CMPA Trading System E-Book
Intra-Day Trading System
Just like the DSP Trading Systems, the Candlestick Matrix-Modulation Pivot Analysis (CMPA) Trading System is designed for use with the electronically traded $5 E-Mini Dow Futures. While the DSP system trades a daily time frame, the CMPA system focuses on intra-day trading.
CMPA uses live, real-time 5-minute candlestick charts throughout normal market hours when the DJIA trades. It sets forth definitions and rules that are intended to provide a framework to support good decision making based on recognized higher probability outcomes.The CMPA e-book introduces the topics of technical analysis, candlestick charting, pivot levels, and futures contracts; all things that are helpful for any futures trader to be knowledgeable about.
The definitions and rules are laid out in a somewhat hierarchical format, and a method for executing the strategies as a live trading system is given. At the core of the methodology is a body of definitions and systematic rules and procedures which the author has found useful for gauging the state of Mini Dow futures prices.
The core material is composed of two separate but equally important elements. They are the Trading Strategy and the Money Management Strategy. These two strategies act together to form a complete trading system.
Let’s browse through the different sections of the book. (A complete table of contents is supplied at the bottom of this page)
The book begins with a discussion about the amount of information contained in the book, a strategy for live trade implementation and the possibility of future automation code for the Trade Station platform.
The introduction provides information on characteristics of successful traders, similar to what is found on the web site. It discusses the importance of discipline, attitude and a money management strategy in addition to a trade strategy. Money management is covered in more detail in Chapter 6.
The introduction also introduces the Efficient Market Hypothesis and price charts in relation to technical analysis. It states “The market technician works with price charts in order to deduce probable future price movements.” Because probability is central to technical analysis and the CMPA system, there is a brief discussion of random vs. deterministic processes.
Some historical background is given and some fundamental tenets of technical analysis relating to trends and price-action formations are presented. The system uses the word “matrix” to mean the combination of price and volume data as displayed in a candlestick chart format.
Chapter 1 - Candlesticks
Chapter 1 is all about candlestick charts. There are four simple rules for interpreting data from candlesticks. Once learned, these provide probably the most intuitive way of looking at market data. Candlestick charts have been used for hundreds of years and many rules have been developed to identify indicators of trends and reversals.
CMPA does not use all standard candlestick techniques, but is “a modified system that attempts to identify entry/exit points and price direction with a higher probability of success.” Though the system recognizes standard candlestick shapes, it gives precise mathematical definitions to them to remove ambiguity. These definitions are different in some cases from the traditional ones, and some new definitions are introduced. The matrix formations and interpretation rules on which the system is built are entirely unique.
Most of the chapter defines precise candlestick shape definitions such as doji, hammer, spinning tops and “well behaved” candles. The important concept of weighting is discussed.
Chapter 2 – Pivot Levels
As used in this manual, the term Pivot level (PL) refers to a commonly calculated price level at which support or resistance is likely to be found. Support occurs when buyers step in to stop the fall of prices, and Resistance occurs when sellers step in to stop the rise of prices.
The ‘self-fulfilling prophecy’ aspect of the psychology behind pivot levels is discussed. Support and resistance represent assemblages of demand and supply respectively. They typically occur at price levels where many contracts changed hands in the past, i.e. high volume occurred. You may read more about this topic in the Support, Resistance and Pivot Levels section of the web site as well.
Pivot Levels are usually defined in terms of a “range”, not a precise level. CMPA defines a precise level, around which a 12 point range is defined. Rules are declared to interpret price movements around and through those levels. It is noted that the role of a price level may change from support to resistance or vice versa when price breaks the level decisively.
“Use of pivot levels in the CMPA trading methodology provides a ‘price-based’ weighting factor to compliment the use of candlestick matrix ‘indicator-based’ weighting factors.” Transaction volume helps to confirm or disprove an indicator, acting as a vital component of the price-volume matrix.
The second part of Chapter 2 presents standard formulas for calculating the daily key pivot level and all support and resistance levels. These are the same concepts presented in the Support, Resistance and Pivot Levels section of the web site, and a fractional pivot level calculator can be found there.
