APPLYING THE COUNT BACK LINE ENTRY

By Daryl Guppy
Several readers have asked for guidance on the application of the count back line (CBL).
For traders who user the Guppy Traders Essential charting pack or tool packs with Metastock,
or Ezy Charts, the construction details are unnecessary. These programs have a count back
line tool which automatically calculates the placement of the count back lines when the cursor is
placed over a price bar. Metastock and Supercharts users have to complete these calculations
by hand.
All users must know the correct starting point for the CBL calculation. The increasing
incidence of double bottoms has led to some confusion about which low should be used in the
calculation. These notes are designed to explain the construction process, and to show how the
technique is integrated with other indicators.
The CBL is not designed as a stand alone technique. It is the final step in planning a
trade that has been signaled by other indicators. My preferred combination includes the use of
straight edge trend lines and the Guppy Multiple Moving Average. The objective is to identify
when a downtrend has turned into an up trend. The focus is on breakout trading and the
objective is to plan an entry as close as possible to the pivot point low. This is the low that sets
the ultimate low point of the downtrend. We cannot know which bar is this until after the event.
But if we know as soon as possible then we have an advantage because we capture the early
part of the trend change.
The CBL is also used to manage entries into an established trend. Here it works as a
stop loss function, and we will look at this in a later series of notes.
When we select a stock we use methods which manage risk at one level. When we
actually buy the stock we take on a different type of risk which is broadly execution risk. This
risk is complicated by our actual ability or inability to get in or out at the price we would like to.
It is a trend following tool which is designed to confirm the reversal of a short term trend.
This is an important modifier. The count back line is not designed to identify and define a long
term trend. We use the MMA for this. The count back line is used to select the better entry
points once we have received trend change signals from other sources. It is a tool that is used
within the context of a previous selection.
The count back line is used to create a short term hurdle which must be overcome
before we can have any confidence of a likelihood of a trend change. It consists of four
applications.
The first is as a trend change verification tool.
The second is as an entry tool with a defined range of safe price levels.
The third is as a stop loss tool.
The fourth is related to the stop loss function when it is used as an exit tool.
Our objective is not to predict the future, but to put the balance of probability in our favor.
We start with the trend verification function. Assume for the moment that the MMA chart
is already showing a strong potential for a trend reversal. We are looking for a trend change and
we are prepared to follow the downtrend down until we get a definite signal that the change is
taking place.
The count back line is used initially as a resistance line. It is calculated from the most
recent low in the current trend. Any action between the count back line and the existing low
point is ignored.
With each new low, we recalculate the position of the count back line. We wait until we
get a close above the count back line before we act. Because we have already been alerted by
the MMA relationship, we can take the count back line signal with confidence. It confirms what
we already know. As the trend continues down we recalculate the count back line.
 A close above the short term resistance level signals an entry. All of this is based on end
of day downloads. We get the signal tonight, and we get to take action tomorrow. The count
back line defines the safe zone of entry. We need to know how far we can safely chase price.
The chart extract shows the simplest and easiest application of the count back line.
Prices have been traveling in a downtrend, but there is some evidence from other indicators,
such as the Guppy Multiple Moving Average, a straight edge trend line, a stochastic or RSI that
a new up trend is emerging. We have already made the decision about the potential for a trend
trade. Now we apply the count back line to determine the exact entry conditions and prices.
 We start with the most recent lowest low. This is marked with an * and shown as bar A.
This is the first SIGNIFICANT bar. We move to the top of the bar. Then move across to the left
to locate the next highest bar in the current downtrend. This is the next SIGNIFICANT bar. It is
significant because it has a higher high than the first bar. In this example this is shown as bar B.
Then move to the top of bar B, and across to the left to the next bar with a higher high.
This is the third SIGNIFICANT bar, shown as bar C. Move to the top of this bar and then plots a
line extending to the right.
This is the count back line entry bar. No action is taken until there is a close above this
bar. We accept that the close is set by the smart money so we ignore temporary highs created
by the bulls. In the chart the first higher bar 1 sets a high equal to the count back line. No action
is taken.
Bar 2 pushed above the count back line for the high of the day, but the close is on the
same level as the count back line. No action is taken. Bar 3 also shows a close on the value of
the count back line and this is ignored.
 Bar 4 deliver the signal for action. The close is above the value of the count back line.
Action is taken on the next day. This is an end of day indicator that sets up an order for
execution in the following days market. This is shown as bar 5.
We do not know at the time that bar A marked with an * - will become the pivot point
low of the downtrend. We can only know this retrospectively. Every time a new low is made that
is lower than the low used in the CBL calculation the CBL calculation starts again. The previous
CBL calculation is shown starting at the two ** and is marked in red. As the downtrend
develops, new CBL calculations are made with each new low, and the CBL entry line is lowered.

There are several variations on placing the CBL which confuse some users even though
they may be using the automatic tools. Selecting the correct starting point for the calculation is
vital. Select the incorrect point and the calculation does not confirm the entry signal at the
correct time. In each of these chart illustrations we retain the A, B, C notation for each of the
SIGNIFICANT days used in the calculation. In the simplest application these significant days
equal three calendar days. This is not always the case.
The chart shows the first significant day, marked as bar A. The * marks the bar that is
the start of the calculation point. It is preceded by an inside day. This day is shown as a thick
red line. The high of the day is lower than the high of the first significant day. When moving back
from bar A we do not find the next highest bar until the third calendar day in this series. Bars B
and C are the significant bars because each has a higher high. The inside day is ignored in
making the count back line calculation. The three significant bars occupy four calendar days.
 There are no real limits on the number or combination of inside days which may be
ignored in the search for three significant bars. In this example the three significant bars cover 7
calendar days. The cluster of thick red bars between bar B and C show different types of price
action. Some dip considerably lowers than bar B. This is not important. What is significant is the
way none of the highs on this cluster of bars is higher than bar B. It is only bar C that meets
these conditions, so this becomes the final significant bar in this series.
Although the construction rules specify to use the lowest bar some people are confused
when there are several bars with equal lows. The chart shows the most complex of these
dilemmas. Bar A is preceded by a day with an equal low, shown as the thick red bar. Two days
previous there is another thick red bar that sets an equal low. Which one should be used as the
calculation point for the CBL line?
The construction rules specify that we start with the lowest low in the current trend, and
that is bar A. The start point of the calculation is shown by the *. This spreads the CBL
calculation over seven calendar days.
A related area of confusion is created by equal highs appearing after one or more of the
significant days. The same rules apply here as with inside days. The key feature of a significant
bar is that it is higher than the preceding significant bar. When we start with the top of bar A we
move to the left ignoring the first thick red bar with an equal high, Likewise we ignore the two
preceding days with lower highs. We also ignore the next thick red bar which has an equal high.
It is not until we hit bar B with its higher high then we can set the next significant day. In this
example the three significant days are found over nine calendar days.
 Traders who complete the CBL calculations by hand are most often confused by the
problems of gaps. In Share Trading the rules specify that in the case of a gap, the calculation
moves to the next highest bar in the CURRENT trend. I did not write this in capitals in the book,
and perhaps I should have because this causes more confusion than any other feature of the
count back line calculations. Several of the chart examples in Share Trading show how this is
applied to stocks with gapping prices.
The chart shows an extreme example which includes two gaps. We start with the lowest
bar in the current trend, shown as bar A with the * under the initial calculation point. From the
top of bar A we move to the left to the next higher bar in the current downtrend. This is shown
as bar B. Again, move to the top of this bar, then to the left to the next highest bar in the current
trend which is shown as bar C. From the top of this third significant bar the count back line is
plotted.
 The count back line is designed to capture activity in the current trend and it starts from
the most recent lowest low. In the situation shown in the final chart, no new count back line
calculation is made unless there is a new low that is lower than the calculation point shown by
the *.
The count back line is designed to trigger an entry as the trend changes from a down
trend to a new up trend. A close above the count back line is the trigger. It is a clear cut signal
and next week we look at this, and at how the count back line is then used as a stop loss and
protect profit tool.

