Showing posts with label Larry Williams. Show all posts
Showing posts with label Larry Williams. Show all posts

Monday, January 20, 2025

How Markets Move: The Natural Cycle of Range Change │ Larry Williams

Markets typically shift from small ranges to larger trend moves. When the market is in a large trend move, wait for it to settle into smaller ranges before getting involved. This gives more reliable setups when the market trends again. Market tops generally occur when the price closes well off its low, while market bottoms happen when the price closes near its low. Most traders get emotional during these times, buying at tops and selling at bottoms. Once you understand this, it becomes easier to make smarter trades.

Small Ranges Beget Large Ranges. Large Ranges Beget Small Ranges.


Markets move from congestion to creation (expansion), transitioning from small ranges to larger, more defined trend moves. A small range signals buildup, and a large range signals an impending trend. If I see a small net change from open to close, I know a large trend move is likely coming and am prepared to act on it. Here’s an example using the NASDAQ: Notice how volume fluctuates throughout the day: heavy volume in the morning, a dip in the middle, and a surge towards the end. 

"U" shaped intraday: Heavy volume in the morning, a dip in the middle, a surge at the end.

This pattern is consistent across markets. It’s like a freeway: traffic is heavy in the morning, dies down in the middle of the day, and picks up in the afternoon. Understanding this helps day traders identify opportunities in the morning and towards the end of the day, while avoiding the midday lull. Volume drives range, and large ranges happen at the start and end of the day. This is when short-term traders make money. We need volatility and large ranges to profit.

 There are three key cycles in market behavior: 
(1) small range/large range, (2) moving closes within ranges, and (3) closes opposite openings. 
All three cycles work equally well in any timeframe and market.
"Do yourself a big favor: Mark off all the large-range days [in the chart above], and then study the size of the ranges just
prior to explosive up-and-down days. See what I see? We are given ample warning of virtually every large-range day 
by the shrinkage of ranges a few days earlier."

The key takeaway for short-term traders is that not every day offers a high-probability trade. You need to identify days with potential for explosive moves and not expect large profits daily. It’s about finding that opportunity.

As for market tops, they usually occur when prices close near their highs, and bottoms happen when prices close near their lows. Focus on these closing patterns to determine when to buy and sell.

Trend is a function of time. The more time in a trade, the more opportunity for trend.

The most important insight in trading is that trends are the basis of all profits. Without a trend, there are no profits. But what causes trends? Trends are fundamentally a function of time—the more time you hold a trade, the more opportunity for a trend to develop. The challenge with day trading is that trends occur only about 15% of the time. Most of the time, prices are consolidating, making it difficult to catch a big trend move. Limiting yourself to a few hours of trading only targets that small window when trends are likely to occur.

 My Day Trade Secret: HTTC - Hold To The Close.

The day trader dilemma is that they have limited time to catch trends. Holding positions overnight allows you to capture longer trends and larger profits. A small bet with the potential for a big move is the key advantage of holding positions over time. 
 
 » How you know a large trend move is coming. «
 
Many day traders are afraid to hold positions overnight. However, if you do the math, you'll see that most market moves happen between the close of one day and the open of the next. Moves within the day are often smaller and less reliable. For short-term traders, the key to success is recognizing large range days and holding positions to the close. This is how you catch a big move during the day.
 
 
 » Hold To The Close. « 
S&P 500 E-mini Futures (daily bars).
 Narrow Range 4 & 7 Days and Inside Bar Narrow Range 4 & 7 Days.

 Narrow Range 4 & 7 Days and Inside Bar Narrow Range 4 & 7 Days.

See also:

Tuesday, December 24, 2024

2025 US Stock Market Outlook │ Larry Williams

My outlook on the US stock market in 2025 uses the metaphor "Clint Eastwood Market," representing a mix of good, bad, and ugly factors:
  • On the positive side, there are no immediate signs of a US recession, with strong employment figures and a labor market expected to improve in early 2025. Business conditions remain stable, and historically, stock markets tend to perform well in the first year of a presidential term. 
  • However, there are risks, including potential profit-taking after a strong 2024 market, the uncertainty surrounding trade policies and tariffs, and the unpredictable actions of the Fed, Congress, and business leaders like Elon Musk. 
  • On the negative side, market valuations, such as high price-to-earnings and Shiller CAPE ratios, suggest that the market is overvalued, which increases the risk of a correction. Additionally, industrial production is underperforming, which could hinder economic growth, and inflationary pressures from the excessive money supply expansion since the COVID-19 pandemic may contribute to market volatility.
 
