The Variable Changing Price Momentum Indicator (VC PMI)
The Variable Changing Price Momentum Indicator (VC PMI) currently runs on more than 70 futures contracts and derivatives. The major ones we trade are:
- E-mini S&P 500
- Crude oil
However, the VC PMI’s price momentum indicators can be used to trade indices, ETFs, futures, options and other financial instruments related to these five markets. For example, we use the VC PMI gold reports to DUST and NUGT, which are double X ETFs based on gold’s volatility.
The VC PMI can be used for day, swing or long-term trades. The day trading program is used with 15-minute charts, but it can also be applied to other time frames for weekly, monthly and annual data.
For each time frame, type of trading and market, the structure based on the VC PMI algorithm is the same. The VC PMI calculates a mean or average price for a given financial instrument and a given time frame, such as for the day, week, month or year. Then the VC PMI uses standard deviations to calculate two extreme levels below the mean, called the Buy 1 and Buy 2 levels, and two extreme levels above the mean, called the Sell 1 and Sell 2 levels. These five levels form the structure of the VC PMI. The structure is always based around the mean and changes as time passes. For example, the daily mean changes each day as the daily average price changes. The weekly structure changes each week on Sunday, the monthly each month and the yearly each year. We have also used the VC PMI to produce 9-year cycle reports on various markets using the same structure.
The five levels are the result of supply or demand from the previous trading period (day, week, month or year). The levels are also called pivot points and are specific, which allows you to use them to guide your trading with precision.
If a market moves down to the Buy 1 level or up to the Sell 1 level, there is a 90% probability that the market will then revert back to the mean. If the market moves down to the Buy 2 level or up to the Sell 2 level, there is a 95% chance that the market will revert back to the mean. Therefore, the highest probability trades involve buying to go long at one of the buy levels and selling to go short at the sell levels. When you enter a buy trade, your target automatically becomes the mean and then the two sell levels above it. You can use the mean and sell levels to manage your trade. If you buy more than one option or ETF share, you can lighten up as those levels are reached or use stops to lock in profits. Conversely, if you sell short at the Sell 1 or 2 level, the targets then become the mean and buy levels below. In this way the VC PMI gives you a structure to guide your trading and levels to watch for as you enter and exit trades. The VC PMI does not offer guaranteed trades, but provides specific entry and exit points for high probability trades. You should still use stops to protect your risk, but the trades you make based on the VC PMI over time should be profitable.
The VC PMI program at any given time will be in one of four states:
You begin your trading session in the wait state. When the market trades at or beyond a Buy or Sell level, you are then in an active neutral state, waiting for confirmation of that level or trigger. If the market at the end of the next 15-minute bar trades above the sell level or below the buy level, you then activate your trade. The target is automatically the level above (mean and then Sell 1 or 2) for buys and the level below (mean and then Buy 1 or 2) for sells. You also place your stop. Once the trade is either stopped out or exited, you then return to the wait state, watching for the market to indicate the next high probability trade.
Long is when you buy into a market at the Buy 1 or 2 level, while Short is when you sell short at the Sell 1 or Sell 2 level. You then wait for a stop to be hit or for the market to reach the mean or Sell 1 or 2 level after you buy, or the mean or Buy 1 or 2 level after you sell short. For a buy to go long, you can use the mean and the Sell 1 and 2 levels as triggers to sell, depending on your risk tolerance and financial goals. For a sell to go short, you would use the mean and Buy 1 and 2 levels as triggers to exit the short position. Once you exit a position, you are then neutral again, waiting for the market to trigger the VC PMI’s next buy or sell level.
At the end of a trading session, such as the end of a day, week, month or year, the program transitions between states. The states and possible transitions are illustrated below:
Most traders use straight stops for risk management. However, straight stops can be identified by large-volume traders and taken out prematurely. This often makes markets appear to whipsaw up and down as nearby stops are taken out by large-volume day traders. Therefore, we recommend only using Stop-Close Only (SCO), Market-on-Close (MOC) and hard-dollar stop orders to eliminate such whipsawing. Such stops can be applied to the daily, weekly and monthly strategies.
SUGGESTED STOPS METHODOLOGY:
( 15-minute time frame )
- Conservative stop.
If the markets closes above or below the trigger point go neutral
When entering a trade, you can use the entry point as a conservative stop. It may be taken out rapidly if the market reverses even slightly, but you will stand little risk of losing much, if any, of your trading dollars.
- Aggressive stop
If the trigger is activated from B1 or S1, use B2 or S2 on a Stop Close Only ( SCO) to go neutral.
If you enter at the Buy 1 or Sell 1 level, you can use the Buy 2 or Sell 2 level as a stop. It will limit any potential loss, while providing the market some room to move without you getting stopped out for what may be a small move against you.
- Catastrophe Stop
Use a maximum dollar amount based on your risk profile.
A catastrophe stop can be used based on a dollar value you are willing to lose. Pick the dollar value, calculate where the level is in relation to your entry point and enter the stop.
- Trailing stop
If the momentum unfolds profitably right away you can use a trailing stop This is the only time a straight stop is recommended.
First fundamental rule: If you are day trading after the opening, wait first 30 minutes to 1 hour. If the price action trades above or below the VC PMI mean price, the price will tend to remain above or below the VC PMI mean price for the rest of the session. The opening tends to be more volatile then later trading, so it is best to wait for the market to settle before trading with the VC PMI. Waiting also provides more data to determine which way the market is likely to move.
Second fundamental rule: It is best to enter and exit trades at the extreme Sell 1, Sell 2, Buy 1 or Buy 2 levels, which provide the highest probability trades. If the market reaches the Sell 1 or Buy 1 level, there is a 90% chance of a reversion to the mean, while the Sell 2 and Buy 2 levels have a 95% probability of the market reverting to the mean from those extreme levels. Therefore, the general rule is to buy (long) at the Buy 1 or 2 level, while selling (short) at the Sell 1 or 2 level. Alway avoid buying at the high (supply) Sell levels or selling at the low (demand) Buy levels. The farther the market moves away from the mean, the higher the probability that the market will revert to the mean. The market may keep rising or falling from those levels, but the odds greatly favor a reversion.
Third fundamental rule: If the market closes below the Buy 2 or above the Sell 2 level, it signifies that the trend is beginning to change and the price pattern may be shifting to the next price fractal and time frame. When this happens, resistance becomes support and support becomes resistance. It is a time to wait and let the VC PMI create a new setup or structure for the new higher or lower price.
When the price breaches an extreme Buy 2 or Sell 2 level, the VC PMI based on each time frame is then linked to the next longer time frame. When the daily extreme price levels have been met, then the weekly price levels come into effect. When the weekly is met, then the monthly comes into play, and after the monthly are met, then the annual comes into use.
Keep an eye out for harmonic convergences between the different time frames. If a market has similar means and/or buy and sell levels for more than a one-time frame, then the odds that the market will reach those levels and then revert to the mean are even greater than if only one data set based on a one-time frame has identified such levels. For example, if gold has a daily Buy 1 level of $1900 and a monthly Buy 1 level of $1905, it is highly likely that if gold reaches about $1900 to $1905, a reversion will occur back to the mean. We also find ways for such harmonics between the different data sets to guide our buying, selling and placing of stops for our trading.