The Accumulator & Delineator

The Accumulator is the PINK line and its smoothed average is the CYAN line


Real Time Price Bars

Accumulator #1: 'Buy/Sell'

Accumulator #1 "Buy/Sell": Accumulator #1 looks for specific types of trades that are identified as pure buying or selling. It also scans for block trades and determines whether these trades are buys or sells. Audio alerts can be configured for 4 separate buy and sell block size ranges which are then continuously monitored.

This Accumulator works best for GLD, GOOG and many less liquid stocks or those with moderate daily volume. Trading opportunities are identified as the Accumulator changes slope. Here, the Accumulator was in a clear sell from the latter part of the prior day, point A. The slow (cyan) line flattens, point B, then the fast (purple) supports the rise in price from the lows indicating a long signal, point C. GOOG is shown here in the chart below.



Real Time Price Bars

Accumulator #1: 'Buy/Sell'

Accumulator #2 "Market Pressure": Accumulator #2 measures overall supply and demand for a stock. When demand rises over supply, the Accumulator rises; when supply overtakes demand, the Accumulator falls.

This Accumulator is the 'default' one to typically start watching on any security. Trades are identified as the Accumulator changes slope, and when 'extended'. The chart shows X (US Steel). Clear positive divergence is shown at the far left of the chart, point A, as price falls and the Accumulator rises. This told you to buy into the lows. A sell is shown at point B; extension and a sell is shown at point C; positive divergence is again shown at point D telling you to buy into the lows. X is a great stock to trade and Accumulator #2 has worked well with it for years.



Real Time Price Bars

Accumulator #1: 'Buy/Sell'

Accumulator #3 "Liquidity": Accumulator #3 measures whether liquidity is coming into the market or is being removed. When liquidity is rising, this Accumulator rises; when liquidity falls, the Accumulator falls. Liquidity is typically greater at bottoms than at tops which is identified through positive and negative divergence.

This Accumulator works especially well with SPY and shows divergences better than any other Accumulator for SPY. At point A we see the Accumulator identifying buying into the lows as price drops rather quickly from 127 to 126.50. At point B we see extension and the Accumulator reverses showing strong buying into the 2nd low and a clear long signal as the Accumulator moves back above its smoothed average (cyan). Notice that the smoothed Accumulator had already turned up at the first low. Price recovers to the initial break down level at 127 (a pattern that is very easy to trade). Positive divergence is shown at point C as price falls while the Accumulator continues to rise. Price recovers again to the break down level at 127. A sell is shown at point D, and at E another long signal as the fast rises as price goes sideways for about 6 bars.



Real Time Price Bars

Accumulator #1: 'Buy/Sell'

Accumulator #4 "Raw Tick": Accumulator #4 measures the Raw Tick. It nets up tick volume from down tick volume and shows this in the line. A rising raw tick line means that up tick volume exceeds down tick volume and visa versa.

This Accumulator is not very predictive anymore mainly due to the fact that program trading can make up to several thousand trades in a single second. But it can be useful in examining the actual tick and to more closely examine certain points in time. This Accumulator is good to use on low volume illiquid stocks.

SPY is shown above for the same period as in the Accumulator #3 image. You can that the two charts are quite different. At point A for example, we can see that up tick volume turned up before the low was made. This supports point A the Liquidity Accumulator.


Based in part on my experience as a wholesale market maker and then portfolio manager, I designed the Accumulator to identify 4 different types of activity that can be derived from information on the consolidated tape (CQS). The 4 different Accumulators are calculated in real time and each tells you something different about how an issue is being traded between two points in time.

The Accumulator was designed for trading intraday ranges using 1 minute price bars. But it is also predictive at longer term time frames where it can identify major selling into highs or buying into lows on daily charts (see 'the Top in Apple' above in the navbar next to Studies).

Not all Accumulators work for all symbols. You must use them to best determine which Accumulator is predictive for a particular symbol. Why? Because not all securities trade the same, hence not all Accumulators will be equally predictive on each symbol.

The Accumulator should be used along side your existing charting systems. While they can be used independently, the Accumulator was not designed to be used exclusively of other analytics. Once you define a range, the Accumulator will tell you whether support or resistance will hold or fail.


The Accumulator is the PINK line and its smoothed average is the CYAN line


What They Do: Divergence and Extension

In a normal market, you would expect to see price and the Accumulator rise and fall together. But when the Accumulator diverges from price, you are seeing a major shift that will lead to a reversal in price.

