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the interpretation and application of price action concepts

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Range Expansion Index Setup by Tom DeMark

thanks to Mike Bruns


MACD Aggressive Setup   MACD Conservative Setup   REI Stochastic Setup REI Note    9/30 Setup    MORE from efuturevision  


 

These contributions are from Mike Bruns, world class trader. Mike's clear thinking and charts have allowed for many traders to finally "get it". His generous sharing and teachings have helped me raise my level of trading. Reinforcing the concepts of  trading with the trend, his knowledge of the bond market and other markets. Mike also gives after market hours seminars for members, they are exceptional. My personal thanks Mike...NQoos

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Range Expansion Index by Tom DeMark Setup   

Location: With the Trend

Tom DeMark developed this indicator.  He discussed it in his book, "New Science of Technical Analysis," and published articles in various trading journals. He has described the workings of the formula and how to trade it.  Capital West Investment has an excellent reprint of one on their website.  I believe the REI to be so fine, it is one of the few indicators I would pay extra to a software company to have available for use.

The indicator has a buy zone, a sell zone and a neutral zone.  There are two entries that Mr. DeMark presents.  I have a third one that I use.  We shall discuss one of his, which I shall call "Market-On-Bar-Close" and my entry, which I call the "Buy/Sell Stop Method."

We want to take a trade in the direction of the Moving Average (30WMA).  While prices are moving in the direction of the MA, they will begin to retrace in the opposite direction and the REI will follow suit.  First, the indicator enters the zone in the direction of the move and we are preparing to put on the trade.

Market-On-Bar-Close (MOBC) - there are two conditions to be met, requiring 4 completed price bars:

The close of the just completed price bar is in the direction of the MA compared to the close of the previous price bar (called bar # 1).  We enter at the "market" if the next condition has been met.

In the case of a buy set up, the low of the bar # 2 (preceding bar # 1) is below the low of bar # 3 (preceding bar # 2).  Unlike Mr. DeMark, I personally do not require bar # 2 and bar # 3 to have occurred in, what I call, the "zone of opportunity."

Buy/Sell Stop Method - is very straightforward and could involve any number of price bars but usually less than 5.

Place a Stop (or Stop Limit) Order upon completion of the first completed price bar after the indicator has entered the zone for entering the trade in the direction of the Moving Average.  Move the Order to the next completed price bar until the stop is hit and we are in the trade. The initial stop loss is the opposite end of the entry bar or last completed bar.

 

 

This SP mini (ES) example (below)  shows the Moving Average is up, so we want to go long.The REI drops into the Buy Zone.  As we monitor the price action, we see that lower lows have been established.  Then at the bar with the arrow, we prepare for the close > previous close, in the direction of the Moving Average.  Bar # 2 and # 3 have established the precondition.  We enter long, "market" on the close of the arrowed bar.

 

 

In this ES example (below) , the Moving Average is down.  We want to go short.  The REI rises into the Sell Zone.  As we watch the price bars, we note that the condition of higher highs is satisfied (bars 2 and 3).  We wait for the close below the previous close. It comes on the bar with the arrow.  We enter short at the "market."  Our stop loss can be placed at the high of the entry bar.

 

In this SP mini (ES) example (below) , we desire to go long.  The first completed price bar where the indicator enters the Buy Zone is bar # 1.  We place a Buy Order just above it.  The next bar, # 2, is completed and we move the Buy Order to just above it's high.  On the very next bar, the Buy stop is hit and we are long.  The initial stop loss is placed just below the low of bar # 2.

 

This chart (below) shows that we want to go short with the Moving Average.  As the price bars are completed once the indicator enters the Sell Zone, we enter a Sell Stop Order (or Stop Limit).  After each bar is completed, we advance the Order to the next bar.  Three bars are completed and the Sell Stop is hit on the fourth (arrow) bar and we are in the short trade.  The initial stop loss is placed above the last completed price bar.

 

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