Trading Price

This is a discussion on Trading Price within the Trading Journals forums, part of the Reception category; Trading price requires a perceptual and conceptual readjustment that is somewhat like parting a veil -- or taking the red ...

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Old Aug 11, 2016, 12:29am   #1
 
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Trading Price

Trading price requires a perceptual and conceptual readjustment that is somewhat like parting a veil -- or taking the red pill -- in that doing so enables one to look at the market in a very different way, one might say on a different level.

One must first accept the continuous nature of the market, the continuity of price, of transactions, of the trading activity that results in those transactions. The market exists independently of you and of whatever you're using to impose a conceptual structure. It exists independently of your charts and your indicators and your bars and your fanciful shapes. It couldn't care less if you use candles or bars or plot this or that line or select a 5m bar interval or 8 or 23 or weekly or monthly or even use charts at all. And while you may attach great importance to where and how a particular bar -- or candle -- closes, there is in fact no "close" during the market day, not until everybody turns out the lights and goes home (if you trade futures. there's no close until the end of the week).

Therefore, trading price, or at least doing it well, requires getting past all that and perceiving price movement and the balance between buying pressure and selling pressure independently of the medium used to illustrate the activity.

For example . . .

Click the image to open in full size.

After 10 hours of moving sideways, a rally is staged on Friday that takes price all the way to 4798. This is a point of interest because this is where buyers were no longer willing to pay the ask. Price then drops to 82. This is a point of interest because this is where buyers found what they considered to be value and not only stopped the decline but advanced price on Monday 19pts. Price then drifted down through 82 for 16pts to 4766, relatively equidistant from 82.

Interesting.

Price then rallies at the end of the session to . . . 82. Price then anchors itself to this level for sixteen hours, rallies a bit, hits 82 hard at 0930 and rallies to 4808, after which it drifts down to . . . 82. Price then rallies during the next eleven hours to a point that is within a couple of ticks of Monday's high, then declines, today, to a point that is within a few ticks of Monday's low, after which it returns, like a swallow to Capistrano, to . . . 82.

So what is it with 82? Who knows? Who cares? Finding the trading opportunities begins with (1) recognizing the footprints of demand and supply, (2) determining the level at which traders are finding value, i.e., finding trades, in this case, 82, the level at which the vast majority of trades are taking place, and (3) detecting how far away from value traders are willing to go in order to profit from the risks they're willing to take. If one understands the characteristics of a range and how to find the median, all of this dovetails nicely. If one doesn't understand any of it, the movements appear to be random, mysterious, a series of traps set for the unwary and the unprepared.

Complicated? No. Complex? Slightly, depending on how well one understands the behavior of buyers and sellers. Trading price is, after all, about trading behavior, and the more sensitive one is to the nuances of trader behavior, such as an increasing reluctance on the part of buyers to pay the ask, the more successful he will be in trading price.
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Old Aug 12, 2016, 1:13pm   #2
 
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dbphoenix started this thread Standard advice: let profits run and cut losses short.

Are these the conditions under which one is most likely to be able to let his profits run?
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Old Aug 12, 2016, 4:52pm   #3
 
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dbphoenix started this thread Where is the Trading Opportunity?
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Old Aug 13, 2016, 11:30pm   #4
 
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dbphoenix started this thread With regard to the aboveposted charts, the advice to "let profits run" may ring hollow. Profits can't run very far after all when price is range-bound. But this range-bound state is only one of two, the other being trending, an environment in which profits have plenty of opportunities to run.

It pays to know when to back away from the "let profits run" state of mind. Otherwise one can end up holding on to trades that should be set free, or, worse, widening one's stops. One can also easily slip into over-trading and give back a substantial portion of his profits in commissions.

There's a time and place for every strategem.

Price is in a continual state of flux between trending and ranging, and while a trend can last from seconds to years, the transition from one state to another is always the same, and dozens of examples are unnecessary (though I've posted hundreds, if one really wants to search them out).

