”. Studying a day trading diary is another way to log “flight time”. Each trading day, I upload the day’s diary entry to my website.
Each diary entry takes my 42 linear regression charts and condenses them to 12+ charts. I show how the lines approach (LRCs + IA + my 10 trading lessons) made sense of that trading day. Through commentary and charts, I provide enough detail to let you relive the flow of that trading day.
Richard L. Muehlberg can be contacted at: www.DayTradingWithLinesInTheSky.com, where you can take advantage of his free, 5-day trial. At your request, he will email you his next 5 trading diary entries free. Take a look at these lines in the sky. You already have a key part of the equation: You are an eSignal user.