INDICATOR REVISION
COUNT BACK LINE (CBL) CONSTRUCTION
Count Back Line construction - long side - buy low, sell high
The CBL is a short term resistance or support line calculated in a falling trend, by counting back
two higher highs, and then projecting a horizontal line to the right. A close above this resistance line
suggests the intermediate down trend has changed. Closes above or below the line are used to fine tune
entry and exit points.
To reduce whipsaws the technique is used when a trend break has been signalled initially by a
trendline break or assesses the trend change using a Guppy multiple moving average.
VOLUME 1
By Daryl Guppy
SUBJECT SUMMARY
VOLUME
Volume is the fuel driving the
market. It is usually shown as a
histogram, with solid bars. Volume charts
yield clues when volume is out of
character. Unusually high, or unusually
low. High volume on a lower close
indicates selling pressure - people want
to get out and nobody is eager to buy so
the price falls. High volume on a higher
close indicates buying pressure - people
want to get in, but nobody will sell so
they have to bid higher. Volume
becomes erratic as the liquidity of the
stock falls. Large blue chips have high
liquidity - there are large scale trades
every day. A small speculative stock has
low liquidity - there are sometimes no
trades for days on end. Volume
significance depends on the normal
liquidity of the stock.
collection of volume tools.
Volume is one of the most elusive concepts in
technical analysis. In this series of articles we will
show how volume is better understood and combined
with other technical tools to provide a strategic
analysis of trend movements, sustainability and
change. We start with an overview of classic
interpretations of volume and then move onto more
modern combinations. It is important to understand
the limitations of existing volume analysis before we
can understand where new volume interpretations fit,
and how they overcome some of the limitations
imposed by existing volume analysis tools. The
implementation of this analysis rests on new analysis
tools.
We explore new analysis tools because the
old analysis tools fail to give us a reasonable way to
understand the relationship between trend and
volume. Although some are very good at establishing
the relationship between price and volume, this is not
the same as understanding trend behaviour. This
limits volume to a trading tool rather than an
investment or trending tool. We start with the existing
 Volume has a vital role to play in immediate trading. This is the assessment of order
lines and volume behaviour in relation to very specific trading situations. Momentum trades are
the best example of this. Here the relationship between volume and price action is very clear.
Although this combination identifies an immediate and short lived trading opportunity, it does not
assist in understanding the broad trending behaviour of a stock. Volume in this sense is a
trading solution.

The broader relationship between volume and price is captured in specialist charting
displays, such as equivolume. Here the intention is to match changes in volume on a daily basis
with changes in price. The display is ugly and confusing. It is difficult to extract any particularly
meaningful relationship from this type of display. The intention is to identify trend change points.
We suggest that this has limited application because a trend change point is rarely a single
point in time. Trends develop and evolve. They do not suddenly emerge. There are times when
large volume is associated with a significant change in price, and a significant change in trend.
However, this trend change is difficult to separate from the short term momentum driven activity
shown in the first chart.

The On Balance Volume (OBV) chart is the next attempt to explore the relationship
between trending behaviour and volume activity. It compares the volume on up days with the
volume on down days and produces an accumulative value. All the volume in up days is added
to the accumulated total. On down days, all the volume is subtracted from the accumulated
total. (This ignores the fact that buying volume always equals selling volume). The indicator
attempts to track the impact of volume changes as measured by bullish or bearish activity. This
is a direct transition from the study of price activity where we are concerned with up days and
down days. Although we can smooth, or average, the OBV values, the result remains much the
same. We are measuring the activity of each day based on a buy or sell dichotomy. Buying and
selling on individual days does not give us the required information about trending activity.
Traders often combine OBV with other indicators to develop a better understanding of the
potential for trend change. However, the relationships do not appear to offer consistent results
or a significant edge.
An OBV application suggests that when the trends are broken on the OBV indicator that
this precedes a trend break in price because it captures the smart money flowing into our pout
of a security. These trend breaks are shown by the pink lines on the chart extract. Note that the
sharp rise in OBV captures the false breakout, and then signals an exit before the genuine trend
breakout occurs.
There are more advanced and complex applications of OBV, but this example highlights
several of the limitations to OBV. The first is the assumption that the balance of buying or selling
on individual days is significantly related to trending activity. Strong trends experience significant
downtrends within the context of the established up trend. The OBV indicator does not provide a
tool to distinguish between those OBV events which are an acceptable retreat within the context
of a major trend, or those which are a threat to the trend.
The second assumption is that there is a significant change in OBV relationships at the
beginning and end of the trend. This is often the case, but OBV analysis is unable to distinguish
between a genuine trend change and a pullback within the context of an existing trend. The
volume relationships from which the OBV is constructed are not designed by themselves to
identify genuine trend changes.
The third factor is that OBV tracks only the activity of those who are active in the market.
It is unable to distinguish between accumulation events and distribution events. Accumulation is
where investors begin to accumulate shares in anticipation of a trend change. Careful
accumulation will not always impact on the existing trend, or show a change in OBV as buyers
are buying on down days within a falling market.
The same applies to distribution where investors are selling stock because they believe
the uptrend has ended. Distribution is inadequately tracked using OBV measures because the
distribution sellers sell into a rising market to maximize profits. This bullish selling which is
distribution activity, does not reflect in changes in OBV values.

The OBV indicator is based on a largely untested assumption that volume increases at
the points at which a trend changes. This is either in anticipation of a downtrend change
buying or in anticipation of an uptrend change selling. Forget for the moment that this
assumption ignores one essential reality in the market. For every seller there must be a buyer.
For every person who believes the stock is going down, there is a buyer who buys the stock
because he believes it is going to go up, either now, or in the near future. In this very important
sense, bullish buying and selling is always balanced. Over an extended period the trend in
prices will tend to favor one outcome rather than another, so the balance is tipped in favour of
the bulls or bears.
We often extrapolate the momentum observation high volume and significant price
change and apply it to a longer term chart extract. The chart extract shows the logical
conclusion of this which suggests that trend changes can be confirmed by volume activity.
 The volume chart above is taken from a chart that has five significant trend changes
from up trend to down trend, and from down trend to up trend. Your task is to use the volume
chart to identify the time points or areas at which you believe volume shows these changes in
trend. Next week we will give you the solution and explain why this type of activity is a
misleading distraction when we try to incorporate volume into better trend trading decisions.

And no, this is not a party trick. One of the most frequent questions I am asked in trading
seminars is What about volume? When we examine breakout trades identified using GMMA
analysis or CBL techniques the inevitable question comes What about volume? These
questions are all based on the assumption that volume is a useful way to confirm trend changes
or trending activity in price. This chart gives you an opportunity to see how the assumed
relationship between volume price and trending activity can be applied.

To understand the way in which volume is related to trending activity we must develop a
broader understanding of the information that volume give us. Volume is an indication of
participation in the market by existing shareholders or owners. Understanding their behaviour
provides a more useful tool in understanding the probability of trending behavior. We need to
move beyond the concepts of accumulation and distribution. We look at this in the next article.
ACCUMULATION DISTRIBUTION VOLUME 2
By Daryl Guppy

SUBJECT SUMMARY Last week we left you with a volume display.

DISTRIBUTION AND ACCUMULATION
At the top and bottom of market
moves price activity slows and briefly
shows a consolidation or broadening
pattern. At market tops this is a
distribution pattern. Canny traders sell
stock at high prices to less skilled market
participants. They distribute their holdings.
At market bottoms these same
canny traders accumulate stock from
sellers who have given up in disgust.
These patterns are not sudden. They
develop slowly, keeping prices within a
temporary trading band on steady volume.
When these patterns coincide with GMMA
crossover points in two time frames we
get additional confirmation of a major
trend change.
We asked you to use the volume chart to identify
the time points at which you believe volume shows
these changes in trend. The full chart display
matching price with volume shows how difficult this
task really is. The boxes match the time period of
the trend change. There is no clear relationship
between volume and trend turning points. In some
cases there is a decline in volume as the trend
makes a major change such as change B.
Elsewhere major volume spikes occur in the middle
of trends and do not have any impact on the trend.
We assume there is a volume relationship,
but we rarely test it rigorously. This idea has
become an accepted convention and forms the
foundation of several technical and fundamental
analysis techniques. It is so commonly accepted
that we no longer seriously put it to the test.

This assumed relationship did not develop and gain acceptance unless it was, at one
time, significant. As with some aspects of market analysis, this volume work dates back to the
first half of the last century. It was significant then because the total volume of trading in the
market and the total number of people involved in the market was exceptionally small. Jesse
Livermore was the last significant trader to make effective use of these relationships, even as
they were changing in his time with the growth of market participation in the late 1920s. The
explosion of market participation in the 1990s confirmed the change in these volume
relationships but most traders still cling to the ideas developed more than 60 years ago.
 Yes, we did select a chart where these relationships were not strong because we
wanted to illustrate several points. First were those cumulative changes in volume behaviour do
not necessarily identify points of trend change. The analysis of traded volume, without reference
to other factors, does not provide a solution for understanding trend behavior, trend change or
trend continuation.
The second point was that volume analysis, as usually applied, cannot be applied to all
stocks. There may be a coincidental relationship, but these coincidences are too infrequent to
allow this assumption about volume and trend changes to be applied with any level of
confidence. Despite this we will continue to hear commentators talk about these relationships as
if they are a firm established fact.

The third point, not shown on this chart, is that any volume and trend relationship must
be broadly applicable to all stocks without regard to liquidity, velocity of trading, or quantity of
turnover.

Belief in this relationship is difficult to unseat so we include two more charts which
illustrate the lack of volume and trend relationship. The first is ANZ. The vertical liens show key
trend change points. They are not associated with any significant volume relationships.

The second chart is a lower priced and lower volume chart. Perhaps with less liquidity
this trend and volume relationship may be clearer. The answer is still in the negative. After the
trend break AGO develops a steady long term trend. Volume is lower than in the previous
downtrend.
 The analysis tools commonly used to analyse volume all rest on the assumption that the
trading activity on a daily basis, or on an average daily basis, is a measure of trending activity in
price. These indicators measure the changes in relationship between those who are active in
the market and who have a bullish or bearish perspective. To better understand the role that
volume plays in trend analysis we need to broaden our understanding of market behaviour and
of the range of participants in the market.
This brings together two separate concepts. The first is accumulation and distribution.
The second is the way in which traded volume is related to available volume.

