LOL..the last time I suggested something similar re volume I believe I was informed that I was breathtakingly superficial..but really how difficult is this when you know what is expected and what is abnormal or unexpected.
Edit by frugi: You were, and the perpetrator suffered the consequences of his rudeness.
http://www.trade2win.com/boards/showpost.php?p=213205&postcount=163
Edit by frugi: You were, and the perpetrator suffered the consequences of his rudeness.
http://www.trade2win.com/boards/showpost.php?p=213205&postcount=163
dbphoenix
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Yes, there are those who will insist that simplicity is superficial. Too easy to understand by those who are less "gifted". But this particular pattern is practically a template by now. You could have played the ES the same way (or even the NQ, if using the ES or YM as "guides"). But as ASC pointed out in his most recent post, you have to know what you're looking for.
--Db
--Db
timsk
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Head & Shoulders
Attached is a recent example of the classic 'Head & Shoulders'. Many traders love patterns like this because they are easy to spot in any time frame. Equally, there are those who steer well clear of such an obvious pattern on the grounds they fail more often than they work. But this one is text book stuff, including truly massive volume when the price crashed through the 'neckline' a week ago today. This, combined with the size of the move on the day, suggests that some traders profited very handsomely indeed from trading this famous pattern.
Tim.
Attached is a recent example of the classic 'Head & Shoulders'. Many traders love patterns like this because they are easy to spot in any time frame. Equally, there are those who steer well clear of such an obvious pattern on the grounds they fail more often than they work. But this one is text book stuff, including truly massive volume when the price crashed through the 'neckline' a week ago today. This, combined with the size of the move on the day, suggests that some traders profited very handsomely indeed from trading this famous pattern.
Tim.
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frugi
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Pretty H&S Tim, certainly no retest of the neckline there. Was there news?
Also a chance to take ...guess what? .... an early 1-2-3 short using some form of the Traders' Trick Entry.
In an uptrend, a bar fails to make a new high, creating point #1 one bar before.
Subsequent trendline break improves conditions for a later short signal (but not short right there cause we're with the crowd and late [5 down bars behind us!], though the brave could scalp).
A point #2 is confirmed by the HL and HH after the hammer. The doji and hammer are quite bullish especially on looking left where there are more similar snapped-up tails so we expect a decent retrace of a few bars, perhaps to kiss the trendline from the underside. Hindsight is glorious, but a reasonable expectation?
So we get a resumption in the direction of the previous trend ending in a #3 high, with lovely symmetry (around 7 bars #1 to #2 = 7 bars #2 to #3) which bounces off resistance at same level as the left shoulder.
But it might go higher still, so we wait for the low of the #3 bar to be taken out as final confirmation.
The market kindly stops us in. Small risk, potential 3+ times reward.
Once in position with a stop just above the #3 bar, there are two targets, first the neckline around 63, then when that broke, the H&S target around 54. Ideal conditions in which to scale out. If the neckline didn't break, we're already in for a profit.
The only problem would be the gap - probably would have had to get in premarket.
If stopped out on that bar, no problem, perhaps the next bar will provide another entry. Whereas If one shorted the neckline break a logical stop would probably equal those of several missed 123 entries, as one is so vulnerable to whipsaw (though not in this case)
No stunner perhaps, but would turn my head all the same.
[The dark green text on the top left refers to an earlier #3 bar which is confirmed by the second (white) doji. This doji's taking out the previous bar's low would be a viable 123 TTE short entry as well, but look where it is - would you take that r/r smack on the neckline?) After that bar there are no false entries triggered till the profitable one.]
Also a chance to take ...guess what? .... an early 1-2-3 short using some form of the Traders' Trick Entry.
In an uptrend, a bar fails to make a new high, creating point #1 one bar before.
Subsequent trendline break improves conditions for a later short signal (but not short right there cause we're with the crowd and late [5 down bars behind us!], though the brave could scalp).
A point #2 is confirmed by the HL and HH after the hammer. The doji and hammer are quite bullish especially on looking left where there are more similar snapped-up tails so we expect a decent retrace of a few bars, perhaps to kiss the trendline from the underside. Hindsight is glorious, but a reasonable expectation?
So we get a resumption in the direction of the previous trend ending in a #3 high, with lovely symmetry (around 7 bars #1 to #2 = 7 bars #2 to #3) which bounces off resistance at same level as the left shoulder.
But it might go higher still, so we wait for the low of the #3 bar to be taken out as final confirmation.
The market kindly stops us in. Small risk, potential 3+ times reward.