Positive Divergence:

When the Accumulator rises as price falls, as shown below, the Accumulator is identifying buying into a low or support level. The rising Accumulator has identified accumulation into price weakness, "buying into the lows". This is called Positive Divergence and a reversal in price will follow.


Real Time Price Bars


In the example above, we can see price falling to point A as the Accumulator rises. This indicates buying into the decline. Price reverses at A, a prior support level, and rises back to its earlier break down level. Price then declines to point B as the Accumulator continues to rise. Price then retraces back to near the prior high of the day. This is a very reliable pattern. Upside potential is determined by the next resistance levels.



Negative Divergence:

When the Accumulator falls as price rises, as shown below, the Accumulator is identifying selling into a high or resistance level. The falling Accumulator has identified selling into strength, "selling into the highs". This is called Negative Divergence and a reversal in price will follow.

Real Time Price Bars

In the example above, price rises to a high or prior resistance level while the Accumulator declines. This indicates selling into the rise. Price reverses and falls back to a prior support level. Late in this chart toward the close, we can see additional negative divergence indicating selling into the final rise of the day.



Extension:

When the Accumulator spikes up or down very sharply within a single bar or two, this is an indication of an exhaustion in trend. Think of extension as a 3 sigma move away from a mean that then reverses. Extension means there's too much volume coming in at once and prices are stretched, then typically reverse. Panic selling or buying, people throwing in the towel, algos running limits through obvious levels--these are all actions that typically create extension.

Real Time Price Bars

In the example above, extension is shown in the first arrow, price making a spike low, then reversing. Then again at the second arrow, extension is shown but there is no spike in price. The Accumulator then reverses showing positive divergence and price then rises again.



Real Time Price Bars

Here's another example of extension. Notice the large green vertical bar and the very sharp rise in the Accumulator. Almost immediately after extension occurs, price reverses.

The Accumulator Tracks

Algorithmic Trading and Dark Pool Activity


The Accumulator separately tracks Algorithmic trading and Dark Pool activity on each of the trade following Accumulators. You can now see what the Algos and Dark Pools are doing.

For example, the three charts on this page show the main directional Liquidity Accumulator on SPY for the period February 1-8, 2013. The first chart shows the composite quote stream, the second Algos Only and the third Dark Pool trades.

By separating out Algos and Dark Pool trades we can obtain greater insight into the character of trade flow over a range of days. Over the time period shown, it is apparent that the Algos, which are generally very short term in nature, were sellers, whereas the Dark Pools, which are generally more longer term, were buyers.

Many institutional portfolios utilize Dark Pool venues so that they can utilize the increase liquidity and privacy needed to accommodate their large transactions. Because their time horizons are long term in nature, knowledge of Dark Pool activity in a stock can be of particular benefit to swing traders and longer term investors.


SPY - Accumulator Ver 5.1b CL

The chart above shows the full composite quote stream for the Liquidity Accumulator



SPY - Accumulator Ver 5.1b CL

The chart above identifies Algo Only trades for the same Accumulator. Algos have very short time frames and cause much of the intraday volatility in SPY and other stocks. Following Algorithmic trading patterns will be of benefit if you are an active trader because you will know what the trading algos are doing at any point during the day.



SPY - Accumulator Ver 5.1b CL

The chart above identifies Dark Pool trades. Institutional portfolios and mutual funds use Dark Pool venues for many of their large block and portfolio management transactions. Since such entities typically have long term time frames, following Dark Pool trades on your stocks can benefit both swing traders and growth investors.

No other software program has these features.

The Accumulator is a stand alone Windows application that will also run on a Mac in a Windows emulation mode. The Accumulator uses a specialized data feed. For each symbol that you want to track, an additional program window is opened. Most standard computers can run 15-20 individual Accumulator windows.

The Accumulator must be started before the market opens and shut down after the market closes. Since it analyzes the tape in real time, if it isn't running it can't analyze and archive the data. We do provide historical data for a variety of symbols including SPY, GLD, AAPL, GOOG, VXX and several other symbols. But most new users begin to build their own histories of the symbols they follow. It takes about a day to create a new historical data file for new symbols.

A specialized data feed is required to power the Accumulator. The amount of data that is transmitted in the tape is voluminous. Most data feeds actually strip out many items in the tape because there is simply too much data. The data feed used for the Accumulator is quite robust and this is one of the reasons why the Accumulator is such a powerful program.