ACCUMULATION
Our understanding of volume comes from three sources: fundamental, intuitive and
technical. Fundamental analysis uses volume as a measure of liquidity. Intuitively we believe
volume is related to changes in price activity. Technically we apply several indicators to track
changes in volume and its significance. On a broad basis we talk of accumulation and
distribution phases in the market. It is interesting that although these phrases are part of our
analysis vocabulary, they are not related to volume. They are most frequently described with
reference to chart pattern behaviour.
 These concepts are important because they provide a link between volume and trend
analysis. The accumulation phase develops where existing shareholders believe the stock has
no future. In disgust they sell the stock to smarter investors who have decided the down trend
has, or is about to end. Classic theory suggests that these are investors who have made
superior analysis based on fundamental analysis. These are the investors buying quality stock
at lower than fair value. They are accumulating.
On a technical basis, this accumulation activity may be identified with a number of chart
patterns. These include consolidation bands, double bottoms, trend line breakouts, saucer
patterns and the development of support areas. These patterns suggest that the selling
pressure has been halted as buyers come into the market. This accumulation phase is not
marked by rapid changes in price or a new trend. However, the accumulation precedes the
development of a new trend as eventually others in the market are also alerted to the potential
for a new up trend in the stock.
The reverse applies to a distribution phase. This occurs when investors believe the stock
is overvalued. It also occurs when some investors are aware of developing bad news. The
assumption is that this is based on superior fundamental analysis. Prior to the trend change,
smart investors begin to sell stock. This selling creates several chart patterns.
These chart patterns include head and shoulder reversals, rounding tops, resistance
levels, consolidation bands etc. These patterns are technical confirmation of the distribution
activity. In classic theory accumulation precedes a trend change, and distribution precedes a
trend change. This is illustrated on the diagram and is an important starting point for trend
volume analysis.
This theory fails to address some significant issues. It leaves no room for continuation
pattern behaviour in mid trend. It does not provide us with a way to understand mid trend
weakness and to distinguish this from end of trend behavior. Next week we show how this
concept is applied when we include the ideas associated with available volume.

AVAILABLE VOLUME

The market is a mechanism driven by supply and demand. This is economics 101.
Todays price is decided by the balance of supply and demand but only amongst those who
are active in the market today. The order line today reflects the balance of supply and demand
buys and sellers on this day only and only for a small proportion of those who own shares. It
does not reflect the total supply of shares for the company. On any given day, the total number
of shares on issue by the company are not available for trading. Only those shares held by
those willing to sell are available for buying.
The market for shares is made up of four groups. The first is those people who own
shares in the company. The second is those people who own shares and who have decided to
sell them. The third is the group of people who do not own shares (or enough shares) and wish
to buy shares. The fourth group is those who do not own shares and who do not wish to buy
shares at this time. We can ignore the last group because this latent demand cannot be
measured effectively. What is particularly important is the interaction between those who want
to buy shares and those who have shares and who choose to sell or not sell.
 This interaction takes place within a defined context. That context is the total number of
shares available for trading by the public. This is the starting point for trend volume analysis.
The relationship was originally explored by Gann. The idea also forms a foundation of the
Standard and Poors methodology in determining the construction of an index. More recent
work, with a Gann analysis perspective has been done by Woods and Arp. This is free float
analysis.
How do we determine the free float analysis figures? Publications such as Huntleys
Shareholder are an important starting point. They list the substantial shareholders along with the
total number of shares on issue. The entry for HHL in the 2006 edition shows there are 24
million ordinary shares on issue. The top shareholder holds 53.3% of the shares. Combined, the
top 4 shareholders hold 72% of the shares on issue. This is a tight share registry.
By comparison, HHV has an open share registry with 214 million shares on issue. The
largest single shareholding holds 6.6% of shares on issue. This is a larger pool in which traders
can play.
There are several problems with this information.
First Huntleys Shareholder covers the top 500 stocks. Coverage of the
remaining two thousand plus stocks listed on the exchange is much more limited.
Locating this information is much more difficult.
The second problem is that this information is accurate as of November 2005.
Getting up to date information as changes develop is a more time consuming
task.
The third assumption is more significant. The Gann analysis and Standard and
Poors assumption is that those shares held by the largest shareholders, or which
are locked up for other reasons such as Government ownership, or in escrow,
are non-tradable. These shares do not form part of the free float.

We believe that the free float analysis is crippled on several grounds. The diagram
shows the way the publicly available shares, or circulating shares, may be divided up. This
includes shares owned by the company directors or their nominees. These may be a significant
proportion of the available shares. A significant number of shares may be held by fund
managers and institutions. These may also be restricted in their availability for trading. Finally
there are the public owned shares. The HHV example shows a company with many public
circulating shares. The changes in the mix of company, fund and public shares have a
significant impact on the trading activity in a stock. This is not considered by free float analysis
based on share registry analysis.

The first is the assumption that large shareholders lock up their shares and do
not trade them so they are not included in the free float calculations. The
assumption is that these shares are not available for trading by the general
public, so the number of shares included in the free float is reduced. Standard
and Poors use a variety of methods to determine an exact figure for the free
float. This is used to decide which stocks are included, or excluded from the
Stand and Poor's Indexes. In Australia, Telstra is not included in the ASX S&P
200 because the Government owns 51% and so the free float is reduced.
The second is that free float analysis as used by Standard and Poor's essentially
stops once it is applied to the selection of stocks suitable for inclusion in an
index. This is very suitable for S&P business, but it fails to recognise the
importance of free float style analysis.
The third is that the market is ineffectively analysed using a free float figure
calculated or based on company share register information and assumptions.
The fourth is related to our discomfort with additional Gann style analysis as
applied by Woods and Arp. We feel that forcing free float analysis into this Gann
framework is not the most efficient application of the free float volume
methodology.

Given these assumptions we make an important change to the application of free float
analysis. There is a difference between the official number of shares that are available for
trading by the public, and the actual number of shares that are traded. Rather than calculating a
figure, we want to take this figure from the activity of the market.

The free float is an important starting point for analysis. We want to take this a step
further to develop this into Trend Volume analysis. Instead of telling the market what it is
supposed to be doing by using a precalculated free float figure, we use market activity to
provide a Trend Volume figure. This is used to identify accumulation, distribution and
continuation volume behaviour. Next week we show how this is applied using the new Trend
Volume analysis tools in the GTE Charting software upgrade.
TREND VOLUME ANALYSIS 3
By Daryl Guppy
SUBJECT SUMMARY
TREND VOLUME
Trend volume analysis is based on the
Free Float concept developed by Gann and
applied in modern markets by Woods and Arp.
Trend volume analysis differs in that it uses the
actual cumulative volume traded between
significant trend points as a means of verifying
future trend turning points.
Major trend turns or continuation points in
market trends occur when all the old shareholders
have been replaced with new shareholders. When
the entire available share register has been turned
over then buyers must bid higher to get stock
because the new shareholders are reluctant to sell
at a loss. It is a useful tool for trading Initial Public
Offerings.
The shares available for trading are
different from the number of shares on issue. Of
the shares on issue some may be locked up under
escrow conditions. Others are held by major
shareholders and are effectively not available for
trading. If the top 10 shareholders own 60% of the
shares on issue then effectively only 40% of
shares are available for trading. This is the volume
trend figure used for the analysis.
This technique is most useful in identifying
bottom reversals and continuation patterns in up
trends. Trend volume analysis is used as a guide
as we cannot be certain that the shares which
have changed hands all belong to just one group
of old shareholders. It is used to verify other trend
change analysis.
observation based on historical trend behaviour.
We start with a brief summary for
new readers. Existing volume analysis tools
concentrate on detail. If we attempt to scale
these upwards and apply them on a
strategic basis, existing tools, such as OBV
give results that are inconsistent and
inclusive. The study of raw volume
behaviour does not provide a reliable way to
understand trending and trend change
behaviour.
An alternative away of understanding
volume behaviour is the free float concept
used by Standard and Poors in deciding
which stocks to include in an index. This
concept and methodology is drawn from
work by Gann. This methodology is
developed more, within a Gann context by
Woods and Arp.
On a broader context, trend
behaviour is related to volume when we talk
of accumulation and distribution behaviour.
This is an accurate concept in the market,
but it is rarely defined in terms of volume
behaviour. It is more frequently defined by
chart patterns such as consolidation bands
and saucer or rounding top patterns.
Accumulation and distribution does not
provide a way to understand continuation
volume behaviour.
In this article we bring together these
concepts and combine them with trend
volume analysis. We start with an
 The price chart shows the development of a clear uptrend from a sideways consolidation
pattern. The consolidation patterns start at point 1 and ends at point 2. The circles identify
points at which the new uptrend pauses, moves sideways, and then continue upwards. The final
circle 7 shows a repeat of the pause pattern and includes two dips back to the trend line.
The uptrend is easily defined using the straight edge trend line. The key question for
traders is how to use this chart information to decide if the uptrend is about to end and if this is
just a temporary pause in the trend prior to a trend continuation. This is the same chart that we
used last week to illustrate the basic concepts of accumulation - circle 1 - and distribution
circle 7. When we combine this with basic chart analysis, we end up with a different question in
circle 7. If this is not a distribution pattern, then we need to stay with the trend for a continuation
of the trend. In the next article, we will show how this decision is made easier by combining
trend volume analysis with the GMMA.
How can we effectively understand the nature of this trend behaviour? The classic tools
are trend lines, moving averages, and our preferred tools, the Guppy Multiple Moving Average.
We can understand this trend behaviour more effectively if we also incorporate trend volume.
The key is the points circled between the start of the up trend and circle 7.
At each of these points the market has paused, retreated, consolidated and then moved
upwards. At each of these points a trader needs an answer to the question end of trend, or
trend continuation? The answer starts with the identification of the trend weakness points shown
in the circles. Our objective is to establish if these are related to volume.