Trading price profitably begins with determining the context, i.e., what is the market doing outside the intraday world, daily, weekly, monthly, even yearly? By studying the illustration of activity that is a chart, one can (1) assess whether buyers (demand) or sellers (supply) are in charge (price is going up or down) at any given interval, (2) determine how active they are (volume*), how quickly price reaches its destination (pace), how far each buying or selling wave goes (extent), how long each of these lasts (duration), where and how and for how long traders come to rest (equilibrium). Daytraders often consider this to be a waste of time since the trading that begins at the opening bell so often seems to have little to nothing to do with what price was doing overnight or where it was going. But this sort of analysis will at least provide one with a sense of the "tone" of the day, even if that amounts to no more than his first trade. After that, one must follow price, wherever it leads, though price has a tendency to halt at points and levels that were important at previous intervals and even take off in the opposite direction (see the aboveposted charts). If one has not even scanned these points and levels, price is likely to take off without him. leaving him wondering what just happened. He may even find himself taking the wrong side of the trade, an all-too-common occurrence.
*If one is observing trading activity in motion, either real-time or delayed or via replay, developing the ability to assess the quality of activity without relying on volume bars is relatively easy, and abandoning the volume bar streamlines the decision-making process.
So, again with regard to the aboveposted charts, how did we get here?

Click the image to open in full size.

One could start anywhere, but the "Brexit reaction" illustrates all of the above considerations. Note that after price bottomed (that is, The Money slowed, halted, and reversed the decline), it rose 400pts, with only one retracement, in a nearly-straight line. Price then altered its angle, taking nearly twice as long to get half as far. The market is sending a message. For a variety of reasons -- profit-taking, lower-quality buyers, etc -- the "move" is getting long in the tooth. "Letting profits run" becomes more of a challenge, particularly if one is using relatively tight stops. Intraday moves are not as dramatic. There's a lot more back-and-fill. Eventually price segues into an equilibrium state and can either bounce around without apparent rhyme or reason or form a range with clear-cut upper and lower limits that provide relatively easy-to-trade trading opportunities. The most obvious responses to the messages the market is sending include at minimum modifications of goals, one's risk profile, and expectations in general. At the same time, one must understand that price won't trade in a range forever and be alert for those signals, those messages, that it's time for price to move on. Trading price successfully means, again, never losing sight of the fact that one is actually trading behavior, the behavior of other traders.
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Old Aug 14, 2016, 11:43pm   #5
 
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dbphoenix started this thread When you're trading tomorrow, or perhaps even this evening, keep in mind that the vast majority of daytraders and the industry that "supports" them -- "technicians" who write articles for the "financial press", authors of a wide variety of books targeted to the gullible, bloggers, vloggers, gurus of all stripes -- are trading (writing about, selling) an optical illusion. And even though this illusion is only thirty years old, it has become so widely entrenched that it has assumed the status of being self-evident, "the thing speaks for itself", i.e., the facts are so obvious, one needn't bother to explain further. But harkening back to the first post in this thread, this optical illusion is in effect the blue pill, an alternate reality that has no substantive basis, one to which the amateur trader is particularly susceptible given the general and pervasive mystery surrounding the financial markets and given that there is no generally accepted route to understanding them (this is not to say that such a route does not exist, only that the route is not generally agreed-upon).

The following is not fly poop. It is a tick chart, a record of transactions between buyers and sellers. It is the "footprint" of price and thus price movement over a 15-minute span of time. There is no "buy volume" nor "sell volume". There is only the transaction between a buyer and a seller, the result of their negotiations. Price rises because of demand. It falls due to lack of it. If demand is strong, price may move quite far quite rapidly. If demand is so-so, price may still move generally upward, but in a more "grinding" fashion. But without demand, price won't move at all.

Click the image to open in full size.

Perhaps the first thing one notices is that there are no bars, much less candles. Nor is there a rainbow of colors, nor shapes, nor anything squiggly. But there are gaps. Lots of gaps. This is due to the likelihood that any given transaction will probably be more than a tick away from the previous transaction. Some of these gaps are highlighted below.

Click the image to open in full size.

One particular gap that I would like to know about occurs when price leaps up into a cluster of trades. And the cluster itself is also interesting, largely because there's no follow-through. Absent follow-through, price plunges back through that gap and bounces around a bit before ending the interval just above the low it printed during the interval.

Click the image to open in full size.

None of which one knows anything about by being presented with a bar or candle. One may as well be navigating a darkened room at midnight with no moon and a flashlight that keeps cutting out.