The Accumulator is very easy to operate and learn how to use. All controls are intuitive and straight forward.


Accumulator - Copyright© by HCMI. V5.0

Shown above is an offline program window. The four different Accumulators are shown on the upper right portion of the screen. When a symbol is loaded, you can switch between each of the four Accumulators in real time during the day to see what each is showing. For each symbol you follow, you must run an Accumulator in the 1-minute mode to analyze the tape and create the data. To view additional time frames, you simply open an additional window and select the time frame you want to view.



Accumulator - Copyright© by HCMI. V5.0

The program contains many additional features including being able to draw trend lines as well as regressions, shown above. Volume at price is included which calculates such volume over the range of bars shown on the screen at the time (up to 2500 price bars). Both arithmetic and regression moving averages are included and are user configurable. Colors and all features are fully user adjustable. A cross-hair feature is also provided that displays all information including levels, high/low/close of any bar as well as the values and net change on any bar of each of the various Accumulators.

The program also monitors for large block transactions and alerts the user to this activity by sounding a configurable audio alarms. Users can adjust the threshold levels to monitor for both buy and sell spikes, shown below. While a basic set of audio alarms are included, users can create their own audio alarms using a simple sound editor that can export a .wav file.

Sound Alert Settings

Limit minders are also included and can be configured to monitor for upside and downside levels as shown below.

Limit Settings

How to Use the Accumulator

There are four different Accumulators that are used to analyze any symbol. Each Accumulator looks for a specific feature within the tape and displays the information graphically. All four Accumulators are calculated simultaneously in real time allowing you to switch between them to see what each is doing. Together, they give you a complete picture inside the tape. Once you know how a stock is trading, you can predict whether support and resistance levels will be held or traded through.

The Accumulator is the pink or magenta colored line and it is the raw minute to minute graph on any of the four Accumulators. The cyan colored line is the raw Accumulator smoothed over a number of periods. Price is not used in any calculation, these are not moving averages. The Accumulators allow you to understand the character of trading, the flow of buy and sell pressure and the underlying strength or weakness between any two points in time. Divergence, that is the Accumulator moving opposite to price, is the Accumulator's key feature. Positive divergence identifies lows, negative divergence indicates highs.

Let's look at SPY from 11:00 to the close on Friday, May 25, 2012. We're going to look at how three of the Accumulators (1-3) are used together to give you a framework under which to view price behavior.

Accumulator #1, called "Buy/Sell", measures direct buying and selling. This Accumulator looks for certain types of trades and accumulates the volume of these trades. As you would expect, buying pressure moves the line up and selling pressure moves the line down.

We see at point G that the Accumulator, the pink line, begins to drop along with price. But at point H, the Accumulator begins to accelerate its decline while price is rising. This is negative divergence and it means that selling into that price level was continuing and accelerating. This means that those levels would fail and new lows should be expected, through to point I.



Accumulator - Copyright© by HCMI. V5.0

But we don't use just one Accumulator, we switch off between several of them. So, consider now that while #1 above was showing its data, two other Accumulator were also running, so let's look to see what they were doing during this period. Remember, you should look at several Accumulators at a point in time to get the full picture of how a stock is trading.

Accumulator #2, "Market Pressure", measures overall supply and demand. This Accumulator looks for certain types of data within the tape to generate its graph, but it doesn't look at either trade volume or price. When this Accumulator rises, demand for stock has increased; when it falls, the supply of stock has increased.

Looking at the chart below, from point A to point B, demand was strong. At point B however that changed completely as supply exceeded demand stayed that way for the next two and a half hours. At point C we see the Accumulator drop prior to those little highs. Point D is especially important because it shows negative divergence as Accumulator #1 showed at this point in time as well. At D, price rises while Accumulator 1 and 2 were falling...both telling you that those highs would fail and the level indicated by Arrow E would be broken to the downside.


Accumulator - Copyright© by HCMI. V5.0

Accumulator #3 (shown below), the "Liquidity" Accumulator, measures whether liquidity is coming into or is being taken out of the market. This Accumulator analyzes the tape looking for a specific type of trade and it is very sensitive to the change in flow of these trades. Divergence is very important for this Accumulator especially when viewed within the context of what the other Accumulators are showing.

