Jim Dean![]() Sage ![]() ![]() ![]() ![]() ![]() ![]() ![]() Posts: 3433 Joined: 3/13/2006 Location: L'ville, GA ![]() | Hi, Duxx ... great questions! "Slope" is "Reward" in that your reward is how much money you make, and how FAST you make it. Sometimes traders forget the concept of compounding and ROI ... even though a slope of Price vs Time is upwards, it may be so gentle that you might as well put the money in long-term CD's, since they have NO risk. So, being aware of the Slope, in terms of DOLLARS PER DAY, is an IMPORTANT "Filtering" criteria for evaluating potential trades. "Wiggle" is "Risk" in that the very short-term ups and downs ... the bar-to-bar ATR "wobble" (like a drunkard that's been to TOO MANY "bars"), illustrates the RISK involved in taking a trade. The "wiggly-er" the price action is, the more likely you will get stopped out by a deep enough pullback that you decide the trade was a mistake. So, being aware of VOLATILITY-wiggle, in terms of DOLLARS PER DAY, is also an IMPORTANT "filtering" criteria. To do a balanced job of evaluating those two metrics, you need to COMBINE THEM - a "hard number threshold" for volatility is not a good filter, since obviously the daily-ATR volatility of GOOG will be different than that of CIEN ... and a visually GENTLE-sloped GOOG will have higher DAILY price change than a fairly STEEP-sloped CIEN. However, if you DIVIDE the Slope by the Volatility for each of those stocks, they can be compared on a Risk/Reward basis. Here's how: first, define what you consider to be your "typical hold time" for a run that ends up with some profit. Let's say it's ten days. If you multiply ten days times the dollars per day slope of the line you are looking at ... that tells you your potential Reward. Then define what you consider to be a minimum-safe initial entry-stop cushion(delta) - that defines your Risk. Finally, divide Reward by Risk ... if you don't get a value of about 2:1 or higher, I'd question whether the trade is worth it ... and if it's less than 1.5:1, I'd say fugeddabouddit. If it's more than 4:1, then be aware that slopes like that rarely last very long, and if you try to catch that wave, you'll probably enter just before it does a retrace. OK ... about Guts. I'm sorta proud of this one. I "invented" it a long time ago, and have found it to be VERY useful. It's one of a handful of ideas that I've come up with (along with its siblings "Wick" and "Shadow") that I think would benefit the entire industry. "Guts" is simply a weighted average of the prices on the bar. The "body" portion of the bar (fat part of the candle) typically has more volume-action during the day than the "tails" portion of the bar (above and below the body). So, if you want a REPRESENTATIVE PRICE for that bar, which shows what most traders during THAT BAR felt the stock was "worth", a WEIGHTED combination of OHLC should be used. For "Guts", I choose to weight O & C (the body) twice as much as H & L (the tails). That is: Guts = (H+L + O+O + C+C) / 6 Historically, people use Close as the "most representative price". Well, if you have to choose between OHLC, I fully agree. But, when using programmable platforms like OT, we DON'T have to choose ... thus, Guts is borne. There is an easy way to demonstrate the value of Guts (hoo-rah!). Create this simple Indicator and plot it on a candle-chart with a black background: #Indicator dim Guts as single Guts = (H+L + O+O + C+C) / 6 plotprice("Guts",Guts,white,2) plotprice("Close",Close,yellow,2) plotprice("GutsMA",SMA(Guts,3),cyan,2) plotprice("CloseMA",SMA(Close,3),orange,2) Return Guts First, notice which lines look "smoother" ... the ones related to Guts typically do. YET THERE IS NO "LAG", which usually is the penalty you pay to get smoothness. Next, SBAS (Step Back And Squint) ... look at WHERE the white and yellow lines are in relation to the general movement of the candles ... the white lines tend to be more in the "center". I like to think of Guts as an "extremely fast MA of Close, without lag". I find that using Guts for MA's and other indicators offers noticeably better results for SHORT period situations. The SMA(Guts,20) is virtually the same as SMA(Close,20) ... but SMA(Guts,2) is meaningfully different than SMA(Close,2). The breakpoint is somewhere between 5 & 10, depending on what indicator you are using. Note ... when you are writing code for things like candle patterns or stoploss exits, etc, you SHOULD use CLOSE in most cases. REASON ... Close has a "TIME" associated with it .. and those kinds of decisions are time-based ones. So, Guts is not the solution to all things, but it does help with a lot of them. FINALLY ... about the "Guts Family" ... I created two MORE price points, which I call Wick and Shadow (Shad for short) ... these are the mid-way points of the tails, above and below: Wick = ( H + Math.Max(O,C) ) / 2 Shad = ( L + Math.Min(O,C) ) / 2 I consider Wick and Shad to be useful substitutions for H & L, in situations where I am worried that bar's "spike" up or down might be formed from just one or a few "fluke" trades ... I don't like to have my trading decisions based on things like that. So, when I write Pivot code, or draw LinReg channels, I will often base it on Wick and Shad instead of H & L. Again, without going through a bunch of examples, it just "looks righter" to me on the chart ... it's what my eyeball gravitates to, rather than the pointy sharp ends. There are, of course, more pricepoints like this ... it's a big family, the others are occasionally useful but not quite as important: Neck = Math.Max(O,C) Foot = Math.Min(O,C) Body = (O + C) / 2 Range = (H + L) / 2 Morning = (O+O + H+L) / 4 Afternoon = (H+L + C+C) / 4 The industry long ago defined a price that is also a cousin of the family: Typical = (H + L + C) / 3 (I think Guts is MUCH more useful than this, but I include it for completeness). One cute little factiod that you may not have noticed ... ALL of these Guts-family price-point names have UNIQUE first-letters: G, W, S, N, F, B, R, M, A (and T). And none of them get confused with our friends O, H, L, C (or V). So, who knows? Maybe one of these years, some software might come out that supports ALL the pricepoints, natively: OHLCVGWSNFBRMAT Sounds like someone who is trying to talk with a mouthful of food. I hope this was useful to you, and makes you think over some of the "basic assumptions" that everyone seems to take for granted. [Edited by Jim Dean on 1/17/2011 7:25 AM] |