ES Monday 10-24-16 : Hot Topic


DeltaT an intra-day timing indicator. This indicator has been designed to work on the 1 minute all sessions timeframe and has been tested against the ES. This indicator is used on other instruments and on other timeframes.


Generally DeltaT is bullish above the zero line and bearish below the zero line. When DeltaT reaches extreme values the bars will change colors telling us that a reversal is likely. For the ES, using the default settings, the color changes at or above 0.5 and at or below -0.5. The value of 0.5 is the default "cut-off" or "trigger" value for DeltaT on the ES. The default colors for DeltaT are lime above 0, red below zero and those switch when the indicator goes above the cut-off. DeltaT will therefore turn red at or above 0.5 and green at or below -0.5 indicating a selling/buying opportunity.

The colors used by the indicator as well as the cut-off level can be changed from the default by the user. As you will see in the charts on this page we have changed the default color on DeltaT such that it's green (instead of lime) above the zero line and orange (instead of red) below the zero line in order to make the distinction clearer.

A DeltaT single bar signal is when the value DeltaT closes at or above 0.5 or at or below -0.5 for one bar only. This is a single bar sell signal:

A DeltaT multi-bar signal is when the value DeltaT closes at or above 0.5 or at or below -0.5 for more than one bar. This is a multi-bar bar buy signal:


The following are basic strategies that we use for trading the DeltaT indicator.

DeltaT single bar buy/sell

Signal type: counter trend

A single bar DeltaT buy/sell signal is a signal to do exactly that. At point 1 in this example chart we have a sell signal and at point 2 we have buy signal. These signals, like any trading signal, has a quality rating which determines how probable the outcome of the signal is. To improve the quality of this signal it should be at a support or resistance area and associated with a volume spike. At point 1 we have a volume spike which improves the quality and probability of this signal working. At point 2 we have the signal on the 144 SMA but no volume spike. A volume spike at point 2 would have improved the quality of that signal. Volume spikes show exhaustion in buying/selling pressure and make the entry at that point safer.
Other indicators can also improve the quality of a signal. In this chart we have the T1 indicator showing a medium strength sell at point 1. A few bars (minutes) after point 1 this turns into a strong signal which reinforces the earlier signal.

When does the single bar signal fail?

The single bar signal less likely to work if it's a low quality signal or is among multi-bar signals. The single bar signal between points 4 and 5 in the chart below has a lower chance of success because of its proximity to multi-bar signals and should be treated as part of the multi-bar collection.

Single bar signals in close proximity to each other should treated as multi-bar signals such as the two between 10:00 and 10:30 in the chart below.

DeltaT multi-bar buy/sell

Signal type: counter trend for scalp and then reverse back to trend

The multi-bar DeltaT signal is the most difficult to trade but can also add many points to a swing or longer term trade signaled by the T1 indicator. The theory behind the multi-bar signal is that by showing us multiple bars in the signal it is telling us that the market is still too strong to counter trend trade and that after a pause at this signal the market will resume in the prevailing direction. In other words we're looking to scalp this signal and then reverse back into the trend.

Let's take a look at an example.
We get long at point 1 on a single bar DeltaT buy signal with the T1 indicator turning to a weak buy on the subsequent bar (minute). At point 2 we have a multi-bar sell signal at the 144 and 200 SMA. We reverse the trade to short at this point. Because this is a multi-bar sell signal we expect it to fail soon afterwards and the trend (up) to resume. This happens around 60 minutes later where the high put in at point 2 is broken. At point 3 we reverse the trade to the long side at support on the 50 SMA. If we get the best possible entries on this trade then we add 2 extra points from point 2 to 3 on the short and 2 extra points by re-entering the long at point 3 making a total of 4 extra points on the long we took from point 1.
Picking point 3 as the turning point in this example is tricky, in this case I have conveniently chosen the 50 SMA but in the live action you wouldn't have know that and you would not have been mistaken using a 1 point reversal at the 20 SMA or other support area. This particular strategy usually offers between 0.50 and 4.00 points from point 2 to 3.
Variations on this strategy allow for a trader to implement just 1 leg of this multiple leg strategy:
1. You could use the multi-bar sell signal at point 2 to book profits on a long taken on a previous signal - such as the DeltaT buy signal in this case.
2. Scalp the short side from point 2 to 3.
3. Use point 2 (multi-bar sell) to signal that a reflex move will allow to enter in the direction of the trend.

In the chart below we see another example of the multi-bar sell signal. In this example the 20 SMA provides the support before the signal fails which should be compared to the above example. Notice how there are (a maximum of) 2 points on the short scalp and an improvement on a previous long position of the same.

When does the multi-bar signal fail?

The multi-bar signal is designed to fail. That is, we expect a multi-bar signal to provide us with a scalp in the signal direction and then a continuation in the direction of the trend and the high/low at which the signal was issued to be broken.
The signal fails if the price does not subsequently go on to break the high/low.
Here is an example of when the multi-bar strategy didn't work. At point 1 we have a multi-bar sell signal where we take a short. At point 2 we reverse to the long side because the floor pivot (horizontal red dotted line) and the 20 SMA indicate that this is a very high probability support and reverse area. We hold this long for over an hour and it finally fails at point 3 where we take get stopped out at a loss. This chart shows the same multi-bar signal at points 4, 5, and 6 which work as expected with the market reversing at the floor pivot (point 5) and breaking the previous low (point 4) and making a new low at point 6.

DeltaT divergence

Signal type: counter trend for regular divergence and with trend for hidden divergence

Divergence can be regular or hidden.

Regular divergence is when the price makes a higher high and DeltaT makes a lower high OR the price makes a lower low and DeltaT makes a higher low. This indicates a change in direction of the trend.

Hidden divergence is when the price makes a lower high and DeltaT makes a higher high OR the price makes a higher low and DeltaT makes a lower low. This indicates a continuation in the direction of the prevailing trend.

The quality of divergence page lists the criteria we look at when we asses the probability of success in the trade. The more criteria that are met and the better formed those criteria are then the more likely that the trade will succeed.

Combined with the quality of the divergence we use volume (also mentioned in quality but not strictly a divergence quality), the price in relation to the MAs and the price in relation to the floor pivots.

Here is an example of regular divergence indicating trend changes. At point 2 the price makes a higher high while DeltaT makes a lower high indicating a change in direction. At point 4 the price makes a lower low while DeltaT makes a higher low (again) indicating a change in direction.

When does the divergence signal fail?

Divergence usually fails when you enter too soon. This is not trading fault but it is something that will happen and you have to take a loss on that trade. In the example below there is divergence just before point 2 at one of the floor pivots (the thin horizontal dotted blue line). You would have been justified in taking that divergence trade long at 1095.00 because it is (a) divergence (b) at a floor pivot and (c) has a (small) volume spike; but would have most likely been stopped out at point 2 which is where it would have worked for a couple of points.
[As an aside: there are other reasons why you might not have gone long at that divergence. For example, at point 1 we have 7 buy bars in the multi-bar buy signal. This extreme number of bars indicates a strong possibility that the trend will continue. But that's not what we're demonstrating here which is a divergence signal failure.]

If you have any comments or questions about this page then please please post them on our trading forum. We will answer all questions and may add them to our FAQ page if they are of general interest.

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