Very Long-Term Market Wave in the DJIA and US-stocks down into 2038.
 
 Shorter Long-Term view on the DJIA with major lows in 2025 and 2028.
 
2025 will be a trading range market with a bullish bias.
 
 Selling pressure in Q1 of 2025. Second half of the year strong. Overall gains.

Given the current very high valuation ratios, the 2025 forecast indicates slower growth and market underperformance compared to historical averages. Therefore I don’t foresee a runaway bull market in US stock indices in 2025, and volatility is likely to be a key characteristic, with short-term rallies and corrections. Very long-term market cycles suggest we are at the beginning of a prolonged period of sideways movement, with the next major bull market not expected to begin until around 2038. 

Regarding a major crash that some are constantly talking about, I don't see it occurring in 2025 either. While the market will be challenging, the overall bias will lean toward the upside.


2025 Bitcoin forecast.

See
also:

The S&P has traded above its 200-DMA all year. This has happened 11 other times since 1952, and the next-year move has been about
half the average. Last time this happened was in 2021, and before that, 2017  —
Bespoke, December 24, 2024.

Thursday, July 4, 2024

Structural Characteristics of Bullish and Bearish Months | D'onte Goodridge

Traders want to find trending markets but often fail to see and understand the structural characteristics of bullish and bearish months. Both move in a similar fashion but inverse to one another. Here are the characteristics for the formation of a bullish month:
 
 
The first example is a daily chart of US Dollar versus Japanese Yen (USDJPY) during February 2023. The market was trending up. It was a bullish month. Let's identify the five key factors to a bullish month:

1. Price moves below the monthly opening price.
2. A swing low forms below the month's open.
3. Price purges a previous daily low (PDL) and reverses back to a previous daily high (PDH).
4. The market creates a market structure shift (MSS) to the upside and an Imbalance or Fair Value Gap (FVG).
5. Higher swing highs and higher swing lows form.
 

Looking at the daily candles in the USDJPY chart, we see the methodical sequence of a Bullish Month developing:
 
1. Price was movesg below the monthly opening price. Price stops below it, runs up, drops below it, runs up and continues the bullish trend.
2. A swing low below the month's open forms. This is a swing low because the candle on the left has a higher low and the candle on the right has a higher low, hence the low in the middle is the lowest point. To form a swing low  only takes three bars.
3. Price purges a previous low and works back to a previous high. The following day price reverses back to the previous daily high, all happening within a three bar setup, creating a swing low, which is a purge on the previous daily low and a reversal back to a previous daily high.
4. Next the market creates a shift to the upside with speed through a previous swing high and a FVG.
5. And price created a new swing high and a higher swing low.

The next example is a daily chart of Apple during January 2023. The same five criteria for a Bullish Month were met:
 

Now let's look at the five key factors to a Bearish Month:

1. Price moves above the monthly opening price.
2. A swing high forms above the month's open.
3. Price purges a previous daily high and reverses back to a previous daily low.
4. The market creates a shift to the downside and a FVG.
5. Lower swing highs and lower swing lows form.
 

The first example is a daily chart of British Pound versus US Dollar during August 2022. The market was trending down. Identify the above listed five criteria for the formation of a Bearish Month:
 
 
The last example is a daily chart of Gold during February 2023. Gold was in a down trend. Identify the structural criteria for the formation of a Bearish Month:
 
 

Tuesday, July 2, 2024

The Oops! Reversal Setup | Larry Williams

One of Larry Williams’ best-known setups is called Oops!: We are waiting for the market to open. We take as a reference the daily bar of yesterday, with its open, evolution and close. When the market opens, suppose a gap up occurs. A gap up takes place when the open is higher than the highest point that was reached on the previous day; a gap down occurs when the open is lower than the lowest traded point of the previous day.


