Oh dear another silly ramble
Context is king. That is the trite phrase that has been reverberating around my thick skull for the past few months, like Widor's Toccata might to the nervous young organist due to perform it.
Interpreting the condition of the market is the grail, as far as I'm concerned. If you know what is going on inside the auction house then suddenly all your superficial triangles, support levels, OBV, time series, higher lows and volume bars become but minor figures on a frustratingly inaccessible but far more wondrous canvas than I have on my screen at the moment. Cliche alert #1 - the map ain't the territory; the former static, the latter fluid.
Who has taken positions where, when and why and what are they likely to do if x happens?
What needs to happen to allow the fox to feed safely and how (if he accepts the R:R) will he prod things in that direction? Can he do so at the moment? In fact is he feeding right now, covertly, under your nose and at your expense?
What is the cause of (change in) market condition that provoked recent decisions by all groups of participants?
What is true nature of the current move? Is it an emotional high velocity ride, an agonisingly slow grind, a trap or a genuine indication of a supply/demand imbalance that is likely to continue for some time (lots of fuel supplied by all), to name but a few?
Why are we consolidating? Who has to feel pain and where to break out (given from whom to whom stock has been subtly transferred, or not)?
f I wanted higher prices but needed to check that there weren't a bunch of sellers to dampen my profits what would I do?
Where are the past levels of high volume activity and what should one expect when they are touched upon again?
There is unexpectedly rapid trading in a light market, yet the price only moves a tick or two - why? etc.
I could make up abstract, irritating questions like this all day long and fail to answer most of them satisfactorily.. But they are important I think.
People who can genuinely do price and volume do not go for a leisurely cup of tea then glance at a bunch of candles with the volume bars of a certain size below and go ... ah right we've had a volume climax and a hammer so there must have been professional buying so if there's a higher low on lower volume I'm going to buy. This will work quite often, as it might well if there's a LL on lower volume instead, but surely the transactions that form these bars have to be watched pretty much from start to finish for a reasonable conclusion to be drawn? This is a genuine question. While I believe that assessing the conditions cannot be a matter of instantaneous analysis, I like to think that with intricate reasoning and concentrated observation it is possible to watch the flow of present transactions with regard to the background and, if you like, reverse-engineer the smart money (and the numpties, for that matter, for they supply a large % of the fuel). If the truth dawns then the former can be joined at the earliest opportunity, long before the crowd. People who say you can't pick close to tops and bottoms are the ones who don't know how. I would almost give up trading tomorrow if I didn't believe that.
The foxes wait very patiently, let the crowd do their work, often suss out the ongoing mood of the crowd at little cost to themselves and only dive in when conditions are appropriate. Once the mood is judged satisfactorily savage action can be taken if there is little resistance to the likely result. Test in quiet conditions ... demand? Yes, good, already long. No, ok short the bejesus out of it. Markets need fuel to move, to batter the weak hands and transfer their wealth to the strong ... and guess who provides it. The smart coat tails dbp had mentioned are key to being on the right side and laughing at the shakeouts and traps.
Sorry I've totally wandered off the point.
I meant to provide an example of 'what was supposed to happen, didn't' to complement Bramble's initial post.
After a reasonable morning, I was caught out this afternoon twice by my poor "past" interpretation of price/volume patterns.
My mistake was of course to view the patterns in isolation and assume that the same pattern will apply in a different context. It won't, necessarily, because the chart can only show a singular dimension, the effect of any number of (often devilishly difficult to detect) causes. Sure, in a simple sense, an up bar means buying pressure won the period. But why? And who? The subtext is apt to stay hidden. Just as the map that draws Everest with lots of dramatic tight contour lines doesn't prepare you for the breathtaking beauty of a first hand view from the top. The trouble is to see it, you have to climb up there. Anyway I labour the point.
My first two longs could have been sweet on another day, in another context. I look for low volume tests approaching the low of a previous hammer, the nearer the low the better. I use a couple of other bell and whistle criteria for "confirmation". In this mechanical pictorial sense, the p/v pats looked good. But it makes me cringe applying such static criteria to a fluid market as I know it doesn't work so predictably and in a strict linear fashion.
I admit that some of the bells and whistles should really have kept me out. I look for divergences with price and they were lacklustre or virtually non-existent. So, a shameful lack of discipline there. Also the wider obvious mechanical context I've included on the chart should have convinced me to consider shorts not longs, at least at that stage of the trend. So in some way, my discretionary filter and comprehension of market condition wasn't far off - rather I failed to act appropriately as all I could see in my greed was the juicy setup in isolation.
Still, keeping the risk (stops) small allowed the third entry to get me to roughly b/e. So all well and good - if sloppy - but not what I really seek: endless robotic repetition of fixed patterns on a page. Or is what I seek impossible? I just hate the idea that trading comes down to a mere appreciation and application of probabilities ... I'm not a quant and I refuse to believe the market must be reduced to mathematical expectancies ... there's no passion involved, no empathy, no real puzzle.
"Define and test your setup" is our mantra. Excellent advice, but what is a setup? It can be anything from a humble RSI 'overbought' condition to a huge confluence of signals, conditions and nuances, that would I suspect be nigh impossible to explain in conventional language, let alone write down in a logical order that a computer could act upon. It is the latter type of setup I seek, the type that varies tantalisingly with the swell of the market. Two of these may look identical to the superficial viewer, but their result can be completely different, pre-empted only by those prepared to dig more deeply into their causes.
I wonder if this distinction is an art / science one. A "creative" divide between the two might explain why so many seem to deny that the pure discretion I am unsubtly hinting at can be done, because they are simply not wired that way. Anyway I witter and lose clarity.
