Wednesday, March 19, 2014

Scheier, Pivots, Patterns, and Intraday Swing Trades

You can buy M. William Scheier’s book Pivots, Patterns, and Intraday Swing Trades: Derivatives Analysis with the E-mini and Russell Futures Contracts (Wiley, 2014) for a little north of $50 or, if you have money burning a hole in your pocket, can take his ten-lesson e-mini trading course for about $3,000 or buy his indicator package software (included in the price of the course) for $250. Let’s look at the cheapest alternative.

The book is divided into four parts: time frame concepts, day model patterns, repetitive chart patterns, and confluence and execution.

Scheier’s methodology combines “old school” technical analysis with a “new school” proprietary algorithm for what he calls the Serial Sequent Wave Method. In the book he focuses exclusively on the former.

Under a somewhat expanded notion of “old school” technical analysis Scheier stresses time divisions; for instance, the trading day can be divided into three separate, distinct sessions in which, on most days, at least when the market isn’t persistently trending, “consolidation shifts to trend, volatility shifts back to drift, action is countered by reaction.” (p. 151) The opening range bar is also critically important to his methodology; “its relevance to trade entries, exits, Day Models, and overall trend direction remains active throughout the rest of the day.” (p. 14)

Scheier introduces the reader to a set of trademarked support/ resistance notions, beginning with the Break-away Pivot. This pivot “does not occur at a nearby high or low. It occurs at the shoulder of the pattern formation where a sudden price movement is steeply accelerated. In the wake of this break-away pattern, a ledge is left behind that will be the basis of significant future support/resistance. The Pivot Ledge defines the focal point of a Break-away Pivot where future support/resistance will be the most insurmountable should price return there. The Pivot Ledge is often death to the current trend….” (p. 27)

Another concept, more frequently noted but useful only as “an assist to an entry model or an exit target” (p. 54), is what Scheier calls the Dough Bar-Die Bar bookends. The Dough Bar, which often marks the beginning of a trend, is “the widest range bar among its peers, and as a candlestick pattern, it often forms with very small wicks, or none at all.” (p. 49) The similar-looking Die Bar often marks the end of a trend.

Scheier devotes four chapters to describing the three broad categories of trading day behavior patterns and their sequence cycle: the persistent trend day, test-and-reject day, and split-open day. “Within each of these categories, separate trade strategies are best employed for each model.” (p. 81)

This book is not written for the seat-of-the-pants discretionary trader. Scheier stresses the necessity of a trading plan and the usefulness of a daily journal’s feedback loop. The plan is necessary because it demands that the trader “take trades he might not agree with emotionally at that moment, and prevents him from taking trades based simply on which way it appears the market is trying to go. There are no gut feelings about the market. There is no tape reading. Intuition is not permitted as an element of decision support, and is not a filter to a qualified Trade Entry Model.” (p. 175) Put another way, “The Trader’s job is not to predict but to position, and then manage the position until either it is stopped out by a signal that did not work, reaches the target of Work-Done trend business, or arrives at another set of confluent technical aspects of disparate but simultaneous tasks.” (p. 161)

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