One cannot have a bar, or candle, without an open, a high, a low, and a close. But as should be obvious from the first chart, there are no opens and there are no closes. The notches that appear to the left and right of the bar, equivalent to what is provided by a candle and is of no substantive difference, are purely arbitrary, provided by the tick of whatever clock is being used. But nothing stops or starts during the session. The trading is continuous. Not only that, the software connects these prints with a line, encouraging one to believe that he's seeing something of importance when in fact what he is seeing is nothing more than connect-the-dots, an invention of software engineers. Rather than providing the trader with information, it is instead hiding it from him. And whether it's red or green or plum is of no value whatsoever.

I've divided this chart into 1m segments, but it should be clear that the segments could just as easily be 65 seconds. Or 40. Or 8 or 90. The 1m and 5m and 15m intervals which became standard on all charting programs are as much an invention of software engineers as the lines that are used to illustrate the intervals. This is not to say that these bars/candles and intervals don't provide some comfort to those who have come to rely on them. But they can be death to the trader who is trying to trade price. Note, for example, the bars illustrated in the chart below. Each of these bars encapsulates the trades that occurred during that particular interval (the multiple opens and closes are the result of the tick straddling the line from the previous minute to the following minute). The 5m bar to the far right encapsulates all the 1m bars. Now compare this to the first tick chart above (the fly poop). Which of these charts provides you with the greater amount of information on what traders are doing and where they're doing it and how fast they're doing it? Which provides you with more information regarding what traders are trying to achieve and what they are trying to avoid?

Click the image to open in full size.

None of this is to imply that the trader trading price is required to trade off a tick chart. The chief difficulty is the lack of context. One can easily get lost in these transactions. Context provides the anchor. But assuming that one is trading live, he can at the very least not be distracted by the connect-the-dots illusion, focusing instead on the transactions themselves. By doing so, he can "see" these gaps, even though they are being disguised by the bars or candles or whatever sorts of lines are being drawn by his software.

Trading price, then, is not about bundling seconds or minutes or ticks or trades or bundling anything at all, nor is about overlaying yet another moving average or some other indicator that allegedly tells you what you're looking at, nor is it about detecting patterns or shapes (the Bunnies In Clouds phenomenon). Rather it is about observing and tracking these transactions in order to arrive at a well-reasoned assessment of what traders are trying to accomplish and how they're going about it. Once one is "in synch" with all of this, he is far more likely to achieve a profitable trade.
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Old Aug 15, 2016, 7:29pm   #6
 
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dbphoenix started this thread Compared to intraday trading, interday trading -- chiefly daily and weekly charts -- is a day at the beach, mostly perhaps because one doesn't have to glue oneself to the screen and follow price prints in order to gain a sense of and become in synch with the price flow. The daily chart, for the most part, has a beginning and an end (one exception being futures, which trade 24/5). And even though access to pre-market and post-market trading makes these beginning and ending times a bit fuzzy, they at least bookend the trading session. Professionals, after all, lock up and go home at the end of the day, so the pressure is off to a large extent for those who'd prefer not to spend every waking hour obsessing over the market. Yes, all those price prints are still there on a molecular level, but there are so many of them by the end of the day that the line/bar/candle that is created is not so much the connect-the-dots of the intraday as it is a genuine summary of the day's activity. As such, somewhat different interpretative talents are required.

There are never too many examples of these talents and skills being applied to the interpretation of daily and weekly price movements, but the "enough" point is different for everyone (and many who believe they'd had enough to move on and begin trading what they learned often go back after direct experience having determined that they aren't as ready as they thought they were; so it's back to the well, or the trough, for further study and practice). The best of these interpretations comes from one of the pioneers of trading price, Richard Wyckoff. He analyzed an entire year of a major market average, and the seventeen pages of his analysis amount to a course in the interpretation of interday price movement. The price trader who studies this once a week will be several levels ahead of others who cling to the guru-wannabees who go on for hundreds of pages and yet don't explain any of it as well as Wyckoff does in seventeen.