Our starting point is between circle 1 and 2. We calculate the volume in this
consolidation area. We use the Find Trend Volume tool in GTE Charting. (Upgrade available
shortly) This is the period in which we can assume that all the available shares held by the
public and those company directors who wish to trade have been traded. In classic terms, this
gives us a free float figure. In reality, this gives us a trend volume figure. The trend volume
figure reflects the actual trading activity in the stock. It may be smaller or larger than the
calculated free float figure as the commitment of existing shareholders and reluctance to sell is
not restricted to company directors as assumed by the S&P methodology.

The trend volume figure is derived from the significant changes in price activity. It is an
inferred value related to the number of shares on issue and those which are currently in free
circulation. This trend volume figure is derived from the activity of the market. It is not derived
from the share register. This is an essential difference because this matches the volume with
the behavioural characteristics of the market.

The trend volume figure is derived from clearly defined changes in price behaviour. It
does not have to be closely related to a free float share registry figure.

The volume figure obtained in the calculation between point 1 and point 2 is then
projected forward. The first projection is shown by the yellow bar B. We use the Plot Trend
Volume tool in GTE Charting. If this trend volume figure is significant then it will match the time
point at which there is another trend change. In this example, it matches point 3 on the original
chart. Project the trend volume value forward again, shown by yellow bar C, and we appear to
have a problem. This trend volume does not conclude until point 5. This suggests that the trend
retreat at point 4 was a mid trend price weakness.
The same problem emerges when the trend volume is projected forward as yellow bar
D. Point 6, a significant drop from the high, also falls within the value of the trend volume
projection. More significantly, the trend volume calculation ends at point 7 on the chart. Is this
the end of a trend, or a point at which the trend will continue? Additional analysis provides the
answer and we look at this solution next week. However, we first need to understand what this
trend volume is telling us.

We start with section A the accumulation period. In this diagram it is based on a

consolidation band. In this period we assume that most of the shareholders on the stock have
become disillusioned with the company. This includes those who purchased near the top of the
previous trend. It includes those who purchased as the stock fell. They believed the trend would
recover. It includes those who purchased near the beginning of the consolidation period in
anticipation of a rapid trend rebound. All of these existing shareholders no longer believe the
stock has a future. This is classic economic interpretation and we take it a step further. Those
people who buy in this period do so because they believe the stock has a future. For every
seller there is a buyer with exactly opposite opinion. The balance of volume is always equal, and
does not give us a significant advantage when deciding the nature of the trend.
In such a classic accumulation pattern we can assume that all of the available shares
have changed hands. This is the basis of trend volume. The number may be very different from
the calculated free float number. This volume figure in this accumulation pattern gives us an
idea of the number of shares that are actually really circulating and really traded.
We verify the significance of this figure by projecting it forward on the historical trend.
Once the new shareholders from the accumulation period have sold all their shares giving into
the lure of short term returns the shareholder register is made up of new shareholders. They
have based their profit and loss calculations on their new and higher share purchase price. Most
of them will not sell unless they can get a higher price than their purchase price. On an
individual level they may be unsuccessful in this objective. However, as a group of new
additions to the share register, their objectives may be more achievable.
Between area A and area B the old shareholders sell to a new group of shareholders.
Once this trading volume figure is reached, there is an increased probability of a trend change.
The new shareholders in area B sell to a new group of shareholders in area C. The diagram
shows how this trend volume figure reflects a lower level of daily volume so it takes a longer
chronological period for the trend volume figure to be reached. When it is reached, it signals
another trend change, or continuation.
The area in circle 4 shows a price retreat which is a low probability retreat to the trend.
We use several factors to decide this. The lack of complete change of trend volume makes it
less likely that this price pullback will lead to a trend change. The same analysis is applied to
point 6.
The final trend volume projection, yellow box D, matches a consolidation pattern in this
trend. The usual interpretation of this is to call it a distribution phase. In classic analysis we take
the price dip at point 6 as an early warning sign of trend weakness. When matched with trend
volume analysis, the interpretation may be significantly different. We combine this trend volume
analysis with other indicator analysis to reach a better conclusion about the significance of the
price retreat at point 7 which matches the completion of trend volume. Next week in the
concluding article we show how this analysis is combined with other indicators to provide a
better trading solution.

This diagram example has been constructed to clearly explain the development of the
concept. The final chart extract shows how the Find Trend Volume tool in GTE Charting is
applied to a real stock. We start by selecting the peak and valley of a trend. This volume value
is then projected backwards. Each vertical bar is placed at the same volume quantity, as shown
by the yellow boxes. The trend volume quantity is about correct, catching major turning points.
We can apply the volume figure and project it forward from the last calculation on the chart. We
use this to verify other trend change or continuation signals. The Trend Volume match with
trend continuation and turning points gives us a significant new way to incorporate volume in
trend analysis for trading.
In the next article we show how trend volume analysis is combined with GMMA analysis
to make better trading decisions.
TREND VOLUME TRADING ANALYSIS 4
By Daryl Guppy
Trend volume gives traders a
SUBJECT SUMMARY
TREND VOLUME
way to identify when trend turning
Trend volume analysis is based on the Free Float points may develop. Trends need
concept developed by Gann and applied in modern markets volume to continue. Volume is the
by Woods and Arp. Trend volume analysis differs in that it fuel of the market, but it is not
uses the actual cumulative volume traded between inexhaustible. The fuel is loaded in
significant trend points as a means of verifying future trenddefined quantities. When one
turning points. quantity is used, it must be replaced.
Major trend turns or continuation points in market When one group or groups of people
trends occur when all the old shareholders have been have purchased all the available
replaced with new shareholders. When the entire available shares, then trading will stop unless
share register has been turned over then buyers must bid
higher to get stock because the new shareholders are
they are prepared to sell those
shares to others, preferably at
reluctant to sell at a loss. It is a useful tool for trading Initial
Public Offerings. higher prices. The Find Trend
The shares available for trading are different from Volume tool in GTE charting
the number of shares on issue. Of the shares on issue identifies the level of volume
some may be locked up under escrow conditions. Others associated with trend behaviour
are held by major shareholders and are effectively not between major trend peaks or trend
available for trading. If the top 10 shareholders own 60% of pause points. This trend volume
the shares on issue then effectively only 40% of shares are figure helps with a better
available for trading. This is the volume trend figure used understanding of accumulation,
for the analysis.
This technique is most useful in identifying bottom
distribution and continuation
reversals and continuation patterns in up trends. Trend accumulation distribution points.
volume analysis is used as a guide as we cannot be certain Trend volume is not a stand
that the shares which have changed hands all belong to alone tool. The analysis is enhanced
when combined with other trend
just one group of old shareholders. It is used to verify other
trend change analysis. analysis tools. We combine it with
the Guppy Multiple Moving Average
and this gives a better understanding of potential behaviour at critical trend points. There are
three points in the trend which traders are interested in. They are:
The beginning and end of a trend. These are high risk points because the
prevailing trend must be overcome. The problem of false breakouts or signals,
makes trading difficult.
Mid trend weakness where several end of trend signals are generated, but
subsequently the trend rallies and continues.
Analysis techniques which help traders to anticipate when a trend may be
changing so they can position themselves to enter or exit. This establishes the
most appropriate time to tighten stops.
We start with the first problem trend changes. Dramatic trend changes do not always
come from V shaped trend breakouts. Stocks which have been locked in sideways
consolidation patterns can rapidly breakout above resistance levels. The chart shows an
example of this activity with an initial break above the resistance level that rapidly turns into a
very fast moving trend. This is a characteristic behaviour of low priced speculative stocks, but it
is also seen in mid cap stocks.
 The resistance breakout is not enough to trigger an entry signal. The GMMA
relationships are also uninspiring. The prolonged sideways movement means the GMMA
groups also travel sideways. As the breakout develops in area A the GMMA quickly turns
upwards, separates and begins to diverge into two clear groups. Although this is a strong
GMMA signal we tend to ignore it because the previous GMMA activity has not been a useful
way to understand the trending activity. As a result we miss out on this type of trading
opportunity.
When we include trend volume in the analysis we see a more complete picture of the
developing trend change and its potential. The yellow box captures the appropriate trend
volume value based on analysis of the historical chart. We use the Find Trend Volume tool in
GTE Charting to establish this figure based on significant trend turning points. We use the Plot
Trend Volume tool to apply this figure to the historical chart so we can validate its accuracy.
Once the full value of trend volume is reached we can anticipate that any new buyers will
have a different perspective on the stock. There is an increased probability of trend change, or
continuation, at the points where the trend volume figure has been reached.
When we combine these three trading signals resistance break, GMMA separation and
fulfilment of the trend volume figure we have a greater potential for a trend change. This
means we can act more quickly, and more confidently on trend change signals. This confluence
of multiple signals is also found with dramatic trend changes that show the classic V shaped
reversal. However the trend volume analysis gives an additional advantage.
The GMMA relationships between the long term and short term group provide many
trading opportunities. Aggressive traders who want to position themselves early in anticipation
of a trend change have focused on the test and retest activity in downtrend. The long term
group of averages begin to compress. The short term group of averages show rally and retreat
behaviour with each rally penetrating further into the long term group. This signals an
aggressive entry in anticipation of the trend break. Aggressive entries carry higher risk because
the downtrend may reassert itself.
 We improve the timing of the entry when we combine GMMA analysis with trend volume
analysis. The trend volume figure is not an exact figure. We prefer to use it as a guide. As the
full trend volume figure approaches, shown in the completed yellow box, we are more alert for
other trend change signals, such as the test and retest activity shown in the GMMA. When this
activity takes place towards the end of the trend volume fulfillment period then there is an
increased probability of a trend change. Aggressive traders can make an early entry with
greater confidence.
Next week we examine how this analysis is used to verify mid trend weakness and
identify safer entry points.
TREND VOLUME TRADING ANALYSIS 5
By Daryl Guppy
SUBJECT SUMMARY
TREND VOLUME
Trend volume analysis is based on the Trend volume is not a stand alone tool.
Free Float concept developed by Gann and The analysis is enhanced when combined with
applied in modern markets by Woods and Arp. other trend analysis tools. We combine it with
Trend volume analysis differs in that it uses the Guppy Multiple Moving Average and this
the actual cumulative volume traded between gives a better understanding of potential
significant trend points as a means of verifying behaviour at critical trend points. There are
future trend turning points. three points in the trend which traders are
Major trend turns or continuation interested in. They are:
points in market trends occur when all the old
The beginning and end of a
shareholders have been replaced with new
shareholders. When the entire available share
trend. These are high risk points because the
register has been turned over then buyers prevailing trend must be overcomed. The
must bid higher to get stock because the new problem of false breakouts or signals, makes
shareholders are reluctant to sell at a loss. It is trading difficult.
a useful tool for trading Initial Public Offerings. Mid trend weakness where
The shares available for trading are several end of trend signals are generated, but
different from the number of shares on issue. subsequently the trend rallies and continues.
Of the shares on issue some may be locked Analysis techniques which help
up under escrow conditions. Others are held
traders to anticipate when a trend may be
by major shareholders and are effectively not
available for trading. If the top 10 shareholders changing so they can position themselves to
own 60% of the shares on issue then enter or exit. This establishes the most
effectively only 40% of shares are available for appropriate time to tighten stops.
trading. This is the volume trend figure used We continue with the second problem
for the analysis. mid trend weakness.
This technique is most useful in
identifying bottom reversals and continuation
patterns in up trends. Trend volume analysis is
used as a guide as we cannot be certain that
the shares which have changed hands all
belong to just one group of old shareholders. It
is used to verify other trend change analysis.
 The modern bull market is characterized by long term trending stocks with trend volatlity.
We see midtrend weakness where several end of trend signals are generated, but subsequently
the trend rallies and continues. We use trend volume analysis to avoid these false exits. The
analysis also provides the opportunity to add to existing positions at points of temporary
weakness. The chart extract summarizes the problem at point B. Price has collapsed below the
trend line. Is this a trend break, or just a temporary weakness? The usual solution is to look at
the GMMA relationships. They show a penetration of the long term group of averages. This is
the first time in this trend. Additionally the long term group of averages are showing initial signs
of compression. The usual analysis tells us to tighten stops and prepare to take an exit at the
next highest rally peak near point C. We prepare to abandon the trend. Traders who entered the
trend more recently may take this is an exit signal to protect their trading capital.