The CMPA system subdivides those levels into halves and quarters when necessary as well. Some statistics about support and resistance levels are given that “can help the calculating trader keep emotion in check while trading.”
Chapter 3 – E-Mini Dow $5 Futures Contracts
Chapter 3 describes what futures are, how they are traded, what margin is all about, and how futures profits are taxed in America. In particular the $5 E-Mini Dow Futures are examined. All the details are given, including session hours and regular and day-trading margin requirements (current at time of writing). A modified version of this information is provided for free on the web site as well.
Chapter 4 - CMPA Trading Methodology
Chapter 4 lays out the CMPA trading strategy. This is where the tools defined so far come together. Pivot levels are drawn on a live 5-minute chart of Mini Dow Futures prices. Exact mathematical definitions are presented for candle weighting. Critical definitions are presented first, then the trade rules are given in detail.
The first part of the chapter presents the following definitions:
Drift & Trend Definitions:
Short-Term Drift (SD) – Definition
Significant Reversal – Definition
Trending Candles (TC) – (Same Color) – Definition
3 Candle Trend (3CT) – Definition
5 Candle Trend (5CT) – Definition
Affirming Formation (AF) – Definition
7-sideways Formation (7S) – Definition
Truly Sideways Formation (S) – Definition
TB Limit - Definition
Signal Candle (SC) - Definition
Backward Signal Candle (BSC) - Definition
Completion Candle (CC) - Definition
Pattern-Confirming Candle (PCC) - Definition
Engulfing Candle (EC) - Definition
Low Volume Quasi-Engulfing Reversal Candle (LQER) - Definition
Trend Buster Candles (TB) – Definition
Light Trending Volume (LTV) – Definition
Double Volume (DV) - Definition
The second part of the chapter establishes the trading rules:
Signal Candles and Trade Rules:
General Reversal Signal Candle (RS) – Rule
Ambiguous Signal Candle (AS) – Rule
Backward Signal Candle (BSC) - Rule
Trend Candles and Trade Rules:
3-Candle (well-behaved) Trend (3CT) – Rule
5-Candle (well-behaved) Trend (5CT) – Rule
Double-Volume 2 Candle Trend (DV2T) – Rule
Alternating-Color Trend (ACT) – Rule
Engulfing Candles and Trade Rules:
Engulfing Candle (ECR) – Rule
Low-Volume Quasi-Engulfing Reversal Candle (LQER) - Rule
Pivot Level Extent Trade Rules:
Pivot Level 2-Candle Reversal (PL2R) – Rule
Pivot Level 2-Candle Trend (PL2T) - Rule
Chapter 5 - How to Execute CMPA as a Live Trade System
Chapter 5 itemizes the steps to trading the CMPA system as a live trading system. The Trade Entry Check List breaks down the steps for identifying entry points. The various candlestick price-action formations are listed in hierarchical format. The trader looks for the patterns in the prescribed order.
The Trade Maintenance Check List lays out the process of pattern identification to follow once a trade has been initiated. The list is assembled in hierarchical format similarly to the trade entry checklist. Once the trader is comfortable with trading the system, he or she will be able to apply the Short Version of the trade entry check list. Eventually, with experience, the Overview Version can be used to further simplify trade entry analysis.
The goal of course is to become familiar enough with the system to apply it quickly and readily to 5 minute charts. This requires the trader to sit in front of a computer from 8:30 am to 3:00 pm CST and make a decision every 5 minutes to enter, exit, maintain a trade by adjusting Stop and Limit orders, or sit on his or her hands and do nothing. Though seemingly a daunting task, it is possible, and even quite easy and enjoyable after some practice and acclimatization. In fact, the author has become quite proficient at trading this way, and can report that the rules soon become so engrained as to be second nature.
Automated Trading and Online Brokerage
Because most traders don’t want to devote the necessary attention required for intra-day trading, or simply can’t because of a full time job, this method lends itself to being programmed as an automated strategy that can run with minimal operator input, systematically entering, exiting, maintaining positions and adhering to strict money management rules. This may be accomplished through computer automation.