Posted below is the beginning of his analysis along with the accompanying chart. If you find it interesting and even helpful, the entire analysis is provided in pdf form following.
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Old Aug 17, 2016, 12:16pm   #7
 
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dbphoenix started this thread The struggling trader quickly comes to the conclusion that the best entry for the trade currently under examination invariably occurred an hour ago. Or yesterday. Or two days ago. Or last week. He somehow never sees them in real time, either because he’s focused on himself (“where do I enter?”) rather than on price movement. Or because he’s laid so much junk on his chart that he can’t see the forest for the trees. Or because he hasn’t prepared properly or thoroughly, and though he may think he knows what to look for, he doesn’t know where to look for it. The trader who is stuck in The Land of CouldaWouldaShoulda may find a leg up by understanding just who it is that he’s trading with (with, not against). Trading the auction market profitably requires more than a knowledge of how to draw a trendline or a box. One must also achieve some understanding of the participants. One of the more extreme examples is the scalper vs he who focuses on weekly charts. If the trader wants to hold something for more than a few minutes, much less a few hours or days, he must understand that focusing on the 5s chart is a waste of time and effort in that those who are also focusing on that chart or a T&S display have no interest in hours and days. The trader who hasn’t thought out his goals thoroughly is therefore out of synch with the market from the getgo. This is not a recipe for success.

There is also the matter of Who’s Got The Money to consider. Scalpers are undeniably busy, but they don’t move markets. They’re not the ones who are providing preliminary support to price as it falls. They are not the ones with the power to engineer sustained breakouts. They are not the ones who engineer trends. If one then wants to trade with the flow of bigtime money, which is arguably a more efficient and profitable method of trading than swinging at shadows, then he needs to understand what bigtime money is looking at. If he can also acquire an understanding of what bigtime money is most likely to do with it, he’ll be in a far more secure position that just about every trader out there, including some of those who have bigtime money but manage it poorly.

One must remember that the more obvious the movement, however it is displayed, the more people there are who will see it. Therefore, if one trades EOD (end of day) using daily bars, he's going to have an awful lot of company. Everybody sees that. Everybody. But if he's trading 5-second intervals, not so much. Therefore, he's more likely to take quick profits because the trading crowd he hangs around with is generally not in this for the long haul. This is NOT to suggest that each and every trade should -- much less must -- be taken off a long-interval chart: daily, weekly, whatever. The point is that the trader should be aware of what all the various players are focusing on and use that awareness to his advantage. Whatever interval one is trading, it pays to know what everyone else is looking at and enter at those points and levels where the larger group or groups is/are mostly likely to join in and propel the trader into profit. Trading in a vacuum is not only inefficient but generally unprofitable. Taking one’s cues instead from the actions of those who are actually moving price is far more likely to lead to a satisfactory result than just plunging in and hoping for the best.

That not every group of traders is looking at the same thing is most easily understood by noting the level of trading activity: the fewer participants, the less activity; the more participants, the more activity (for the purpose of getting through this, we won’t quibble about the differences between transaction volume -- number of transactions -- and share volume -- number of shares changing hands; in terms of price movement, it really doesn’t matter). In other words, if everybody is looking at the same thing, such as a major parabolic move, then everybody is trading and there’s tons of activity. But if the money players aren’t paying attention, aren’t interested (as they wouldn’t be in itty-bitty movements on a tick chart or T&S display), then there’s much less activity. When the little players notice the big moves that are initiated and sustained by the big players, they join in (if they’re smart; the stupid ones will short the upmoves and buy the downmoves in the fond belief that they’re smarter than they really are, thus adding fuel to the moves they’re taking the opposite sides of).

It should come as no surprise that those who daytrade are interested in different intervals and timeframes than those who trade off weekly charts and those who scalp, the latter likely not using charts at all. If one is unaware of what those who are interested in longer timeframes are doing, whether or not the latter use charts (even if they don’t, their actions will show up on the chart), he will in effect be trading blind. He may also find himself attempting to negotiate his way through a lot of chop, as a working definition of chop can be a lack of participation of those who are interested in longer timeframes. If, on the other hand, he is aware of those circumstances and conditions under which longer-term players are most likely to enter the market -- new daily and weekly highs, climax highs and lows, breakouts from major ranges -- then he is more likely to enter and profit from those trades that take off and never look back (the scalper can’t be depended on for these as he is out in minutes, if not seconds).

Those who have yet to grasp the importance of the continuity of price may catch a glimmer of understanding here given that traders/investors with longer timeframes don’t give a rat’s ass about bar intervals. Or bars themselves, for that matter. Much less candles. They are interested in getting from here to there. How they get there or even how long it takes them to get there is not of consuming interest. But, as mentioned above, their actions can be detected and monitored on a chart, which, after all, records transactions. If one is daytrading, he will be interested in a smaller interval, i.e., something less than a day. If he can adjust his focus to keep his attention on these influential moves and ignore what the scalpers and the assorted clueless and fearful are doing, he can marshal his smaller intervals into a profit-generating army. The question of “Where Do I Enter?” becomes much less important, even trivial, depending on what ball one is keeping his eye on.