In the chart below, we can see just prior to point G that the Liquidity Accumulator was already rising and it rose while price declined from the first and second highs. This indicated that those highs would be tested again. But at point H this changes and we see a sharp decline in the Accumulator. At points I and J, notice that the Accumulator was falling as price attempted to rise, negative divergence. This indicates selling into these up moves and that price would not sustain any additional move higher. All three Accumulators were clearly bearish during the 1:30 sideways move in SPY.


Accumulator - Copyright© by HCMI. V5.0

Taking into account what the other two Accumulator were doing at the same time, and what each of those measure, we can see that at point J, SPY was already very weak. Hence, the small upside move from point J forward could not be sustained. Point K again we see Accumulator 3 decline while price held fairly steady. This indicated that the level indicated by the arrow would break and price would make new lows during this period.

The Accumulators work extremely well for trading SPY which can then be used to trade ES by inference. Here are several examples of both Divergence and Extension.

Extension:

At point A in the chart shown below indicates the open and the Accumulator, the pink line, is declining as is price for the first 10 minutes of the day. The Accumulator becomes extended at point B. Extension is caused by an increase in selling or buying pressure. When the Accumulator is extended, it means that a reversal in the Accumulator and in price will occur. With extension, we basically have a three sigma move away from the Accumulator's smoothed value, the cyan line. So at 9:40am--point B, where price also filled the opening gap, the Accumulator reverses as does price.



Real Time Price Bars

Divergence:

Continuing, the Accumulator also shows divergence, periods when the Accumulator moves in an opposite direction to price. There are positive and negative divergences. Positive divergence identifies buying into lows, and negative divergence identifies selling into highs. At Arrow C above, we see negative divergence: the Accumulator falling while price rises. This indicates selling into a price move and is typically seen at the end of a short term trend. The Accumulator is telling us here that the highs being made in the morning portion of the trading day were not going to hold.


Retracement:

Divergence leads to a price retracement back to the level where the divergence began. Shown below, we see the period of negative divergence C that indicated the highs above 133 would fail. Price reverses in the direction of the Accumulator and retraces the price move, shown as Arrow D, back to the level where the divergence began.


Real Time Price Bars

The Accumulator continues to fall past Arrow D and price follows in the direction of the Accumulator. At point E, we see a 'test' where the Accumulator moves up a bit but stays below the smoothed cyan line. This indicates a bit of short covering coming in but no new longs, which would have moved the Accumulator more strongly up. Price continues all the way back down to Arrow G. At that point, price has completely retraced the entire move, a move that was never supported by the Accumulator.

Something else that is noteworthy: Algos trade the most obvious ranges, in fact, you can depend on it. So while many believe that algorithmic trading has made the market more difficult to trade, I believe the opposite. If you look for the ranges and the break-out and break-down levels, you will find that setting targets at those levels will make your range trading more effective. Using the volume at price functions to identify the price level that contains the largest volume also helps in identifying ranges.


Real Time Price Bars

Shown here is nearly a full day for SPY. The Liquidity Accumulator is shown above and the Market Pressure Accumulator below. For trading SPY, the Liquidity Accumulator is the main directional indicator and the Market Pressure is used to bias the strength or weakness of the Liquidity's direction. When the Market Pressure is moving opposite to the Liquidity Accumulator, it means that the strength of the Liquidity's signal is weaker than if both Accumulators were moving in the same direction.

In these examples, the moves to the highs were not supported by either Accumulator indicating that the highs would fail and should be sold if one were long, or shorted. The negative divergence into a prior resistance level especially by the Market Pressure Accumulator is especially noteworthy in this example.


Real Time Price Bars

The Accumulator can be run on multiple time frames from 1 minute bars to daily bars enabling you to analyze Accumulation over a range of times. Divergence typically identifies the last move to new highs or lows that subsequently reverse.

Shown below is a 5 minute SPY Liquidity Accumulator chart. The Liquidity Accumulator began to rise mid-day on May 15th and continued to rise into the 18th as SPY was making new lows during an extended down trend. This is positive divergence and it indicates significant buying into the lows, either short covering or new longs.

The gray horizontal bars from the left are volume at price over the range of periods shown. These are used to further define support and resistance levels.


Real Time Price Bars

Moving forward a day, May 21, is shown below. SPY rose from the lows established on the 18th, but notice how the Accumulator turns back down late in the morning and continues lower as price continues to rise. This is negative divergence and it indicates selling into a price rise. This told us that this first bounce was not going to sustain a move higher and to expect price to test the lows again.