Computer automation claims the added benefit of removing emotion from the trading equation. If thoroughly and correctly programmed, the perfectly executed strategy would remove the hurdles of human reaction time, emotion and technical operator errors. The key, of course, is to program the code as flawlessly as possible, and then to allow exit options in case any situations are encountered, the circumstances of which may stretch beyond the program’s capabilities.
Ninja Trader software in combination with an online brokerage such Trade Pro Futures is an ideal solution. Such a brokerage can connect the active day trader seeking to automate his/her strategies with a clearing house and live data feed. Then Ninja Trader can be set up to interface and execute/manage trade positions automatically.
We have generated Ninja code of my own creation, capable of executing a portion of the CMPA system. This code will be offered, along with back-tested results, for purchase on this web site as it becomes available. Additionally we may occasionally generate other automated algorithmic trade strategies for use with Ninja Trader that will be offered as they are developed.
When to Stop Trading
Some advice is given as to when to stop trading for the day. What conditions should alert the trader that the market is not responding well to the CMPA technical analysis based rules? There will be days like this, and they must be recognized before losses mount.
Finally, money management is mentioned. If the money management scheme presented in the CMPA book is not followed then it is up to the reader to search out a method appropriate to his or her own personality, account balance, tolerance for risk and desire for profit potential. This is critical. The DSP systems offered through subscription on the website also suggest examples of good money management schemes.
Chapter 6 – Money Management
Chapter 6 explains the importance of a money management strategy, and presents one that the author has found useful when trading the CMPA system. The trading strategy, in combination with the money management strategy, forms the complete trading system. If money management is left out then the system is simply incomplete. This is a recipe for disaster.
A trader must expect and prepare for draw-downs. “A draw-down is a local minimum in the running account dollar value. Basically, the goal of any trader is to grow the account value. This results in a succession of accumulated running account value highs, with dips in between each new high where losses occurred before the new high was achieved. The lowest value the account reaches in between two highs is called the draw-down for that period.” If a trading account is to survive and thrive then it must weather the storms that WILL happen from time to time. It must be capable of withstanding the draw-downs that result from those storms.
This chapter explains why “it behooves us to put considerable effort into those things we can control in striving for optimum profitability.” The outcome ‘Expectation’ of any process must be positive to produce profits in the long run. The following gambling analogy is presented as an example of this.
From the CMPA e-book:
“To use a gambling analogy (probability examples are often given in terms of gambling), money management is simply determining the optimum percentage of your bank roll to bet on any given roll of the dice, hand of cards, or spin of the roulette wheel. The problem with gambling is that the game usually has a negative expectation for the player.
The only positive expectation is for the house. As an example let’s look at the expectation of a spin of the roulette wheel. The wheel (American) has 38 slots or locations into which the ball may come to rest. The ball has an equal chance of falling into any one of them; however, the only number/location that will win money is the one bearing the same number on which you have placed your bet. In this case the resultant ball location after a roll (l) is considered a discreet random variable. In probability theory the expectation (E) for this system is the sum of all possible (n) individual results (ln) multiplied by their attendant probability of occurrence p(ln).
A roulette wheel represents a simple case of Win or Lose. Note that the amount won or lost must be constant, and in this case is a constant multiple of the amount bet.
The probability of the ball landing on “your number” and winning is also constant at 1 in 38 or 1/38 for each spin of the wheel. In this case the event can be described as “keep your original bet and win 35 times that amount.”
The probability of the ball landing on a losing number is then 37 in 38 or 37/38. In this case you lose 100% of your original bet.
So the mathematical expectation of the game is simply the sum of the Win result times its probability of occurring plus the Loss result times its probability of occurring. Assuming a bet of $1 on a single number then...
This negative expectation tells us that on average we will lose 5.26 cents each time we place a bet. (This result is only valid for a large number of rolls since obviously casinos do not normally deal in cents or fractions of cents. In the short run your bank roll will simply rise and fall in integer multiples of dollars.)