When a market opens at a very high level and there is a gap up, it is very strong. So, we obviously suppose that it goes up. It will probably do it but, if for some reason it starts to fall and then reaches the highest level of yesterday, it is as if it said: "Oops!, I was wrong. I’m not strong, but weak." In this case, we open a short position at this level. We enter short because we imagine that the market (and the players in the market) realizes it isn’t that strong. Actually, the market is weak, so it will go down. 

To use this setup, we obviously need a stop-loss whose size depends on the market we are trading. How do we close this position? Larry Williams proposed a bailout exit he called "first profitable open". This consists in staying in the position until, on the following day or days, the market opens somewhere below the entry level (because we are short). When that happens, we close the trade. So, we keep the position until we get the profit or, obviously, when we are stopped out. We can also close the position at the end of the same day. The one suggested by Larry Williams is however the best one, although it sounds quite weird. Believe me, the first profitable open is a very effective close of the position.
 
This is the basic version of the Oops! Anyway, I know Larry Williams made some tweaks to it. The Oops! works, but today this specific setup is quite rare. The reason is that many markets trade for 23 hours a day now. So, it’s quite hard to have a heavy gap in just one hour. Maybe, you can have one after the weekend, but normally it’s not there.

Monday, July 1, 2024

Buy and Sell Signals | Larry Williams

If I observe prices in a strong downtrend, followed by a period of sideways movement before another decline, only to immediately return to the previous trading range, that's a buy signal.
 

Buy Signal: Dump, dump, (dump), go sideways and pump a bit, one more small dump, then the pump.
Sell Signal: Pump, pump, (pump), go sideways and drop a bit, one more small pump, then the dump.
 
Why? Because, during the sideways range, accumulation was taking place. The breakdown likely liquidated many long positions, and professional money will often buy in that area.
 
 
If the price quickly returns to the range, it confirms that they’ve been buying, and that's when I want to enter a long position in the market.
 
See also:

Wednesday, June 12, 2024

Swing Points as Trend Change Indication | Larry Williams

A trend change from up to down occurs when a short-term high is exceeded on the upside, a short-term trend change from down to up is identified by price going below the most recent short-term low. The first chart depicts such trend changes in a classic manner, study it well because reality comes next! Here are a couple of pointers on this technique. Although the penetration of one of these short-term highs, in a declining market, indicates a trend reversal to the upside, some penetrations are better than others.

» There are only two ways a short-term high or low is broken. «

There are only two ways a short-term high or low is broken. In an up trending market, the low that is violated or fallen below will be either a low prior to making a new rally high, as shown at (A) in the second figure, or a low that occurs after decline of a high that then rallies making a lower short-term high; it then declines below the low prior to the rally that failed to make a new high, as shown at (B). The better indication of a real trend change is the violation of the low shown at (A). 
 
Best Trading Patterns.
 
By the same token, a trend reversal to the upside will occur in one of the two following patterns: In (A), the rally peak prior to a new low is violated to the upside, or in (B), the market makes a higher low, then rallies above the short-term high between those two lows. In this case, again, the (A) pattern is the better indication of a real trend reversal.

 
See also:
 
Arthur A. Merrill (1980) - M and W Wave Patterns
.

Sunday, June 9, 2024

An Outside Look at Inside Days | Larry Williams

First, lets define what constitutes an inside day. An Inside Day is exactly the opposite of an Outside Day. That is, today’s high is less than yesterday’s high and today’s low is greater than yesterday’s low. Hence the terminology inside day, as all of today’s price range or trading activity took place inside of yesterday’s range. An inside day is usually thought to be an indication of congestion. A price could not exceed the previous day on the upside nor could it break below the previous day’s low on the downside.

 » Inside Days are one of the most reliable forecasting patterns to occur in the marketplace. «
 
Chartists and authors have not paid very much attention to the inside days over the years. They have made note of them, but this is the first time, to my knowledge, that anyone has made a serious study of the impact of inside days. And, wouldn’t you just know it … inside days are one of the most reliable forecasting patterns to occur in the marketplace!