Real Time Price Bars

Moving forward another day to May 23rd is shown below. SPY continues to rise and the Accumulator shows stronger selling into higher prices than the prior day. The slope of the Accumulator is a function of volume. When it is flat, buy and sell volume are about equal. A stronger move by the Accumulator indicates more buy or sell volume. In this case, a much higher level of sell volume than the prior day. Accordingly, SPY fails to hold the rise and price drops back down to the 130 level from where it started.

Thus, the Accumulator identified that the lows being made at 130.00 on the 17th and 18th were going to hold, and the rise to 133 was going to fail.


Real Time Price Bars

The Accumulator can also be used on a daily basis to see a much longer term trend. The Liquidity Accumulator chart below shows SPY from January 2011 to May 2012. The gray bars at the left are volume at price.

Looking at the period from August through December of 2011, the Accumulator made its lows in mid August and rose steadily through the additional lows made by SPY in October. Again, positive divergence into a low is a reversal indicator and evidence that those lows will hold. This told you to buy into those lows.

The Accumulator continued to rise steadily until mid April of 2012 when it turned down, showing negative divergence into the highs in early May. We can then see that while SPY continued lower into late May, the Accumulator did not make new lows--positive divergence again telling us that those lows in May were going to hold and reverse which they did.


Real Time Price Bars

How the Accumulator identified the top in Apple

The Accumulator can be run on multiple time-frames from 1 minute to weekly charts. Watching longer term timeframe's can identify selling into major highs and buying into major lows.

Case in point APPLE:


Real Time Price Bars

Shown above, a 15 minute Buy/Sell Accumulator #1 chart for AAPL. It shows that starting on August 24, 2012, the Accumulator rolled over and began declining as AAPL traded between $660-$680. Then, indicated by the parallel lines, the Accumulator identified very strong negative divergence into the highs above $700 starting on Sept 14, 2012.

The negative divergence indicated that there was strong selling into the highs above $700. Negative divergence into a high on a stock, especially after a long upside run, indicates that professional traders and especially portfolio managers are taking advantage of a strong move up in which to liquidate large positions. The media may tell you that a stock was down on "profit taking" but I assure you that profits are booked as stocks move up, not down, especially for portfolio managers that have very large positions.

This selling activity was identified by the Accumulator which set up a 187 point decline that took Apple stock down -26% over the next two months.

I have been following AAPL for several months and have kept a running log waiting to see the Accumulator identify positive divergence to call the bottom for a swing trade back up into the range.

Watch the Delineator Tutorial Video Below:


DeLineator Trading Model #1 Version 9.2.D - Copyright© by HCMI.


The Delineator is a derivation of the McClellan Oscillator. It uses market breadth, not price, to measure and forecast future price direction. But more than a simplistic buy/sell indicator, the Delineator is a process of analysis and decision making that is measurable and repeatable. I designed the Delineator in 1998 when I was a portfolio manager and used it to manage our client's growth portfolios. Maintaining a disciplined approach to the timing of investment decisions is critical to long term success. This is the key benefit of using the Delineator.

The Delineator provides a multiple time period framework from which to view market trends. The daily chart, called the Secondary, determines the main trend. The 30 minute chart, called the Primary shown above, is used to identify subcycles within the main trend and is the trigger for timing purposes. The Primary will only confirm trends that are supported by the direction of the Secondary. If the Secondary is up, only up cycles on the Primary will be confirmed. If the Secondary is down, only down cycles will be confirmed by the Primary. It is this pairing of time frames that makes the Delineator reliable for the ETF investor who wants to hold a position over a period of time, and it can be used quite effectively for day trading as well using the 30m/5m time pair. The Delineator is particularly good at identifying reversals as they set up.

A WORD OF CAUTION: The Delineator IS NOT a mechanical trading system. You DO NOT go long when it turns green and then sell and go short when it turns red. Trades are put on as the Primary changes slope and a targets are always used. This page does not explain how to trade, it explains the process and terminology only. To learn how to use the 5m trading Model, see the 5m trading strategy tab above.