You may think that if there is a 1 in 38 chance of winning that you should simply keep playing at least 38 rolls. However, you can expect to lose $2 in this endeavor. You will pay $38 over 38 rolls, and on average you will only win back $35 plus the dollar you bet on your winning roll = $36.
What this game’s negative expectation really means is that, from the standpoint of probability, if you keep playing long enough you will lose all your money! The only thing to do in this case is run away!
But it can be fun to gamble at times as long as you have set aside your gambling stake as “the cost” for an evening of entertainment, and losing it will not harm you emotionally or financially.
As a side note, probability theory tells us that when playing a negative expectation casino game the best approach is that of extreme aggressiveness. Set a profit goal at which point you will stop gambling. Then begin by laying it all on the line (bet aggressively) in hopes of reaching your goal. This reduces the number of times you risk money, which is good because as the trials number gets higher, the more probable it is that you will lose all your money as calculated above! Of course this could definitely reduce the “entertainment factor” if you bust on the first roll! And if you believe in luck, then well… good luck!
Back to trading… Unlike gambling, trading should create a positive expectation for the trader. Notice in the above equation that the expectation is dependent not only on the probability of winning, but on the amount won or lost in each case. If the roulette wheel paid out 100:1 for a winning role, then the expectation would jump to +$1.66. Now that would be a game worth playing!
This fact is also proof positive that letting your Winners Run and Cutting your Losers Short can create a positive expectation from less than favorable circumstances. Even a trade system averaging 30% wins can be profitable if the ratio of per-win profits to per-loss losses is sufficient.
Unfortunately our trading system does not return a fixed or constant amount for every win, nor will our losses be the same each time. So the standard Expectation definition falls short and provides incorrect results. But the lesson learned from the fixed outcome case is still valuable. Maximize the wins and minimize the losses as much as possible.”
It’s not always possible to set limits and stops to take advantage of winners and get out of losing trades before the losses mount. This is where money management tells us how much to “bet” or risk on each trade. Once you’re happy with your trade strategy, the rest boils down to “how many contracts should I put on, given my account standing?” Futures margin requirements act to quantize the number of contracts, and thus the dollar amount, a trader can “bet” on each trade. This simple fact complicates things a bit, but the CMPA book addresses it effectively.
The chapter goes on to discuss fixed fractional money management, and introduces a specialized strategy developed by the author. The strategy is considered “A Draw-Down Resistant Money Management System.”
Chapter 7 – Example Trade Studies
Chapter 7 exhibits 5 individual trading days as recorded on 5-minute charts. Each section is a detailed guide to the action that developed throughout each trading session.
The chart for each day is marked with entry and exit points as indicated by the CMPA trade strategy. Also, the various patterns that occur, both valid and invalid, are shown. Sometimes a pattern forms, but is not confirmed or doesn’t quite fulfill the requirements for trading. When patterns like these occur, they are marked in the charts for reference.
It is not uncommon to have "Trend Buster" candles indicate a profit limit, only to have an "Affirming Formation" remove that limit and impose a new limit. Similar things happen with stop loss placements. These are the types of events that are chronicled in the trade example charts.
Accompanying each chart is a detailed written description of the day’s progress from one 5-minute candlestick to the next. These are descriptions of the trades, and the reasoning behind each decision. Not every possible combination of pattern forming candlesticks is covered, but these charts and accompanying trade descriptions should help to familiarize the reader with the system.
Below is a single example trading day from the book. There are four more such examples in Chapter 7.
The following is an analysis of the action that took place during the trading session
Chart #4 – E-Mini Dow $5 Futures – 5 Minute Candlestick Chart for 5/1/08
Begin trading: 8:30 am CST
New Entry cut-off time: 2:45 pm CST
Exit all positions: 3:00 pm CST
Chart #4 begins with an insignificant Doji. The next six candles form a very linear ACT. To explain: There are 6 candles, with alternating color. None of them are dojis. Each black candle has higher body tops and bottoms than the previous black candle. Each white candle has higher body tops and bottoms than the previous white candle. Note that each opposite colored candle does not need to have higher tops and bottoms than the candle immediately before it. The series begins with a black candle, and ends with a white candle, and the whole thing is very linear, forming a very nice upward trend. The PCC is the 9:00 to 9:05 am candle. We enter Long with a Market Buy order ASAP, and set a 30 point stop-loss below the Entry price. We follow the 5CT-A rules from here. The first three candles are not 3 TB’s because the middle candle is a doji. Five candles later, 3 TB’s have appeared, and a 20 point Limit is imposed. Five candles after that the Limit order is triggered, and a profit of 20 points is recoded for the first trade of the day.
