Tension
Preface:
Tension is built to forecast U.S. Equity Indexes && their derivatives:
SPY, ES – S&P500
QQQ, NQ – Nasdaq 100
IWM, TF, RTY – Russell 2000
DIA, YM – Dow
Tension does NOT use price, it’s calculated from Market Internals.
Here’s a Gif showing how to find a list of market internals on ThinkOrSwim.
Clicking the image makes it bigger
Author Comment:
Tension is one of the most powerful tools available to an equity trader. Making it possible to have realistic expectations for how equity markets will move and behave for 1-3 days into the future. Understanding what is actually going on and what is coming next will support, filter and improve most short-term, mid-term and swing trading strategies. This tool deals with the most common reason why good trading strategy fail to consistently or reliably bring in profits: No Expectations. This page is dedicated to introducing Tension’s most valuable trading concepts.
Table of Contents:
How indicators are thinking
Tension’s identity
Reading the Tension Visuals
1. Numbers
2. Colors and Lines
Reading Tension Numbers
1. Mean Reversion Mentality
2. Trend Mentality
3. Example Historical Data Practice
Now, Let’s Define the Trend!
1. Big Money Preface:
2. What is Trend State?
3. Trend State’s effects on Tension
Building Realistic Expectations!
1. When the Market Closes
Empowering momentum trading with Tension
More Stuff
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How indicators are thinking:
When an indicator provides a very reliable trading signal which a trader can simply shadow or auto-trade then IT’S NOT AN INDICATOR, it’s a strategy. Strategies are built from multiple measurements (indicators) packed together to produce a trading signal. A complete strategy can accurately model markets and contain all 4 classes of indicators:
1) Structure – measures how the current market is doing what it’s doing.
2) Expectation – implies what a market should do by measuring what it cannot do.
3) Entry – timing when probabilities are temporarily imbalanced to improve order execution.
4) Filter – measurements and/or models which increase the probabilities of another indicator.
Most traders do not realize they are using an incomplete strategy. And when a strategy only employs 3 of the 4 classes then traders always complain about the same symptom, “This strategy is amazing! But somehow I’m not actually making money” ( Which is usually followed by the sentiment, “which is upsetting when the guru I’m paying always makes money” ). This can waste thousands of dollars & years of a trader’s life; trading with an incomplete strategy provides all the feelings-of-success without any profit.
Tension’s identity
Tension is an Expectation class indicator designed specifically for day/swing trading U.S. Equity Indexes and Equity Index Futures ( i.e. SPY, QQQ, IWM, ES, NQ… ). Each day’s market conditions, trades, and behaviors can be forecasted by the Tension indicator — the previous day — . These expectations enable traders to anticipate markets which improves decision making and order execution/management. There are quite a few useful ways to use Tension but I believe that the daily expectations are the most valuable analysis.
Reading the Tension Visuals
1. Numbers
Tension oscillates between +1 and -1 while its counterpart label expresses the same number with it’s polarity reversed as a location percentage between +100% to -100%. When the line is plotting a positive number, the label will read a negative number and vice versa ( Image 1 )
Image 1: The relationship between the Tension line and the Tension Label
2. Colors and Lines
Tension tends to be doing one of two operations: Building or Releasing. The market will build up tension ( potential energy ) and then release that tension into the market ( kinetic energy ). When Tension is building the line plots thicker. When the market is releasing the line plots thinner. In image 2 A and C are examples of positive (Green) and negative (Red) tension releasing into the market; B and D are examples of the market building positive ( Below 0 ) and Negative ( Above 0 ) tension into the market.
Image 2: How the indicator visually depicts tension building and releasing.
Reading Tension Numbers
1. Mean Reversion Mentality
The market price is affected when tension releases. Let me say that again, market price is affected when tension releases. Price is then Expected to move in the same direction which tension is releasing. Predicting the release of Tension is, therefore, also predicting price moves. Predicting when tension will release is made possible through one of it’s unique properties: it will never reach +/-100% ( +/-70% is very large ). When the market builds tension to larger numbers it is simultaneously increasing the probability tension will release. Image 3 below shows an example of A) Building tension negative and B) Releasing negative tension into the market which pulled price down.
image 3: the process of building and releasing tension drives prices.