So let's describe the components of the Delineator using the 30m Primary shown below. The Delineator is the line with the multi-colored dots. The green indicates an uptrend Delineator cycle and the red indicates a down trend Delineator cycle, the gray indicates an unconfirmed signal. The white arrows are slope changes not buy or sell signals. The orange line is the change of the Slope value (and is the most important item to understand.) The blue lines are of course the time series of the ETF, SPY in this case. The Primary and the Change (orange) lines are independently displayed so do not look for cross overs as there are none. (watch the Video if this is confusing)

Primary= +4450

SW= +1480

SLOPE= +665

CHANGE= -8


Real Time Price Bars

click to watch delineator basics video

The Primary oscillates between positive and negative extremes based upon changes in market breadth, what is called signal weight. Increasing signal weight makes the Delineator rise, negative signal weight makes it fall. The Primary cycles between values of approximately -8000 to +8000. Integrated into the Delineator are the tools needed to monitor these values and use them to predict when a slope change will occur. When a slope change confirms, price will soon follow in that direction. Once the Primary changes slope, it cannot change slope again until it completes its cycle.

The numbers at the top are:

  • Primary=the actual value of the Delineator (ranges from -8000 to +8000)
  • SW=Signal Weight (ranges from -2500 to +2500 at extremes)
  • Slope=slope value of the Primary
  • Change=last bar value change of the Slope (the orange line)

Consider each cycle on the Primary as comprised of an initial phase, and a terminating phase. The initial phase begins at the slope change signal and ends when the Slope value is at maximum--the Change shows zero. This is the easy money phase of the cycle. During the initial phase, any counter trend move in price will resolve back in the direction of the Delineator. During an up cycle, you should be buying every dip back near the low of any previous bar. You have virtually no chance of the trend suddenly reversing. Selling out of a long position during the initial phase should only come as a result of hitting a profit target. If you get spooked and want to sell out of a long because you are afraid the trend is going against you, you need to do some pushups or buy those lows and stop worrying about being wrong.

During the terminating phase, the final push in price exhausts as the Slope value moves back toward zero pulling price with it in the opposite direction. At maximum terminus, the Primary is overextended at a high level of signal weight and the Slope already moving backward, a balloon underwater.

One thing: the initial phase is shorter in time than the terminating phase, which can be more than 50% of the entire cycle. Here's a little exercise you can use to understand how the Primary moves. Let's assume that everything starts at zero. As you move down the list, you can see how the values of each of the components move:

signal weight = 0 Change = 0 Slope = 0 Primary = 0
signal weight = 1000 Change = 100 Slope = 100 Primary = 100
signal weight = 1000 Change = 90 Slope = 190 Primary = 290
signal weight = 500 Change = 40 Slope = 230 Primary = 520
signal weight = 0 Change = 0 Slope = 230 Primary = 750

As signal weight changes, it either adds to or subtracts from the Slope value which is reflected in the Change component. In this way we can predict from any level in signal weight how long the Slope can rise before it reaches its maximum level for that level of signal weight. The Primary's value is determined by the Slope value.

These numbers are used to analyze the strength of the current Delineator cycle. Using these numbers we can predict the value of the Delineator and the state of the current trend. For example:

The value of the Primary is +4450 and the Slope is +665. We can easily determine the value of the Primary during the next 30 minute bar will be +5115 (the slope value added to the Primary). Further, we can see that the Change value is -8. The Change is the change in value of the Slope from one bar to the next. So with the Change being -8, we know that the Slope value has already reached its maximum given the current level of signal weight. This means that further increases in price are unlikely to sustain unless signal weight increases from its current level of +1480. We also know that the current cycle is old.

Further, we can predict how long it will be before the Primary becomes overextended in the +8000 value range. At +4450, the Delineator is 3550 ticks away from +8000. Dividing the Slope into this value gives us 5.3 bars (3550/665) or about 2.5 hours of trading. We want to time our entries into cycles as they originate and our exit as they become overextended and unsustainable. So in this example, profit taking would be the trading focus. We certainly wouldn't want to be establishing new long positions this late into a Delineator cycle, nor would we wait for a slope change down to exit. Price could still very well rise but from the perspective of the discipline, profit taking not establishing new long positions is indicated.

Again using this example, we can determine what would need to happen to begin the process of the next slope change. First, signal weight will need to become much less positive. If signal weight during the next bar dropped to zero from +1480, the Slope value would change by approximately -150 ticks. (We would know this if it happened because the amount would be calculated by the program). Dividing -150 into the Slope of +665 we get 4.4 or about 2.5 hours.

