JFC Market Direction Indicator Manual

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The JFC Market Direction Indicator is the first of two tools which we will use to determine the major trend for the day.
Since it is designed as a day trading tool, this indicator is programmed to work only on intra-day data. It will not work on daily data.

Inputs

There are no user selectable inputs for this tool. Therefore your input screen should appear as below during the insertion process.

JFC Market Direction Input Screen for SuperCharts and TradeStation

Style

You may use the style as shown on the next page to change the colors of the three plots for the JFC Market Direction Indicator.

In the upper left portion of the style box you will notice the names for the three plots used by the JFC Market Direction Indicator. The top selection on this menu is labeled “Pos”. Clicking on this item will place a dot in the button to the left of the menu item. This designates that the selections below are the ones which will be effective for the Pos item.

Note that the type is set to “histogram” and the color is set to blue. Also, the style and weight tabs are set to the minimum value for each. These default settings control the blue histogram which measure the positive energy in the market.

Next select the item labeled “Neg”. This tab should be set identically to the Pos tab except the color is set to red. These settings control the type and color of the red histogram which measures the negative energy in the market.

Scaling

It is important that the scaling screen for the JFC Market Direction Indicator be set to screen.

The numbers which appear under the user defined section of this dialog box will vary with the chart to which the indicator is being applied. Ignore these values as they are not used when the scaling tab is set to Screen.

The Axis Type is always set to Semi-Log.

Properties

  Be sure that the settings on your properties tab are as they appear in the image above. The Auto-detect button should be activated as evidenced by the small dot in the circle to the left of the item.

The “Base study on:” box will detail the chart on which the indicator is being applied. In this case the indicator is applied to a one minute chart of the Dow Jones Futures, December contract. This box can be ignored as it is only used when multi - data charts are used. This does not apply to the JFC Market Direction Indicator.

The “Subgraph” box in this case is set to plot in subgraph two. Any setting in this box is acceptable with the exception of Subgraph one. If the indicator is plotted in Subgraph one it will cause the plots of both the indicator and price bars to be distorted to the degree that they are not useable.

If you have other indicators already plotted on this chart when you insert this indicator it is possible that the subgraph designation could default to three or four or even higher, depending on the number of other studies you have on the chart. This is of no consequence.

There are no alerts programmed into this indicator, thus the Enable Alert box remains unchecked.

There is no need to update this tool on every price change, hence the lack of a check by this item. Do not check this box unless it is important for you to have this information updated regularly. Unnecessarily checking this box on some of the more complex indicators in this package can result in slowing computer performance by requiring unneeded repetitive calculations  on each price change.

Objective

I can not emphasize enough the importance of identifying the Major Trend of the day. It is the objective of the JFC Market Direction Indicator to aid you in making this critical determination.

Accurate, early trend definition is a very powerful concept which you will need to master early in your education as a day trader. With this concept fully in mind your ability to select the trades with the highest probability of a market move in your direction will increase dramatically.

Many trades will surface during the duration of a trading day. Our task is to graphically determine which trades have the best success of increasing the balance in our trading accounts at the end of the day.

If one could determine, lets say after the first 90 minutes of the day or less, that the predominant trend for the day was up, we would then be able to take trades only in the direction of the predominant trend.

Recall the old axiom, “the trend is your friend”.  The task here is to determine which way the train is headed early in the trip. After we know which direction the train is going, the task of riding along the right way becomes significantly greater.

Later on in this manual we’ll introduce tools which will tell us when and where to get on and off the train, and, incidentally, how far to ride each time we climb on board. But for now, let’s concentrate on figuring out early in the day which way our train is headed.

In many ways, trying to trade the wrong side of the market is roughly akin to standing on the rails attempting to stop the locomotive with your bare hands. Would you rather ride comfortably on the luxury liner or become “Day Trader Road Kill” between the tracks?

General Construction & Interpretation

  The JFC Market Direction Indicator will appear on your chart on subgraph 2 or any other subgraph of your choice. Do not plot this indicator in subgraph 1 as significant chart distortion will appear which will make the interpretation of the indicator and price charts difficult if not impossible.

The plots will appear as two different colored histograms. As with all of these trading tools, a blue color will relate to a buying situation and a red color will indicate a selling situation is in order. The blue histogram will plot above the zero line and the red histogram will plot below the line.

This indicator measures both the positive and negative energies within the market and then does a comparison between the different energy levels. The positive energy of the market is charted by the blue histogram while a red plot depicts the level of negativity in the market.

Therefore, 60 – 90 minutes into the market day, if you observe more blue than red on the subgraph containing the indicator you can be confident in expecting an up day for the remainder of the day. Conversely, an abundance of red visible on the general plot will be telling you that the most profitable trades will be found on the short side for this day.

There is a third plot on the indicator which measures the balance between the positive and negative internal market forces. This calculation is represented by the line you will see plotted overlaying the histograms. If it is plotted on the red portion of the indicator it will appear as a yellow line while it will appear as a white line when it is in the blue portion of the subgraph.

This line is a very important one to observe occasionally during days which are identified early on in the trading day as being sideways in nature. Careful observation of this plot can give you an early warning of a general trend change for the day.