Once in position with a stop just above the #3 bar, there are two targets, first the neckline around 63, then when that broke, the H&S target around 54. Ideal conditions in which to scale out. If the neckline didn't break, we're already in for a profit.
The only problem would be the gap - probably would have had to get in premarket.
If stopped out on that bar, no problem, perhaps the next bar will provide another entry. Whereas If one shorted the neckline break a logical stop would probably equal those of several missed 123 entries, as one is so vulnerable to whipsaw (though not in this case
)No stunner perhaps, but would turn my head all the same.
[The dark green text on the top left refers to an earlier #3 bar which is confirmed by the second (white) doji. This doji's taking out the previous bar's low would be a viable 123 TTE short entry as well, but look where it is - would you take that r/r smack on the neckline?) After that bar there are no false entries triggered till the profitable one.]
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dbphoenix
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frugi said:
FWIW, also a 2b trade, perhaps simpler to negotiate. TL is broken, the entry stop is trailed below the subsequent upbars, then the trade is stopped in on the downside.
There is an op for a false entry here as well, but only if one is rigid about the "rules". Knowing nothing else about this, I'd probably take the immediate short in real time and exit on the doji. Better that than guess-'n'-hope.
--Db
timsk
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frugi said:Pretty H&S Tim, certainly no retest of the neckline there. Was there news?
QUOTE]
Oh yes! Q3 earnings release :cheesy: In light of this, your short entry at the end of the day before the release might be too risky for many. On the other hand, if all that is known about a stock is encompassed in its price at any one time and the chart was already looking bearish the day before the release, is it not rather unlikely that the news will be the exact opposite of what is expected, possibly causing the price to do a u-turn and head north?
These are the earnings figures:
GRMN Garmin Ltd. Q3 2005 Garmin Ltd. Earnings Release $ 0.63 $ 0.67 $ 0.58
Interestingly, the actual EPS figure ($0.67) exceeded the estimate ($0.63) and last years figure ($0.58). One wonders what the price might have done had the earnings figures fallen short of expectations . . .
Thanks for the excellent analysis Frugi.
Tim.
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H& S why does this work and why does it not work ?
When it works it is because the H& S pullback from the higher high is in this case a 1:1 retracement of the prior wave..this does two things...firstly it signals that a change of trend is more likely than not (this does not necessarily mean reversal ..it could be sideways and this is important) ,secondly it signals profit taking from the early trend instigators in conjunction with a pullback opportunity for the late arrivals again important.....the right shoulder however may actually form a trend reversal movement or still go into a trading range..this is not known for sure until the move is underway...if you take an entry on a one bar reversal in theory you take minimal risk on your entry...I would say if you take a small delay and take a stop entry on the break of the second bar back forming the right shoulder then you are even less likely to get whipsawed (I have not tested this statistically but have a look for yourselves) ..the caveat on this is the formation of that bar...entry on that bar should still offer 1:1 based on a 1st target at the base of the right shoulder...manage the trade by making sure you are at b/e quickly as the target approaches..two things may happen (but you will already have a good idea of probability by watching the way the bars form on the downleg of the right shoulder) ...one is it arrives at target but resistance forms and repels price back forming a trading range (the H& S failed ..there was still further buying to be done) ..second is it powers past that resistance and sucks in the stops from the former pullback entries of the latecomers..if it does the latter then 2nd target becomes the area for the breakout prior to the H&S and as this approaches either exit on a stop buy , or trail your stop on the high one bar back....there is another option based on a larger move for managing this but it depends on your timeframe..
Another slant on this is to look at the H&S in a larger context..if you think it is forming after one push up it is much more likely to become a trading range that signals the halfway point of the forthcoming move...if it forms as a third push up it is much more likely to be an H&S although end of trend distribution can sometimes come also via a sagging trading range which in itself belongs to a move from a higher timeframe. Again this reinforces the advice of a topdown view.
Good to see people just talking trading ideas without extraneous input.
When it works it is because the H& S pullback from the higher high is in this case a 1:1 retracement of the prior wave..this does two things...firstly it signals that a change of trend is more likely than not (this does not necessarily mean reversal ..it could be sideways and this is important) ,secondly it signals profit taking from the early trend instigators in conjunction with a pullback opportunity for the late arrivals again important.....the right shoulder however may actually form a trend reversal movement or still go into a trading range..this is not known for sure until the move is underway...if you take an entry on a one bar reversal in theory you take minimal risk on your entry...I would say if you take a small delay and take a stop entry on the break of the second bar back forming the right shoulder then you are even less likely to get whipsawed (I have not tested this statistically but have a look for yourselves) ..the caveat on this is the formation of that bar...entry on that bar should still offer 1:1 based on a 1st target at the base of the right shoulder...manage the trade by making sure you are at b/e quickly as the target approaches..two things may happen (but you will already have a good idea of probability by watching the way the bars form on the downleg of the right shoulder) ...one is it arrives at target but resistance forms and repels price back forming a trading range (the H& S failed ..there was still further buying to be done) ..second is it powers past that resistance and sucks in the stops from the former pullback entries of the latecomers..if it does the latter then 2nd target becomes the area for the breakout prior to the H&S and as this approaches either exit on a stop buy , or trail your stop on the high one bar back....there is another option based on a larger move for managing this but it depends on your timeframe..