Applying trend volume analysis improves our analysis of this trend behavior. The yellow
box shows the total of the trend volume figure for this stock. At point B we know that the total
trend volume fulfillment figure has not been reached. For this example we assume that only
50% of the appropriate trend volume figure has been traded at point B. This suggests that there
is a lower probability that this price retreat will be the beginning of a trend change. The trend
volume analysis suggests that there is a higher probability of a trend change developing when
the appropriate trend volume figure has been reached. At the midpoint of this activity there is a
lower probability of a trend change.

Combine this with the GMMA relationships and it suggests that this is a temporary pause
in the trend. For those who hold stock this means they do not need to tighten stops significantly.
It may also mean that initial exit signal generated by the dip below the trend line can be ignored
with safety. It means that the dip below the count back line stop loss can also be ignored
because there is a lower probability that this price fall is the beginning of a new sustained
downtrend.
 This analysis method is enhanced with the Count Trend Volume tool in GTE Charting.
Analysis techniques help traders to anticipate when a trend may be changing so they can
position themselves to enter or exit. This establishes the most appropriate time to tighten stops.
At point D we know there is a low probability of a trend change. At point E the trend volume
figure has almost been reached so there is a higher potential of a trend change or continuation.
In this environment traders tighten stops and they prepare to act on the stops quickly. Trend
volume analysis tells traders when it is appropriate to be nervous. The Count Trend Volume tool
is used to count the developing volume between the selected point point 1 and the last
trading day on the chart in this case point 2. Traders know in advance the cumulative trend
volume and can compare this with the previously verified trend volume figure derived from the
Find Trend Volume tool.

Equipped with this advance information we can make more effective use of other trend
information from the GMMA, count back line, trend lines and other indicators.

Using the Count Trend Volume tool we know that from point 2 only 5% of the trend
volume figure has changed hands. This trend is most likely to remain stable and intact until the
cumulative trend volume figures approaches 90% of its value. When that happens we prepare
to tighten stops and pay more attention to developing distribution or accumulation patterns.

The final chart brings together these analysis features combining trend volume and
GMMA analysis. This combination enhances the application of the GMMA and improves our
understanding of the trend. As with all indicators and indicator combinations, this analysis
applies most effectively to compatible stocks. Not all stocks show clear trend volume reliability.
However, where trend volume analysis provides a close match with historical trend change
points then the combination with GMMA analysis improves trading success.
MODERN PRICE AND VOLUME
By Daryl Guppy
INDICATOR REVISION
The classic concept of the relationship
PRICE AND VOLUME RELATIONSHIPS
Using Metastock Explorer screen to
between price and volume suggests that price
find securities where the price has increased follows volume. When people search the market
5% and the volume is 50% above the 50 day for opportunity many of them look for significant
moving average. Formula is ColA CLOSE, changes in daily volume. The classic volume
ColB REF(CLOSE,-1), ColC analysis techniques are based on this
ROC(CLOSE,1,PERCENT) ColD VOLUME, observation. They all use changes in volume to
ColE MOV(VOLUME,50,EXPONENTIAL), tell the trader something about the potential to
ColF ((VOLUME-MOV (VOLUME, change price and the price trend. In modern
50,EXPONENTIAL))/MOV(VOLUME,50,EXPO Western markets, this is not very successful.
NENTIAL))*100, Filter WHEN (COLC>=5)
AND WHEN(COLD> =COLE*1.5)

The observation that price follows volume was accurate 60 years ago when markets
were dominated by a small group of large and well informed investors. The financial markets
were reserved for the elite so participation was limited. The general public was not widely
involved in the market. Even in the 1920s only a small proportion of the public was involved in
the market. Legendary America trader Jesse Livermore used this observation as an important
part of his trading method. We watched for volume accumulation as the big well informed
investors began to buy stock. Then he simply joined the buying.

Modern markets are very different. They have changed dramatically, but slowly. These
changes have been gradual so many traders have been slow to recognise the important
changes between volume and price. The most important differences between past financial
markets and modern markets are these:

The number of participants is much higher so the impact of the elite is smaller.
The flow of information is much better.
Advanced technical tools are available to all participants
Advanced market analysis tools are available to all participants
It is more difficult to conceal significant news
The result of these changes is a change in the way we understand volume. Now volume
more often follows price. This change has occurred because more people are participating in
the market and they are using similar analysis tools. More people use the same information to
make the same type of decision. When they see rising prices today, they become buyers
tomorrow. Their buying increases the volume substantially. In modern markets volume often
follows the lead set by price increases.
There is often a small increase in volume associated with the rapid price move. This
increase is volume is usually too small to appear in searches based on finding substantial
increases in volume. Understanding the way price leads volume allows traders to make better
use of market price scans. When they see high price increases without unusual volume
increases they have the confidence to trade in anticipation of increased volume the next day.
In some markets, investors are overwhelmed with news. It is available in the
newspapers, on dedicated financial television channels, on the internet and on radio. In 1930
the Wall Street Journal was less than 30 pages. Now it is often over 300 pages. In the past the
problem was getting information. Now the problem is how to reduce the amount of information
we have so we can locate the most important information.
 In the mid -1990s it was a difficult and time consuming task to compete basic market
analysis. Creating a list of all stocks with PE ratios higher than the industry sector averages
required many hours of research. Finding stocks where the price had increased by more than
15% over the past 3 days and where volume has also increased by more than 15% was a task
beyond the capacity of most investors. They relied on specialist brokerage reports.
Now these tasks are completed in a few seconds on a web site, or using readily
available software. Many of these results are free and they offer a quick way to understand what
is happening in the market. The results identify stocks where there is an increased probability of
a trend change or price continuation. Our favourite market search is to find all securities which
have increased by more than 10% in one day. Many other traders use similar searches. We
look for price changes preferably without supporting volume surges and then we think about
buying the stock.