The next 16 candles are insignificant. The following two Positive candles from 11:30 to 11:40 am form a DV2T in a clear upward Drift. We enter Long ASAP with a Market Buy order and place a stop-loss order 40 points below the Entry. The next Positive candle that appears forms a 3CT-C, but it has no effect on the trade. The next two candles are also positive and form a 5CT, but because the first 3 candles are LTV, it is not a tradable formation.
The candle from 11:55 am to 12:00 pm is the PCC of a 5CT-A. The stop-loss order is reset to 40 points below the new Entry price. The Limit-Entry remains the same since this is the first AF. The next two candles are insignificant, but the following two Positive candles form an AF DV2T. The stop-loss order is reset to 40 points below the new Entry, and the Limit-Entry level is reset the first AF 5CT-A Entry level. Immediately after this, three trending black candles, separated by single white candles in between, appear and each has a lower body top and bottom than the previous black candle. The third such black candle constitutes a TB candle formation. The trade is exited immediately by selling at the market, and a profit of 54 points is recoded for the second trade of the day.
The DV2T CC combines with the next two Negative, Well-Behaved candles to form a 3CT-C with Light Trending Volume (LTV). This is a reversal formation. We enter ASAP with a Buy Market order. Then we set a stop-loss order 30 points below the entry, and a Limit order 20 points above. Two more Negative candles appear, but have no effect on the trade. Then four Positive candles appear, the last of which triggers the Limit order. The trade is exited with a sell at the Limit price, and a profit of 20 points is recorded for the third trade of the day.
The next Negative candle is insignificant. The next Positive candle looks like it is engulfing, but its volume is not greater than that of the highest of the 2 preceding candles. The next Negative candle is insignificant. The next Positive candle looks like an SC, but since its high doesn’t penetrate at least 7 points above the breached PL, it is NOT an SC.
The next two candles are insignificant, but the third is a clear signal candle. Because the current two candles’ total body extent is greater than a single PL, this qualifies as a downward Drift. So this is a standard RS, indicating a short-term reversal upward. We enter with a Buy Limit order that is set 3 points below the breached PL. This Limit Entry is triggered, and we enter Long on the next candle. Then we set a stop-loss 30 points below the Entry and a Limit order 20 points above. Over the next five candles, no significant patterns form, and on the fifth candle the Limit Exit order is triggered. A profit of 20 points is recorded for the fourth trade of the day.
Immediately after the RS CC, three Negative candles appear in a clear downward Drift. The third candle is a clear SC, which indicates another RS short-term reversal. We enter (like the previous trade) with a Buy Limit order set 3 points below the breached PL. This Limit is triggered, and we enter Long on the next candle. Then we set a stop-loss 30 points below the Entry and a Limit order 20 points above. The next three candles are Positive, and on the third candle the Limit order is triggered. A profit of 20 points is recorded for the fifth trade of the day.
We have now passed the new entry cut-off time, so trading is finished for the day.
1st Trade: +20 Points
2nd Trade: +54 Points
3rd Trade: +20 Points
4th Trade: +20 Points
5th Trade: +20 Points
Total Points = 134
If all signals were followed and traded, potential profits for the day were:
Per-Contract Commission = 5 trades x $4.24 = $21.25
Per-Contract Profit = $670- $21.25 = $648.75
5 Contract Profit = $3243.75
10 Contract Profit = $6487.50
20 Contract Profit = $12,975.00
Remember: When contract lot size increases, there is a greater chance that not all trades will be filled at the same price. This introduces some variability into the points-won figure and hence the potential profits.
Book Table of Contents