Pay particular attention to the balance line when it approaches the zero line which separates the red and blue  histogram plots. If, for instance, the balance line is approaching the zero line from below and turns back lower then the trend for the day can be assumed to be sideways to lower. Since this day has earlier been determined to be sideways, this occurrence can give the daily trend a slight downward bias. Conversely, if the balance line passes through the zero line of the histogram and continues higher our sideways day can now be given a slight upward bias.

On the other hand, if the balance line is approaching the zero line of the histogram from above the zero line and turns back higher, again it is appropriate to give a slight upward bias to the trend for the next part of the day. If, in this instance, the balance line continues on through the zero line and heads lower, a negative component can be added to the trend of the day.

The subsequent progression of the balance line for the remainder of the day is also an important feature of this trading tool with which the trader should become familiar if one is to gain the maximum advantage from this indicator.

Frequently the balance line will wander back and forth across the zero line, crossing it several times early in the day. When this pattern presents itself the trader can be more confident of the sideways trend which was earlier indicated by the JFC Market Direction Indicator.

These determinations can be particularly useful, as you can be more and more confident in taking positions on both sides of the market. In fact, when your confidence level of a sideways day increases in response to this type of pattern, you may want to take your positions closer to the indicated exhaustion points as indicated by any of the four exhaustion point indicators which will be discussed later in the course.

Often, these sideways trending days can be quite profitable for the short-term day trader. Multiple positions can be entered and exited with small profits when the trader has the knowledge that the market is not going to move very far in one direction or the other, anticipating several minor trend reversals which can definitely be traded.

The key to this entire scenario is the ability to determine the major trend early in the day. Traders using this material are encouraged, as one of the primary tasks of this course, to become intimately familiar with the various patterns displayed by this indicator. While careful examination of the charts and explanations of this indicator on the video, there is no substitute for the careful observation of this tool on both back data and in real time as the market picture unfolds through the day.

This balance line plot can also be of use on days when the trend is defined as up or down. After examining several charts you will notice that on the strongest up days the line will closely hug the top of the blue histogram without hesitation. Occasionally on up days you will notice the white line beginning to pull away from the upper border of the blue histogram. When this slight departure from the blue border becomes apparent it can be the first hint of a intra-day trend change within the market.

At this point the trader will do well to pay close attention to various support and resistance levels on the chart. It is very likely that the market has encountered one of our calculated support or resistance levels and may stop to rest for a while or actually undergo a directional change for the day.

Mastering the use of the JFC Market Direction Indicator and the several tools we use to define support and resistance can be a very powerful combination for assessing general market trends.

The opposite is also true on strong down days. When the yellow line, in this case, pulls up and away from the red border one should be on the alert for a possible trend change. Again, the use of support and resistance information in conjunction with this phenomenon can be very useful to the trader.

The chart on the following page depicts the activity of the JFC Market Direction Indicator on a one minute chart of EBay from August 17, 1999.

Note that the market rises sharply at the beginning of the day, falters slightly, but rallies nicely into the close.

To the casual observer, this might appear to be a day with mostly sideways action and one during which a substantial sell off could occur at any time.

However, the JFC Market Direction Indicator is giving very strong indication that the bull move will be good for the remainder of the day, as evidenced by the histogram which rises with each new bar as it measures renewed internal strength in this stock issue.

Note the many slight pull backs which were clear invitations to buy the market throughout the day.

Later we'll detail additional indicators which will further define these short term pullbacks as buying opportunities and, additionally, will give exact points of entry for a move to the upside.

The next chart above illustrates the activity of the JFC Market Direction Indicator during a down day in the market. This E Bay chart is quite typical of the patterns which are presented on a declining day.

Recall that the trend determination from this indicator is made after only one hour into the market. That time frame is clearly marked on the chart above by the JFC Median Line Indicator’s vertical Signal Bar, this is the heavy vertical black bar which appears near the left side of the chart.

Although it is not obvious on this small black and white chart, the balance line remains at the base of the lower histogram for the entire session. This pattern is typical of a day with a strong trend to the down side.

Note the multiple selling opportunities which present themselves on this charts the market attempts to correct the downtrend through the trading day. These selling points will be clearly defined by our exhaustion indicators, which will be discussed later in the course.

The chart above is included to illustrate one of the points made earlier in this section concerning the behavior of the balance line with relationship to the zero line on the JFC Market Direction Indicator histogram.

After the initial hour of the trading day (at 9:30 Central Time on the chart), note that the direction of the market can be determined without question to be higher. During the next half-hour the market sells off, putting in the lows of the day. Note on the chart the behavior of the balance line with respect to the zero line as the lows of the day are being put in place. The balance line approaches the zero line from above, briefly touches it and then once again turns higher, confirming the initial assessment of an uptrending day.

In conclusion, the JFC Market Direction Indicator along with the Directional Day Filter Indicator, which is discussed in the following chapter, are the two main trading tools which form the foundation for all other day trading indicators contained in this course.

There is no more important component of any day trading strategy than early, effective definition of the days major trend.

The proper application and interpretation of these two tools each trading day is essential to the building of an effective day trading strategy.

Please refer to JFC Market Direction Charts 1 through 10 on the menu screen for more individual charts detailing the use of this indicator on up, down and sideways days.

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