The DMA chart shows the typical result we are interested in. The 16% daily price
increase is not matched with a substantial increase in volume. Smart traders enter the next day
in anticipation of increased volume and an increase in prices. Traders who moved quickly were
able to get an entry around $0.14. Those who waited for volume confirmation delayed the entry
until the following day and paid up to $0.20 to join the rising trend.
This pattern of volume following price persisted as the uptrend continued. The volume of
trading is much higher than the value of trading before the day when prices increased by 16%.
The AMX and GDY charts show the same relationships. traders use price as a leading
indicator of trend changes without waiting for volume confirmation. The change in volume on the
day of the price increase is not large enough to feature in most volume based market searches
discussed in the previous chapter.

Modern analysis software available on the internet makes it very easy to compete these
searches. Many people use this as an important search tool. They all receive the results at
about the same time, so many people make a similar decision. The result is an increase in
volume that follows an increase in price. Volume follows price and this is the reverse of the
traditional way of understanding the relationship between price and volume.
 Strong price movements followed by an increase in volume are an important leading
guide to changes in trend behaviour. This is also applied to a fast decline in prices, followed by
an increase in volume. This is an early warning of the end of an up trend.
TRADING WITH ATR
By Daryl Guppy

Volatility is the new challenge in modern markets. It has made identifying the end of
downtrends and the start or new uptrends more difficult. We have made increased uses of the
traders application of the Average True Range (ATR). The ATR calculation contains a number
of variables and in these notes we show how they are selected and combined to give optimal
outcomes for individual stocks.
The ATR tool in the GTE charting package is exceptionally useful because it allows the
trader to start the ATR calculation from a user selected point selected with the click of a mouse.
This is not easily possible with MetaStock where the user must use separate dialog boxes to
input the starting point. The calculation parameters for the ATR indicator tool in GTE are shown
below.

We start with the basics of the combination use of traders ATR. A short side ATR
calculation is applied to a falling trend. The trend reversal is signalled when prices close above
the value of the short side ATR. Aggressive traders will use this as an entry point. Conservative
traders wait until the value of the long side ATR is higher than the last value of the short side
ATR.
 Once the downtrend has ended, a new long sides ATR calculation is applied. When the
long side ATR moves above the value of the short side ATR then a long side entry is confirmed.
The value of the long side ATR is used as the trailing stop loss. A close below this level is taken
as an exit signal.
Under perfect conditions, this is what it looks like on a chart.

Although we may take an aggressive or a conservative entry, when it comes to the exit
there is no such distinction. The exit is always taken on the day following the close below the
long side ATR.
Usually I am looking for a long side trade, so my assessment of the indicator and its
signals start with the short sides ATR. I am looking for two features.
1) Compatibility with the short side ATR as a means of defining the trend. This means
there are no false exit signals as the downtrend develops., The chart extract shows
the short side ATR is compatible with defining the downtrend. It means that where
there is a close above the value of the short side ATR that this has a high probability
of signalling a genuine change in the trend. This is shown in the chart.
 2) Compatibility with the long side ATR. This means that the trend breakout identified
with the short side ATR can also be managed effectively with the long side ATR. The
chart shows that this has failed. Prices dip below the value of the long side ATR
signalling an exit from any long position. The long side ATR is not suitable for trading
the new rising trend because of these exit signals. As the trend develops it may show
that these are false exit signals. No matter, it still means the long side ATR is not a
suitable trade management tool.
We look for past compatibility with ATR management, and continuing compatibility in the
emerging trend. This sets up the broad parameters for ATR trading.
We fine tune ATR trading by adjusting the calculation value of the ATR to better match
the volatility of the market. The initial chart extract shows ATR (2) for the short side ATR and
ATR (1) for the long side ATR. Why do we select these values and what do they mean?
The ATR calculation provides a value for the average true range over a selected period.
Our preference is to use a 14 day moving average period. If this calculation is used then this is
an ATR (1) calculation or 1*ATR. This is the most sensitive calculation. It can generate many
false exit signals in a trend, but it provides a tighter stop loss.
An ATR(2) calculation takes the ATR(1) calculation value and doubles it. This is also
written as 2*ATR.
Next week we look at how change in sensitivity impact on the ATR.

INDICATOR REVISION
TRADERS ATR
The traders application of the Average True Range (ATR) captures price volatility, defines the
emerging trend breakout and provides a method to manage the developing trade. Our purpose
is to use the ATR calculation as a stop loss designed to protect capital and identify the end of
one trend and the beginning of another. We use the ATR as a method to identify and confirm
trend changes. Later we want to use the ATR as a protect profit stop designed to protect profits
and identify the end of a trend. Traders ATR is a tool in Guppy Traders Essentials charting.
TRADING WITH ATR part 2
By Daryl Guppy
Volatility is the new challenge in modern markets. It has made identifying the end of
downtrends and the start or new uptrends more difficult. We have made increased uses of the
traders application of the Average True Range (ATR). The ATR calculation contains a number
of variables and in these notes we show how they are selected and combined to give optimal
outcomes for individual stocks.
The ATR tool in the GTE charting package is exceptionally useful because it allows the
trader to start the ATR calculation from a user selected point selected with the click of a mouse.
This is not easily possible with MetaStock where the user must use separate dialog boxes to
input the starting point.
Changes in ATR sensitivity have a large impact on the positioning of trading signals.

The changes in sensitivity can be seen on the chart. The 1*ATR delivers a trend change
signal more quickly than the 2*ATR calculation. In volatile conditions we prefer to use the more
sensitive calculation so we can get an early signal. The key to deciding which to use is the
compatibility. In this chart extract neither the 2*ATR nor the 1*ATR generate false exit signals in
this falling trend. In this case, we would use the 1*ATR calculation.
The same shift applies if we change the sensitivity of the long side ATR. We use the
more sensitive short side 1*ATR as the reference point.
 The objective is to adjust the sensitivity of the ATR calculation by adjusting the
application of the ATR calculation from 1*ATR to 2*ATR. The sensitivity adjustment is designed
to be compatible with the observed trend. In falling markets with high volatility we use a short
side 2*ATR calculation to ensure the trend breakout is genuine. We then use a 1*ATR to ride
the rising trend to keep the stop loss tight to protect profits.
The combination you use is a judgement call. This is the methods we use. In a volatile
falling market if the 1*ATR short sides calculation is compatible with the falling trend because it
does not give false exit signals, then we apply the 1*ATR short side. This gives an earlier entry
signal into the trend reversals. We use 1*ATR to trade the rising trend to keep the stops tight.
We use a 14 day calculation period for the ATR. The chart shows the impact of changing
the calculation length. We used the 14 day 1*ATR as the base calculation point.

We use a 3, 7, 14 and 21 moving average of the 1*ATR short side. There is no strongly
significant difference in the entry points for these values. We find the default 14 day calculation
gives robust results that work in most situations.
 The final variable is the trigger point in the ATR calculation. The trigger point is the point
where the ATR calculation ends. This is shown by a horizontal line that moves to the right of the
chart. In GTE this line colour changes to black. For the short side ATR we use a trigger point
abased on the low. The low must be higher than the value of the short side ATR before the ATR
indicator signals a change in trend. For the long side ATR we prefer to use the closing price as
the trigger.
 The chart shows the difference. The calculation for the ATR does not change, The green
ATR line exactly matched the red ATR line calculation. The difference is when the ATR
calculation stops. If the trigger is based on the low then an exit is triggered near $5.12. It is a
false exit. If the close is used as the trigger then the exit is triggered near $5.84.
We find the application of traders ATR to be very successful in current market
conditions. These notes explain in detail how we assess and apply this indicator.

