Trading Price

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dbphoenix

Well-known member
Aug 24, 2003
6,905
1,149
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#1
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 . . .

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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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dbphoenix

Well-known member
Aug 24, 2003
6,905
1,149
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#2
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?



If you’ve read the material on Auction Market Theory in the SLAB, then you know what you’re looking at. If you haven’t, or haven’t yet, then you probably don’t. In a nutshell, market dynamics are largely a matter of traders looking for value, and they most often do that by looking to see what everybody else is paying for whatever it is. Since nobody wants to pay more for something than what it’s worth, and everybody loves a bargain, what is everybody else paying?

Here you see bulls driving price up past 4810. Then bears drive it back down below 87.5. As with so many things, the most likely answer is the compromise, the meeting of the minds, the “let’s split the difference”, or, in mathematical terms, the median, in this case a horizontal line that coincides with the “u” in “Supply”. At first their efforts are relatively broad, but they always return to that median. As time and trading efforts wear on, the range between highs and lows narrows to less than ten points (4805 to about 4797) and the median, value, where most of the trades are being consummated also shifts slightly (where I’ve typed “median”), the point being that as long as traders are circling around this median, there’s really nothing for you to do but watch. Or perhaps set an alarm to alert you that price is exiting the range while you go make a sandwich. There will be an opportunity for you to enter a trade that might actually go somewhere, but this isn’t it. Not yet.
 
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dbphoenix

Well-known member
Aug 24, 2003
6,905
1,149
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#3
Where is the Trading Opportunity?



When price eventually exits that tight little range, as it inevitably must, it travels downward to the swing low posted at 1000 the previous day. Is this a trading opportunity? Maybe. What happens next?



Note that when price hits that swing low, it puts in a double bottom. This is generally a signal that buyers are stepping up to the plate, and this is confirmed by a series of higher highs and higher lows. However, it can’t get past 97.5 before the stride is broken and price retraces some of its advance. But even this decline is soon broken and reversed, segueing into yet another range, this one with a median only six or seven points lower than the median you had before this test and bounce. So here you are, having made perhaps a few points, but twiddling your thumbs again waiting for price to bust out in one direction or another so you can “let your profits run”.

Should you not have taken that long off that double-bottom bounce? Of course you should. It was a perfectly good long, and price could have just kept on going, running for daylight. And it may yet do so. But in the meantime you have to consider your risk and protect yourself, waiting for the right opportunity. You have no losses to cut short, but neither is “letting your profits run” in the picture. So disciplined you sits. And you waits.

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 stratagem.

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.

So, again with regard to the aboveposted charts, how did we get here?



One could start anywhere, but the "Brexit reaction" at the end of June 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 (a month later, in fact, price plunged 200pts and subsequently rallied 250+; ah, election season). Trading price successfully means, again, never losing sight of the fact that one is actually trading behavior, the behavior of other traders.
 

dbphoenix

Well-known member
Aug 24, 2003
6,905
1,149
223
#4
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.



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.



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.



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 tick 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?



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, whether that morning, the previous day, the previous week, the previous month. 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 (rising wedges, heads and shoulders, black crows, white soldiers and on and on and on). Rather it is about observing and tracking these transactions -- whether by seconds or minutes or days or weeks -- 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.


There are those who think they are studying the market, when all they are doing is studying what someone has said about the market, not what the market has said about itself.

--Richard Wyckoff