This process is repeated over and over, it remains constant. At any point in time we can determine the strength of the cycle and project out how many days it will last. We can observe the trend in signal weight especially between up and down cycles which provides further insights into the character of any trend. We can identify periods of time when we should be selling into strength and buying into weakness. This is best described as positive and negative divergence shown in the chart below:


Real Time Price Bars

Negative divergence, shown above at points A & B is when price makes higher highs, but the Delineator makes lower highs. This tells us that the trend is going to reverse and to sell into the highs. Positive divergence, points C & D, and E & F is where price makes a lower low but the Delineator makes a higher low. This tells us to buy into the lows. WHEN CYCLES ON THE SECONDARY BEGIN WITH DIVERGENCE, THAT NEW CYCLE WILL BE STRONGER THAN THOSE THAT DO NOT START WITH DIVERGENCE. This is very important and I have seen this play out on the Delineator consistently since 1998.

I am the first to point out that the Delineator has a steep learning curve. Many have learned to follow price, using price based indicators, then make decisions based upon how price is moving or in reaction to it. You will see that price follows the Delineator, so when the Primary changes slope up, price will soon reverse and move higher. Trading and investment decisions are based upon the motion of the Delineator not upon price action. After 14 years of using it I can tell you that the Delineator is a reliable leading indicator of price.

The BEST WAY to learn is to follow the Model Trading Strategy for a few weeks. You can do this by signing up for the Delineator Journal website 2-week free trial. The Journal is there to support existing users and allow new users to follow along and see what we're doing. By following the 5m Model, you can learn about how to use the Delineator and maybe make some money following our signals at the same time.

5 Minute Delineator Model Trading Strategy

The best way to learn how to do something, is to do it. The process by which the 5 minute Delineator operates is the same as the Primary Delineator, only faster. There are many cycles on the 5 minute for every cycle on the Primary.

So by watching the 5m for a few weeks, you will learn how the Delineator works on all time frames. You can then select the time frame most suited to your needs: day trading, interday or interweek swing trading.

I have developed a 5 minute Model trading strategy that is easy to learn which will teach you how to use the Delineator. It typically generates 1-3 trades a week that are typically triggered within the first 10-60 minutes of trading. The Model isn't designed as the best way to trade using the Delineator, but it is the best way to learn.

Strategy:

The Delineator automatically generates long and short trades which are then reviewed as follows for a long trade (reverse for a short trade):

  1. The defined profit target for each model trade is .50 cents on 2500 shares of SPY.
  2. The trade is confirmed and executed only if the following three conditions are met on each signal:
    1. The profit target must be within the range of the most recent double chevrons on the 5m chart (which define the ranges)
    2. Signal weight must be +- 800 (+ for long signal, - for short signal)
    3. The position of the 30m Primary supports the direction of the trading signal. For example: If the Primary has just turned up, the model would not take a short signal against the direction of the Primary during its initial phase.
Only when all three conditions are met is the trade executed, otherwise, the trade is avoided.
Execution:

An "Enter Long" is confirmed at the slope change up signal on the 5 minute Delineator when the Slope value is +10 or more. A market buy order for 2500 shares of SPY is placed as the signal confirms. When the purchase is completed, two limit orders are then placed:

  1. a limit sell is placed at the profit target which is 50 cents above the signal price identified by the Delineator
  2. a limit stop loss sell is placed 50 cents below your cost which is the signal price identified by the Delineator.
  • Then you wait. If price moves up 30 cents toward the profit target, the stop loss limit is raised 30 cents which limits your risk to only 20 cents.
  • If the profit target is achieved, the limit will be filled and the Model will be out of the trade. If price reverses and hits the stop loss, the Model will be out of the trade.
  • If neither limit order is filled, if the 5m Delineator changes slope again, it will issue an early exit long and the slope change down signal takes you totally out of the trade.
  • All model trades exit by the close, positions are not held overnight.
  • All remaining limit orders are cancelled following a closing trade.

Hence, your profit or loss potential for any trading signal is $1250. Experience has shown that about 80% of the Delineator signals that meet all three conditions achieve their profit targets.

You are free to modify any of these rules to suit your own needs or styles. The Model is designed as an easy way for you to learn to apply the Delineator to trading. It isn't the best or only way to use the 5m Delineator, just a good way to learn how to use it. You are free to modify the strategy to suit your needs.