INDICATOR REVISION
TRADERS ATR
The traders application of the Average True Range (ATR) captures price volatility, defines the
emerging trend breakout and provides a method to manage the developing trade. Our purpose
is to use the ATR calculation as a stop loss designed to protect capital and identify the end of
one trend and the beginning of another. We use the ATR as a method to identify and confirm
trend changes. Later we want to use the ATR as a protect profit stop designed to protect profits
and identify the end of a trend. Traders ATR is a tool in Guppy Traders Essentials charting.
TRADING AVERAGE TRUE RANGE part 1
By Daryl Guppy
Managing volatility is the most
INDICATOR REVISION significant challenge in changed market
AVERAGE TRUE RANGE
conditions. Long term trend volatility is
The average true range (ATR) indicator
was developed by Welles Wilder. It is a measure effectively managed using the trend volatility
of the true ranging activity of a stock. Most times line but this is less suited to the increasingly
when we talk about range we mean the difference common shorter, sharper trend behaviours.
between the high and the low for the day. This These extended rallies require management
gives us an idea of how volatile the stock is. This based on price volatility, but these measures
measurement does not tell us who is in charge of need to be more sensitive to volatility
the price bulls or bears. developments to ensure profits are kept and
The ATR indicator measures only the not diminished by stops that are placed too
range of prices set by the strongest players in the far below the current price action.
markets. It does this by comparing the distance
The count back line with its self
from yesterdays close to todays high, and the
distance from yesterdays close to todays low. adjusting stop is one option for volatility.
This is combined with the distance from todays Another is the traders application of the
high and low. These figures are averaged to give Average True Range (ATR). This captures
the Average True Range of price movements price volatility, defines the emerging trend
between the end of yesterdays trade and the close breakout and provides a method to manage
of todays trading. the developing trade. Our purpose is to use
the ATR calculation as a stop loss designed
to protect capital and identify the end of one trend and the beginning of another. We use the
ATR as a method to identify and confirm trend changes. Later we want to use the ATR as a
protect profit stop deigned to protect profits and identify the end of a trend. In extended rallies it
can be combined with the CBL line to provide a series of alert and confirmation exit signals.

The ATR is an elegant mathematical solution developed by Welles Wilder. It highlights

the difference between the mathematical analysis of market behaviour and the actual process
of trading. Just having a good mathematical solution does not create a good trading solution.
Hence we call this work the traders ATR.

Our purpose is to use the ATR to enable entry at the best point in the trend to:

1. Follow the trend break

2. Define average price volatility and price volatility limits
3. To adjust price volatility calculations as average price volatility changes
4. Set stop loss conditions related to price volatility

ATR CALCULATIONS
The mathematics of the ATR calculations are less important than the use to which the
results are put. The ATR calculations are done automatically in most charting software. Our
interest is in the logic of the calculations rather than the details.
 \The logic is summarised in Figure 22.1. The True Range is equal to Todays high to low, or
yesterdays close to todays high, or yesterdays close to todays low. The largest of these figures
is selected and used in the ATR calculation. The largest of these calculations is selected as the
starting point for the calculation of todays ATR value. In the example in figure 22.2 the largest
ATR calculation for today is 1.20. This figure is combined with the one day ATR calculations for
the previous four days. This provides a total of 4.90 for the previous 5 days. The 5 day average
of this calculation is 0.98. Todays value of the 5 day average ATR is 0.98. It suggests that price
can move 0.98 during the day and remain within the average 5 day volatility range.

The value of the ATR is the degree to which price can be expected to move on the next
day and still remain consistent with the existing trend. The trader takes the next step and
decides a move larger than this value is outside the current volatility range and may indicate a
change in the trend. The 1*ATR is often considered too sensitive so the indicator sensitivity is
reduced by calculating the 2*ATR value. Usually the ATR values is multiplied to create a 2*ATR
value. In this example the 2*ATR value is 0.98*2= 1.96. This doubling is used to reduce the
whipsaw, or false signals generated by the 1*ATR.
 These ATR calculations provide great insights into volatility and its measurement. The
changing value of the ATR calculation is usually plotted as a line as shown in Figure 22.3.
Typically the result of these calculations are shown in a separate window below the main chart
display. And they are not particularly useful for actual trading. The display does not quickly show
the relationship between the ATR calculation and todays price. It is difficult to use the ATR as a
trend change indicator, a stop loss or a protect profit stop.

Additionally the ATR value moves up and down and that breaks the first rule of a stop
loss. In a rising market the stop loss should only move upwards because its purpose is to
protect the profit and provide an early exit signal. A stop loss value that moves to lower values
in a rising trend does not protect profit. The traders application of ATR overcomes this problem
by taking the essential calculations of the ATR process and modifying their application to
prevent the erosion of profit when a trend reverses.

Next week we look at how this ATR calculation is modified to make a useful traders
ATR.
TRADING AVERAGE TRUE RANGE part 2
By Daryl Guppy

INDICATOR REVISION Managing volatility is the most significant

AVERAGE TRUE RANGE
The average true range (ATR)
indicator was developed by Welles Wilder. It
is a measure of the true ranging activity of a management based on price volatility, but these
stock. Most times when we talk about range
we mean the difference between the high
and the low for the day. This gives us an idea
of how volatile the stock is. This
measurement does not tell us who is in
charge of the price bulls or bears.
The ATR indicator measures only
the range of prices set by the strongest
players in the markets. It does this by
comparing the distance from yesterdays
close to todays high, and the distance from
yesterdays close to todays low. This is
combined with the distance from todays high
and low. These figures are averaged to give
the Average True Range of price movements
between the end of yesterdays trade and the
close of todays trading.
line to provide a series of alert and confirmation exit signals.
challenge in changed market conditions. The
increasingly common shorter, sharper trend
behaviours and extended rallies require
measures need to be more sensitive to volatility
developments to ensure profits are kept and not
diminished by stops that are placed too far below
the current price action.
The traders application of the Average
True Range (ATR) captures price volatility,
defines the emerging trend breakout and
provides a method to manage the developing
trade. Our purpose is to use the ATR calculation
as a stop loss designed to protect capital and
identify the end of one trend and the beginning of
another. We use the ATR as a method to identify
and confirm trend changes. Later we want to use
the ATR as a protect profit stop deigned to
protect profits and identify the end of a trend. In
extended rallies it can be combined with the CBL

TRADERS ATR
The traders ATR takes the calculation results are displays them in a way that is useful
for trading decisions. It has five elements. We start with the result of the ATR calculation and
create a ratchet or stepped process. For example, we start with the first ATR calculation of 1.00.
If tomorrows ATR calculation is 1.2 then the value of the ATR is plotted at a higher level. If the
following days ATR calculation falls back t0 1.00 then the new lower ATR value is ignored. The
ATR value is shown as the previous days ATR value of 1.02. Values lower than 1.02 are
ignored until a new higher ATR value is calculated. This process is shown in figure 22.4. The
dots show the value of the ATR calculation. The three dots below the horizontal ATR line show
ATR values lower than the value of the horizontal ATR line.
 When the next ATR value is 1.03 then the ATR plot moves higher. Using this first
modification the ATR value follows the rising trend without taking any backward steps. This
makes the ATR more useful as a stop loss method rather than just an interesting measure of all
changes in price volatility.

In a falling trend the same principle is applied, but in reverse. The ATR in a falling trend
is designed to follow falling prices down. In this environment the ATR shows only lower ATR
values and ignores any higher ATR values.
The second element of the trader ATR is the relationship between the ATR calculation
and the current price. How is the ATR value of 1.00 related to todays price? Unless the trader
establishes a relationship then the ATR calculation remains a curiosity rather than a trading tool.

We start with a long side trade. Here the intention to enter an uptrend and use the ATR
as a method of managing the trend. A fall that is greater than the value of the ATR suggests the
price volatility has expanded. This is a potential end of trend signal. To use the ATR in this way
the value of the ATR must be directly related to the current price so it establishes a barrier. If
the price tomorrow moves below the value of todays ATR then it creates a trading signal.

The value of the ATR can be subtracted from the value of todays price. We have a
choice of using the low price for the day, the close price for the day or perhaps the open, high or
median price for the day. The selection of the subtraction point has a significant impact on the
location of the ATR value as shown in figure 22.5. The ATR calculation for the indicator is the
same, but the subtraction point is different so the location of the ATR line changes.

The purpose in using the ATR is to create a stop loss line that follows a rising trend and
gives an exit signal when there is increased probability the trend is changing. Our preference is
to subtract the value of the ATR from the value of the close to establish the correct position of
the ATR exit signal. This selection is a solution to the increased volatility in the market. If we
use the low as the calculation point then the danger is that the ATR line is too far away from the
current price because intraday day volatility ranges have increased. By using the close the
position of the ATR becomes a tighter stop loss and it ignores the swings of intraday volatility.
The ATR based on the close provides the better solution in conditions of high price volatility.

There is a third element in the calculation of the ATR is the length of the average
calculation. Depending on the software you use, the default is a 14 day or 10 day average
period for the calculation. In conditions of higher price volatility a 7 day average calculation is
more suitable for catching rallies and extended fast moving short term trends.

The fourth element in the ATR calculation is the multiplication factor. The multiplication
factor is applied to the value of the ATR calculation. If the value of the 7 day ATR calculation is
1.00 then the 1*ATR value is also 1.00. The value of the 2*ATR would be 2.00. This can be
extended to a 3*ATR equalling 3.00 but this is not useful for either investing or trading solutions.

The selection of the ATR multiplication value has a significant impact on the
management of the trade as shown in figure 22.6. The 2*ATR captures the long term underlying
trend. The 1*ATR calculation is more sensitive, and triggers an earlier, and potentially, false
exist.

Prior to the global financial crisis many traders used the 2*ATR calculation and this was
very suitable to long term rising trend. It remains well suited to these conditions, but with
increased price volatility it often leaves the exit signal too far below the current price. Substantial
profits are surrendered before the exit signal is triggered.