(to be continued)
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Old Aug 17, 2016, 7:46pm   #8
 
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dbphoenix started this thread Daytraders are constricted. In order to be daytraders, they must trade during the day, generally during the hours during which the market is “open” (this doesn’t apply to futures, which are open all week, but daytraders will still initiate and complete their trades within a day; otherwise, they’re something else). They have the option of not trading at all during a particular session, but how many daytraders, not to mention scalpers, will/can go an entire session without trading, much less two or three?

The longer-term trader, however, particularly “The Money”, can indulge himself in the luxury of waiting until the circumstances for which he is waiting coalesce, until the conditions for a profitable trade are just right, until his ducks are in a row. The daytrader who understands this and knows what to look for and who can control his impulses can enjoy more of those trades which simply take off, cleanly, presenting no issues of recoil or of being “stopped out”. The daytrader who doesn’t understand this and hence has no idea what to look for finds himself quite often trading chop because he’s trading with others whose timeframe is even less than his: he’s looking for points while they’re looking for ticks (and there are of course the legions of ill-prepared who are happy to take whatever they can get, which is generally a collection of small losses).

Traders who have longer-term timeframes and traders who have shorter-term timeframes are fated to trade at cross-purposes only if the shorter-term traders don’t understand and accept that it is not they who are in charge. They just don’t have the money. And it’s money that moves markets. Shorter-term traders who understand that they are reactive will cultivate the patience to wait for those moments when traders trading more than one timeframe are all trading together and exploit that behavior for their own benefit. This dynamic can be seen most days when traders in more than one timeframe seek direction during the first thirty to ninety minutes. If nothing’s happening, they withdraw, and price drifts sideways for a while, sometimes for the rest of the day. The short-term trader who doesn’t understand what’s going on will try to force a trade out of this and will end up with little to nothing, or even a loss. The short-term trader who does understand what’s going on will sit on his hands and wait, and observe, and look for those clues which indicate that several categories of traders in several timeframes are on the same track and travelling the same train. This is most clearly seen during climactic highs and lows, when practically everybody is on the same track going the same direction but is also seen in the more low-key breakouts that often occur after extended sideways drifts during the morning session.

Does this “work” every time under all conditions in all circumstances? Of course not. Longer-term traders don’t all share the same goals, much less exactly the same timeframes. Nor does any given longer-term trader have the same goals every day, every week, every month (maybe he’s decided to spring for that Lamborghini). Various groups of traders with varying timeframes are continually assessing and re-assessing the state of the market just like anyone else who is engaged in it, including “fundamentalists”. But the trader who is aware of this phenomenon and who monitors the activities of those who trade timeframes other than his own, at least by watching weekly and daily charts, will be far less likely to be surprised by what other traders, including those who trade longer timeframes, are doing. He may even be able to anticipate where these traders will stall, will back off, will drift, will reverse a movement, will break out. Understanding the synergy of multiple timeframes is part of what makes an edge robust, and the trader who strives for this understanding will not be caught off-guard by a reversal off a previous day’s or week’s high or low, nor will he be thrown by climactic moves that to others are coming out of nowhere. At the very least, he will understand when and where and why traders following other timeframes are trading with him and when they are trading against him.

An example. This up-down-sideways phenomenon does not occur before every single session, but it occurs often enough to warrant a place in the trader’s prep. Here one sees a range formed Sunday night followed by another, slightly higher, that runs from late Sunday night through Monday morning. When European markets open, traders move price down to see where buyers will see value and support price. Price then moves upward to whatever point buyers are no longer willing to pay the ask. This form of “price discovery” provides the bones for a new range. Price then travels down the center of this range all the way to the open, a sort of preparedness.

Click the image to open in full size.

A half-hour before the open, price begins drifting down toward the lower limit of this range. At the open, it “thrusts” its way through this limit, but there’s no interest down there. So price reverses and looks for the line of least resistance, which happens to be up.

Click the image to open in full size.

The same up-down-sideways dynamic was illustrated on Thursday. There was no test of the lower limit here until Friday morning, but price then came within a point of Thursday’s low before reversing to the upside.

Click the image to open in full size.

These moves are not accidental. Nor are they random.
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