  » In a study of nine major commodities covering 50,692 trading sessions, I noted 3,892 inside days,
suggesting we will see these days appear about 7.6 percent of the time. «
Larry Williams, 1998.

There does seem to be some validity to this. The following chart shows what happens when we have an inside day with a down-close while prices are lower than they were 10 days ago. In the Standard and Poor’s, 71% of the time you were higher the next day. This may not even be as significant as the fact that 71% of the time you were higher 20 days after this occurrence. In the Value Line, price is higher 50% of the time after the occurrence, and in Treasury Bonds it’s higher 75% of the time. The pattern in Silver was not nearly as bullish, which surprises me because I had used this trading technique in Silver with some success … which just goes to show you! In Silver, on 36% of the time you were higher 20 days following the occurrence of the pattern. Soybeans were higher 57% of the time, Bellies 50% of the time and the Swiss Franc, where so far we have not found a pattern that forces prices higher, you were up only 22% of the time.

'Inside Days in the S&P 500' - Toby Crabel, 1990.

For a moment though, let’s take a look at just the occurrence of an inside day. What happens when we simply have an inside day with a down-close? Does that, on its own merit, forecast any significant market activity? The results are on the next few pages [of 'The Future Millionaire's Confidential Trading Course']. What can you find?

Then there’s the other side of this coin. What happens if we have an inside day with an up-close? Does this forecast positive action? It appears that it does to some extent. Study the tables for yourself. I have gone to the computer to give you the results for almost all possible configurations of the inside days. While, quite frankly, much of the data suggests random-gibberish-behavior, others are relationships that you can find and successfully trade with. What you need to focus on here is not that the patterns will always work for you, but that patterns, like methods, systems and tools, will give you the much needed odds that lead to successful speculation.
 
I have not exhausted all possible ways of looking at inside days with down-closes, though I have looked at the majority of the relationships one can study. There are others. As an example, what happens if the prices are higher, or if prices are lower following an inside day five days later. Does that mean that the down trend will continue? One could also ask the questions about an outside day following an inside day. Is this a particularly bullish pattern? (It is.) As you can see, your opportunity for research here is unlimited. If you have a computer, some data, and a desire to study the markets, here is fertile ground for you to come up with your own great ideas.

Outside Bar Trading Setups | Larry Williams

In his book, 'Long-Term Secrets to Short-Term Trading', 2nd Edition, Chapter 7, Larry Williams provides price action patterns to profit. Larry Williams says that there are two daily bars that most confuse retail traders, the Inside Bar and the Outside Bar: 
 
» What the public 'sees' on their charts as being negative is most often apt to be positive for short-term market moves and vice versa. A case in point is an outside day with a down close. The day's high is greater than the previous day's high and the low is lower than the previous day's low and the close is below the previous day's low. This looks bad, like the sky is indeed falling in. In fact, the books I have read say this is an excellent sell signal, that such a wild swing is a sign of a market reversal in favor of the direction of the close, in this case down. [..] The problem is these outside day patterns do not occur as often as we would like! The next time you see an outside day with a down close lower than the previous day, don't get scared, get ready to buy ! « 

After an Outside Day with a Down Close lower than the previous day, BUY!
After an Outside Day with an Up Close higher than the previous day, SELL!

An Outside Bar is a bar that broke the previous bar's high and the previous bar's low. For related trading setups
Larry Williams specifically looked for outside bars on the daily time frame that closed below the previous daily low or closed above the previous daily high. After such a bar prints, a reversal in the price action should be expected. According to Larry Williams, Outside Bars only appear 7% of the time on the daily time frame.

This is what an outside bar with a down close looks like:


According to Larry Williams, this will be a buy set up in theory. Here we can see it looks bearish to the public eye because the close is below the low. This indeed can be a turning point. Enter long on the next daily open. The stop loss is below the low of the outside bar.
 
This is what an outside bar with an up close looks like:
 

This is a sell set up. It looks bullish to the public eye because the close is above the high. This indeed can be a turning point. Enter short on the next daily open. The stop loss is above the high of the outside bar. 
 