We prefer to use the 1*ATR. Its a trade-off between more frequent exit signals and
collecting better profits. In figure 22.6 the 1*ATR generates a false exit signal while the 2*ATR
keeps the tared in the trade. However, if the 2*ATR exit signal had been triggered then the profit
erosion for this tared is substantially larger than the profit erosion using the 1*ATR. Using the
trend high at $15.80 as the calculation point, traders profits are eroded 13 % with the 2*ATR
signal compared to a 9% profit erosion using the 1*ATR signal.

The fifth element is the ATR display on the chart. It is this display that creates the full
application of the traders ATR. In a rising trend the ATR values only move up. The value of the
ATR is shown with a continuous stepped line, already introduced in figure 22.6. This display is
available as a default indicator in the Guppy Traders Essentials charting package. When the
price closes below the ATR line an exit signal is created. The ATR line is extended to the right
clearly showing an end of trend signal. The stepped line display provides the trader with an
instant evaluation of the current price in relation to the ATR stop loss conditions. This is the
traders application of the ATR, and it opens the door to two other trading applications. We look
at these next week.
TRADING AVERAGE TRUE RANGE part 3
By Daryl Guppy
INDICATOR REVISION
AVERAGE TRUE RANGE
The average true range (ATR)
indicator was developed by Welles Wilder.
It is a measure of the true ranging activity of
a stock. Most times when we talk about
range we mean the difference between the
high and the low for the day. This gives us
an idea of how volatile the stock is. This
measurement does not tell us who is in
charge of the price bulls or bears.
The ATR indicator measures only
the range of prices set by the strongest
players in the markets. It does this by
comparing the distance from yesterdays
close to todays high, and the distance from
yesterdays close to todays low. This is
combined with the distance from todays
high and low. These figures are averaged
to give the Average True Range of price
movements between the end of yesterdays
trade and the close of todays trading.
Managing volatility is the most significant
challenge in changed market conditions. The
increasingly common shorter, sharper trend
behaviours and extended rallies require
management based on price volatility, but these
measures need to be more sensitive to volatility
developments to ensure profits are kept and not
diminished by stops that are placed too far below
the current price action.
The traders application of the Average
True Range (ATR) captures price volatility, defines
the emerging trend breakout and provides a
method to manage the developing trade. Our
purpose is to use the ATR calculation as a stop
loss designed to protect capital and identify the
end of one trend and the beginning of another. We
use the ATR as a method to identify and confirm
trend changes. Later we want to use the ATR as a
protect profit stop deigned to protect profits and
identify the end of a trend. In extended rallies it
can be combined with the CBL line to provide a
series of alert and confirmation exit signals

SLIDING ATR
When the traders ATR is displayed on a chart using the Guppy Traders Essentials
charting package it provides a clear and elegant solution for managing the trend. However, the
value of the ATR is often well below the current price activity. This creates a problem for trade
entry planning. Ideally we prefer an entry close to the value of the ATR line. When we use CBL
for entry method the price is often very near to the CBL value. With the ATR line use din this
way it may take days or weeks for the price to move near to the ATR value.
 The solution is a sliding ATR entry condition. This is applied to an established trend. It
starts by identifying a compatible trend and evaluating the average distance of price above the
ATR value. Price has a higher probability of moving into this area and a lower probability of
falling below this area. The trade risk and reward calculations are based on an entry within the
trading range. This may require a reduction in position size as the ATR stop loss may be some
distance from the entry price.

The illustration in figure 22.7 shows an example of this entry method where the entry
range is always 0.80 cents and always calculated from 0.50 above the value of the ATR line.
When the value of the ATR line changes the trade entry range is then adjusted. Traders wait for
the price rebound behaviour to develop before the trade is entered. Aggressive traders may
decide to pay a little bit higher price if the trend rebound is strong.

COMBINED ATR ENTRY

The count back line indicator follows the downtrend and gives an entry signal when price
closes above the value of the CBL line in a down trend. This signals a change in the volatility of
price in the existing downtrend and points the way to a higher probability of trend reversal.

This same logic is applied with the ATR. The downtrend is followed using the short-side
calculation for the ATR. The ATR line continues to fall until there is a closing price higher than
the value of the short side ATR. This is a signal to close short positions and the closing value of
the ATR provides a reverence point for a potential new uptrend. This is not an automatic stop
and reverse process. A close above the short-side ATR is a signal the short trade is closed. It is
not a signal to open a long side trade.
 As shown in figure 22.8, traders start a long side ATR calculation. The entry signal is
generated when the value of the long side ATR is higher than the closing value of the short side
ATR. This is area A on the chart extract.
The down trend is defined with the 1*ATR short side trading indicator. This is a 1*ATR
calculation using a 7 day moving average period. It is used to define long term down trends.
Traders wait for the price to move above the 1*ATR short side line. The entry signal is when the
1*ATR long side trading indicator value is very near to, or above the value of the 1*ATR short
side indicator value. The objective is to enter the trade when the price rebound from near the
value of the 1*ATR long side line. The price sometimes dips below the ATR line but closes
above the ATR line and develops up momentum on the next day. This is a entry opportunity.
Waiting for this condition increases the probability the trend change is genuine. Traders
can apply a sliding ATR entry technique or join the trade at the best possible price in the days
following the trend breakout confirmation. We look at these next week, in the final of these ATR
notes.
TRADING AVERAGE TRUE RANGE Final
By Daryl Guppy

INDICATOR REVISION Managing volatility is the most significant

AVERAGE TRUE RANGE
The average true range (ATR)
indicator was developed by Welles Wilder.
It is a measure of the true ranging activity
of a stock. Most times when we talk about
range we mean the difference between
the high and the low for the day. This
gives us an idea of how volatile the stock
is. This measurement does not tell us who
is in charge of the price bulls or bears.
The ATR indicator measures only
the range of prices set by the strongest
players in the markets. It does this by
comparing the distance from yesterdays
close to todays high, and the distance
from yesterdays close to todays low. This
is combined with the distance from todays
high and low. These figures are averaged
to give the Average True Range of price
movements between the end
yesterdays trade and the close of todays
trading.
challenge in changed market conditions. The
increasingly common shorter, sharper trend
behaviours and extended rallies require
management based on price volatility, but these
measures need to be more sensitive to volatility
developments to ensure profits are kept and not
diminished by stops that are placed too far below
the current price action.
The traders application of the Average True
Range (ATR) captures price volatility, defines the
emerging trend breakout and provides a method to
manage the developing trade. Our purpose is to use
the ATR calculation as a stop loss designed to
protect capital and identify the end of one trend and
the beginning of another. We use the ATR as a
method to identify and confirm trend changes. Later
we want to use the ATR as a protect profit stop
of
deigned to protect profits and identify the end of a
trend. In extended rallies it can be combined with
the CBL line to provide a series of alert and
confirmation exit signals

ATR AND CBL VERIFICATION

Both the CBL and the ATR indicators measure price volatility. We can use them as a
combined alert and confirmation signal combination. This guards against false exit signals and
improves the reliability of the exit while still maximising profits. However each indicator has a
slightly different purpose. The purpose of the ATR is shown below and the key differences are in
bold italics:

1. Follow the trend break

2. Define average price volatility and price
volatility limits
3. To adjust price volatility calculations as
average price volatility changes
4. Set stop loss conditions related to price
volatility

The count back line is similar, but different in some

significant areas. The key differences are shown in
bold italics.

1. Identify the trend break

2. Define significant price volatility and price
volatility limits
 3. To adjust price volatility calculations as significant price volatility changes
4. Set stop loss conditions directly related to price volatility

Combining these two indicators to manage a developing trend change and to confirm the
trade exit as shown in figure 22.9 provides a useful solution for the problem of false exits. Both
indicators are displayed on the chart. A close below the highest value indicator is an exit signal.
Confirmation of the exit comes with a close below the value of the lower indicator.
The first signal on the left of the chart shows an ATR exit signal but not a CBL conformation
signal so the trade remains open. The ATR calculation is commenced again from a new start
point after the false ATR exit signal.
On the right of the chart there is a combined ATR and CBL exit signal which confirms the
end of the trend.
The combination of methods which measure the same process price volatility in different
ways develops a more reliable exit signal that eliminates many false exit signals.

TRADERS ATR APPLICATION

The expansion in price volatility is the defining feature of the post-GFC market. The
management of extended short term rallies and declines provides the solution to consistent
profits. The use of the traders application of the ATR provides an effective solution for end of
day trading in stocks, indexes, commodities and currencies. The same method is also applied to
intraday trading using 3, 5 and 15 minute charts.
The traders ATR is defined as a trading solution. It is not applied as a long term
investment or trend following solution, although higher values such as 2*ATR can be used in
this way.
TACTICS
In long side trading buy while the price is above the ATR value.
Sell when price drops below the ATR value
In short side trading buy while price is below the ATR value
Sell when price rises above the ATR value.
Exits can be executed on either intraday alerts, or at the open on the following day.

RULES
The ATR value defines the acceptable limits of volatility.
A move beyond these ATR limits signals an end to the current trend.
Stop loss is based on the value of the ATR. This is updated whenever necessary
ADVANTAGES
A good measure of volatility.
Good for short term trends
Good for momentum driven trading as a stop loss and protect profit method
Very useful for intra-day trading.
Works well with derivatives.