2. Trend Mentality
When a market has a trend mentality then price is able to advance in a direction without requiring tension to release, BUT the act of advancing in a direction presses on tension. This results in the tension label maintaining a smaller contrary tension number during the duration of a trends ( See image 4 for a visual of this concept ). Image 4 contrasts Tension’s behavior during both Long (B) and Short (C) Trend mentalities and, also, contrasts Tension’s behavior between Trend (BC) and Mean Reversion (D) mentalities. Additionally, there are markings to show bull/bear flags (A & E). During B, the tension line stayed above zero and prices were able to independently move higher ( Without needing tension to release ). During C, the tension line stayed below zero and prices where able to independently move lower ( Without needing tension to release ). During D, the market began building and releasing tension on both sides which pulled prices higher and lower, respectively.
Image 4: Indexes trend when price is able to advance without needing tension to release.
3. Example Historical Data Practice
( 02 Jan 2018 – 26 Jan 2018 )
At this point in this document the most important concept to be able to spot using Tension is the Market’s Mentality. Take a few minutes to look at image 5 to check if you can spot the Long/Short Trend Mentality & Mean Reversion Mentality.
(Clicking the chart opens a larger image in a new browser tab)
Image 5: Test yourself! — Tension on the SPY for dates: 02 Jan 2018 – 26 Jan 2018
Now, Let’s Define the Trend!
1) Big Money Preface:
Before we talk about trend, let’s quickly talk about big portfolio managers and risk. When a trader is working with large amounts of an investor’s capital then being able to quantify reductions in risk becomes important when they justify their trading activity (establishing that Risk is very important to traders with equity). When the majority of these bigger traders (Not using Margin) get into positions then their orders deposit large amounts of equity into the market which directly impact the way daily bars close . Now, we can put these together to deduce that, when:
1) Tension releases (as Expected) that it reduces risk, which,
2) draws in the majority of big players to get into positions, which,
3) should result the Day bar closing in the same direction from the open as tension was releasing.
Image 6 is a visual example of what is meant by this:
image 6: Positive tension releasing closed the day higher – Bullish traders did that.
2. What is Trend State?
When the market only drives price for low risk trades for one side and fails to drive price for low risk trades on the opposing side – this is a trend – Directional Risk preference. In order for the market to express a trend it must show two events in succession:
1) One side releases and works – daily closes in favor
2) Opposing side Releases and fails – daily closes against
This works like a ratcheting wrench which turns in one direction and resists the other. Image 7 shows the steps necessary to flip a Bearish Trend State into a Bullish Trend State.
Image 7: The steps needed to flip trend state from Bearish to a Bullish
3. Trend State’s effects on Tension
A Bullish / Bearish Trend State provides Expectations for how Tension will effect index prices. There are two times when prices respond to Tension releasing:
1) Immediately while tension is releasing (Usually this is within the first hour)
2) By the close – how the day closes with respect to the day open.
Image 8 shows how price is expected to respond in both a Bullish and Bearish Trend State. In both examples (A) prices move down when tension releases but (B) the counter trend move in the second example does not perform as well, then (C) the tension fails to close price lower during a Bullish Trend State and succeeds in the Bearish Trend State.
image 8: Prices respond to Negative Tension differently based on Trend State.
Building Realistic Expectations!
1. When the Market Closes
Once the market closes you will be able to gather a three important pieces of information using Tension.
A) How did price respond to Tension?
B) What is the Trend State?
C) What is the Tension Number?
The earliest signs of market conditions changing can be observed by looking at Tension releasing and how price responds. Tension expectations are based on market mechanics ( Not Correlation ) and offer expectations that will stay effective as long as Equity indexes are built on groups of component stocks. When expectations between Tension and price do not hold – then, Market Conditions are changing. Image 9 gives an example for when expectation break down can be a strong Bearish Flag.
image 9: A breakdown to expectations Flag changing markets.
Trend State is calculated and updated on the last bar of each day. Once the last bar closes the Trend State will be available along side the Tension number, and an expectation for the next day can be built.
Things to consider:
A) Market Mentality
B) Flagging
C) Tension Size
D) Trend State
Then think about what would happen with 3 general behaviors for the next day’s open.
Tension rises.
Tension Flat.
Tension Falls.
When tension releasing is reasonable in the current market, then One would expect that tension will release and therefore one should look for trades to profit from the resulting price move. Then determine how well the price move should perform based on the expected trade being With or Counter trend. Building these expectations can take a little practice to get a handle on, but once you see it you’ll never be able happy trading without it again.
Empowering momentum trading with Tension
Tension is designed to work in conjunction with broad market equity momentum trading systems.
Now that you’ve read the documents, here’s a closing read analysis video that has some good examples of trending mindsets:
More Stuff
Shoot me any email with questions BaconTrading@Gmail.com and follow me on Twitter @Pipsinger to see how I use Tension numbers to build my expectations each day.
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