Another slant on this is to look at the H&S in a larger context..if you think it is forming after one push up it is much more likely to become a trading range that signals the halfway point of the forthcoming move...if it forms as a third push up it is much more likely to be an H&S although end of trend distribution can sometimes come also via a sagging trading range which in itself belongs to a move from a higher timeframe. Again this reinforces the advice of a topdown view.
Good to see people just talking trading ideas without extraneous input.
Ran out of time on the last post ..but here is another trick I like....look at the 'pattern' using the candlesticks collectively..effectively what an H&S is doing as it develops is to form one of the many candlesticks that signify indecision....to see that happening go up to another timeframe now on that timeframe my entry suggested above becomes a break of the centre of the doji where indecision in that higher timeframe is being resolved leaving new longs isolated in the top half of the doji with longs from the low of the doji next in the sights...and again on that higher timeframe does this indecision appear where on the prevailng trend ?
dbphoenix
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chump said:
Nice take on management. Knowing the behavioral dynamics can also be helpful, i.e., buying pressure propels the price into the first high, even more pressure into the second (greed). Then, when the TL is broken (important, otherwise the trader may end up trying to "catch the top" and make a series of counter-trend trades), those few who think this is yet another buying opportunity will push price into the last effort at a new high (hope), which of course fails (fear). Thus the pattern of transactions forms the same pattern as that of price. If one is using "volume bars", they should look the same as the price pattern: a high, a higher high, and a subsequent attempt which is not as high as the first.
All of this helps to ensure that the "pattern" succeeds. Without it, as you point out, one can often move sideways. The particular example provided here is an H&S in form but not in content since the "right shoulder" fails due to an event. End result is the same in this case, but without the event, the probability of moving sideways rather than plummeting is likely different than if the pattern is allowed to ripen naturally.
All of which makes real-time trading so much more challenging (the Fred Astaire approach to trade management
)--Db
Another chart for comments. First my verbal interpretation of what I 'think' is going on .
W/c 2/9/05 Utilities were marked up. w/c 9/9 onwards was distribution. My view these are capital intensive and very susceptible to the increasing cost of capital ,but can be hedged by other asset groups of which gold is one.
W/C 16/9/05 transports down move stopped at prior level of accumulation. W/C 28/10/05 start of transports being marked up. If this really is a top reflecting the increase in short term rates that normally precedes same then we should now see the start of distribution of transports and the use of rallies to distribute to inflation busters in resources etc. If transport distribution takes out earlier lows of accumulation we should then see distribution of resources as the last lagging leg of distribution ,but whether that happens I would say depends on short term interest rate cycle.
Pick holes by all means I have no claim to 'rightness' on this stuff.
By the way when I say "see distribution of transports" that does not mean they not yet make a new high ,it just means that high will be in the wrong hands.
You'll have to correlate my dates above by reference to your charts for utilities and transports.
My chart above is is really just to show the inter relationship with other asset groups .In this case gold. And just drawing trend lines through the 'meat' of the action where the breakouts occur I find helpful as I think the extremes are irrelevant in trying to get the bigger picture of what is happening.
W/c 2/9/05 Utilities were marked up. w/c 9/9 onwards was distribution. My view these are capital intensive and very susceptible to the increasing cost of capital ,but can be hedged by other asset groups of which gold is one.
W/C 16/9/05 transports down move stopped at prior level of accumulation. W/C 28/10/05 start of transports being marked up. If this really is a top reflecting the increase in short term rates that normally precedes same then we should now see the start of distribution of transports and the use of rallies to distribute to inflation busters in resources etc. If transport distribution takes out earlier lows of accumulation we should then see distribution of resources as the last lagging leg of distribution ,but whether that happens I would say depends on short term interest rate cycle.
Pick holes by all means I have no claim to 'rightness' on this stuff.
By the way when I say "see distribution of transports" that does not mean they not yet make a new high ,it just means that high will be in the wrong hands.