Targets should be logically related to buy side/sell side liquidity levels (previous highs and lows), Imbalances/Fair Value Gaps and/or 50% swing retracement levels. Consider only setups offering risk-to-reward ratios ≥ 1:2.
 
Don't expect every single Outside Bar setup to be a winner. Other setups and filters can nullify or optimize it (e.g. Oops Pattern, Smash Day, Day of the Week, trading in Premium or Discount, actual outside bar small range or large range, swing high or swing low recently broken, occurrence in 3 Day Cycle and 3 Week Cycle, close above/below 9-Day EMA, etc.). The video below shows Outside Bar Trading Setups on timeframes also smaller than the daily.


Wednesday, May 29, 2024

The Three-Bar High/Low System | Larry Williams

At one point in my career, I had over 30 consecutive winning trades using this next short-term trading strategy. You will first have to calculate a 3-bar moving average of the high and a 3-bar moving average of the lows. (Each bar represents the time period displayed on your chart. Use 5-minute charts for lots of signal, or 15-minute charts if you want a little less hectic trading career.) This is automatically done on all quote machines, although “in the old days” I did it by hand. You can have the old days!
  • You will first have to calculate a 3-bar moving average of the high and a 3-bar moving average of the lows.
  • The strategy is to buy at the price of the 3-bar moving average of the lows — if the trend is positive, according to the swing point trend identification technique — and take profits at the 3-bar moving average of the highs.
  • Sell signals are just the opposite. This means you will sell short at the 3-bar moving average of the highs and take profits at the 3-bar moving average of the lows. It is downright foolish to do this unless there is a reason to take only short sales. Our reason might well be that our swing point reversal system has told us the trend is down. Then, and only then, sell the high and cover at the lows.
Now let’s try to make some order out of all this.
 
 
Figure 9.5 shows the addition of the 3-bar mowing averages and the swing lines. I have marked the points where trend changes; we switch from buying the lows to shorting the highs following these reversals. The 3-bar high and low entry points are also shown. The game goes like this; trend reversal up so we buy the 3-bar low line and take profits at the 3-bar high and await a pullback to the 3-bar low. If the 3-bar low would create a trend reversal for selling, however, pass on the trade. Sells are just the opposite; await a trend reversal down, then sell all the 3-bar highs and take profits at the 3-bar lows.
 

Figure 9.6 has all the trend reversals marked off, so you can begin paper trading by looking for the buy and sell entries and exits. I suggest you walk through this chart to get a sense of how one can trade this very short-term approach. Note these are 15-minute bars, but the concept will work on 5-minute to 60-minute bars as well.

My New Reversal Day Discovery | Larry Williams

The most common reversal day is simply one where prices sell off substantially, almost always down limit, only to reverse and close up for the day. Such a day appears in the following diagram [A + B].
 
» When prices should go lower, but don't, buy ! «

A series of top and bottom reversals are also shown for your observation. Notice, in each case, how a temporary reaction against the main trend was ended when we had the flush-out day with prices selling off drastically, then recovering, to close up for the day. A reversal day is even more significant the longer the correction has been in effect.
 
Our second form of reversal day, and one I’ll bet you’ve never even heard about, starts with prices heading sharply lower and closing, sharply lower prices might end up limit down, or just off sharply but, in any event, prices take a beating and are down handsomely for the day [C].

The trend reversal is indicated the next morning when prices open a good deal higher than the previous day's close. Such unusual strength is indicative of a key reversal for the market. What happens, in essence, is that prices fail to follow through with the previous day's slide. This type of action is most unusual since lower prices forecast lower openings about 85% of the time. Lower prices, with substantially higher openings, are a sure thing that a new move has begun.

It is particularly significant if prices close down the limit, and the next day open slightly up. Limit moves should beget more limit moves. A reversal of this pattern points to a market opportunity. A special point of interest here is that an extremely strong signal is generated any time you have two reversal days with the second one higher, for a buy, lower for a sale. This is an unusual display of strength. I cannot recall when such a signal did not produce profits.