You'll have to correlate my dates above by reference to your charts for utilities and transports.
My chart above is is really just to show the inter relationship with other asset groups .In this case gold. And just drawing trend lines through the 'meat' of the action where the breakouts occur I find helpful as I think the extremes are irrelevant in trying to get the bigger picture of what is happening.
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dbphoenix
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chump said:
It's worth noting that the strength in Transports is centered in Trucking, specifically CHRWD, CNF, and LSTR, though BNI (Railroads) and EXPD (Delivery Services) are also strong. Therefore, anyone looking for distribution would do well to monitor these stocks first.
--Db
timsk
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Trending Stock
For those that don't want there to be any doubt about the trend of the instruments they trade and like to see a well defined channel with a range that's wide enough to extract a decent profit from, then the attached monthly chart of Praxair Inc. should float your boat!
Tim.
For those that don't want there to be any doubt about the trend of the instruments they trade and like to see a well defined channel with a range that's wide enough to extract a decent profit from, then the attached monthly chart of Praxair Inc. should float your boat!
Tim.
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timsk
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Hi Db,dbphoenix said:
A very good question and one that any trader wanting to trade an instrument displaying similar characteristics to these must ask. For me, the upper channel line is largely irrelevant as I wouldn't seek to fade the long term trend. (I'm assuming a 'swing' or 'position' trade here, given that we're looking a monthly chart). My focus would be on the trend continuing with the view to opening a long position. As I have never traded off a monthly chart, I can't answer your specific question as to when I'd begin to extract a decent profit. That said, if I saw this chart in July of last year as the price approached the $40 mark and having made two earlier swing lows in Sept 03 and May 04 respectively, I would want to put the stock on my watchlist and study shorter time frames.
Do you have any answers to your own question?
Tim.
timsk
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Well, if I had to make a call - with the benefit of hindsight - I would go long on the large bull candle of October 04 as it broke to new highs around the $32 mark.. August and September were both inside months, following the large bull candle of July which indicated that buyers have come out on top following a fairly even handled battle in June where the price spiked to new highs.dbphoenix said:
Perhaps someone who trades channels in a strong trend can offer some alternative ideas?
Tim.
charliechan
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dbphoenix said:Nice take on management. Knowing the behavioral dynamics can also be helpful, i.e., buying pressure propels the price into the first high, even more pressure into the second (greed). Then, when the TL is broken (important, otherwise the trader may end up trying to "catch the top" and make a series of counter-trend trades), those few who think this is yet another buying opportunity will push price into the last effort at a new high (hope), which of course fails (fear). Thus the pattern of transactions forms the same pattern as that of price. If one is using "volume bars", they should look the same as the price pattern: a high, a higher high, and a subsequent attempt which is not as high as the first.
All of this helps to ensure that the "pattern" succeeds. Without it, as you point out, one can often move sideways. The particular example provided here is an H&S in form but not in content since the "right shoulder" fails due to an event. End result is the same in this case, but without the event, the probability of moving sideways rather than plummeting is likely different than if the pattern is allowed to ripen naturally.
All of which makes real-time trading so much more challenging (the Fred Astaire approach to trade management
--Db
have you ever considered that greed & fear are in fact the same thing in a trading sense?
Without any chart I can tell you my strategic view that incorporates the psychology you are referring to CC...,it's very simple actually.
Always fade the area of disbelief when the rational view of risk to reward ratio based on support & resistance tells you that that disbelief is probably wrong (fear) (emphasis "probably") . use that fade to exploit the transparent area of trades where belief kicks in and confirms the belief you had when you entered the trade. Exploit the irrational belief that good times last forever (greed) that is held even when the current rational view of risk to reward tells you that the contrary is more probable to be true.
That's it , simple quants and psychology. What's a rational view on risk to reward ? If you risk more than your reward you're perhaps working a strategy that is based on your psychological need to be right rather than one based on optimising return. Granted there are exceptions to that that are logistically driven.
Always fade the area of disbelief when the rational view of risk to reward ratio based on support & resistance tells you that that disbelief is probably wrong (fear) (emphasis "probably") . use that fade to exploit the transparent area of trades where belief kicks in and confirms the belief you had when you entered the trade. Exploit the irrational belief that good times last forever (greed) that is held even when the current rational view of risk to reward tells you that the contrary is more probable to be true.
That's it , simple quants and psychology. What's a rational view on risk to reward ? If you risk more than your reward you're perhaps working a strategy that is based on your psychological need to be right rather than one based on optimising return. Granted there are exceptions to that that are logistically driven.
