Trading Price

[dbphoenix]

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 . . .

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.

 

[dbphoenix]

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.

 

[dbphoenix]

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]

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

 

[dbphoenix]

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 nineteen 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 nineteen. See the pdf attached below.

 

[dbphoenix]

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 launch 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).

*About this “timeframe” business. Back in the day, “timeframe” referred to how long one intended to hold whatever it was he held: days, weeks, months, years, death. How long he intended to hold whatever it was pretty much dictated what charts he looked at, if any (fundamentalists often do not look at charts at all): daily charts, weekly charts, monthly charts. “Timeframe”, in other words, refers to the frame of time in which one is trading. If one intends to hold for years, his timeframe becomes years. By the same token, the timeframe of a daytrader is, of course, a day. Or perhaps a portion of a day, such as the open until 1000, or noon until 1400. That portion is the frame around the time in which he is interested in trading. A 5m bar or candle, on the other hand, is not a timeframe. It is a bundle of however many trades were consummated during that five minutes. It is a timeframe only if the trader is entering and exiting his trades within that five minutes. If the trader generally trades for four hours, then four hours is his timeframe. How he chooses to display prices during that four hours -- 5m bars, 3m candles, 15m whatevers, a “line on close”, a moving average with individual ticks “hidden” -- is irrelevant. What matters is how he trades during his four-hour timeframe.​

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Five minutes is an interval, not a timeframe. Therefore, when I post a “5m chart” or whatever, I do it in lieu of zooming out so that one can get a broader view of context without having the smaller bars merge into something resembling a caterpillar. And if you lose your context, you’re lost. This is problematic in that these zoom outs mean that the subtleties of price movement are to some extent masked, but by the time these zoom outs become necessary, one is likely already in a trade and has switched to management mode. If necessary, he can always zoom back in, but it’s rarely necessary when managing to see every little movement (yes, every little movement has a meaning all its own, but one needn’t always be aware of it). You will note, therefore, that I sometimes zoom out to provide context but zoom back in again to provide a closer look at price movement. ​

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One may understandably wonder what the big deal is. And it’s not as big a deal as world war. But when it comes to trading, precision is necessary. Sloppy thinking leads to sloppy action and sloppy management, all of which lead to losses. This is not Monopoly. It’s real money. And if one doesn’t respect his money, it will find a more respectful home elsewhere.​

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.

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 (hours, days, weeks) 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 (maybe he is required to put down a deposit for that cruise by August 1st). 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 daily and weekly 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, using the chart from post #3 that I employed to introduce the subject of the “messages” that the market sends:

To repeat, longer-term traders -- which usually means The Money -- see that price is changing its trajectory after the initial 400pt reversal. It alters its angle, taking nearly twice as long to get half as far. It then segues into a sideways movement, pulling off to the side of the road to rest a bit (and take care of other business).

The vertical line is placed just after the last bar in the chart above. After that bar, past the “hard right edge”, the next day achieves a higher high.

This is of no great importance. The Money might only glance at it. They might pay a bit more attention two days later as price falls. But it stops short of breaking the stride and even stages a rally to close near the high.

However . . .

Four days later, on the 23rd, price attempts to make a higher high and fails to do so. Not only does it fail to do so, it closes more than 50% of the distance from high to low (this has nothing to do with Fibonacci; Wyckoff noted a hundred years ago that price falling more than 50% and closing there implied weakness, which may sound like a duh, but no one had ever thought about it before). The Money sees this, and it responds. And if you’ve been following all this, noting that by the 23rd price has broken its stride, watching to see if price can make a higher high, and seeing not only its failure in real time but also the character of its failure, you’ve got your trading opportunity. Right there. And you’ll be trading with the big guys down 80pts a week later. Price then rallies, of course, another 80pts, but that’s another trade.

You don’t even have to futz with itty-bitty bars. These are four-hour intervals. That price drops so precipitously on the 17th may be a clue to the outcome of the effort to make a higher high, but that may be just hindsight (note, however, that this drop and recovery can be seen even on the daily chart). The real news, though, is the weakness of the attempt to make a higher high more easily seen here than on the daily. Not only does price fall nearly to the low of that interval (or, technically, that wave), but the next interval continues the weakness. And the next session? Look at the interval on the far right.

Whether you trade off a tick chart or a daily chart, what matters most is that you understand just what it is that The Money is trying to do, determine in what direction they’re going to do it, then stick out your thumb and hitch a ride. To achieve these goals requires an understanding of the nature of trend, of support, of resistance. Achieving these goals also requires that you work your way through your fears so that you are free to take advantage of the fears of others.

 

[dbphoenix]

As a follow-on to the earlier discussion of tick charts, post #4:

Every upward or downward swing in the market, whether it amounts to many points, only a few points, or fractions of a point, consists of numerous buying and selling waves. These have a certain duration; they run just so long as they can attract a following. When this following is exhausted for the time being, that wave comes to an end and a contrary wave sets in. The latter may attract more of a following than the former. By studying the relationships between these upward and downward waves, their duration, speed and extent, and comparing them with each other, we are able to judge the relative strength of the bulls and the bears as the price movement progresses.

All stock market movements, however large or small, are made up of buying and selling waves. The market does not rise and fall like the water in a tank which is being filled or emptied. It moves to a higher or lower level by a series of surges - a good deal like an incoming or outgoing tide, with successive waves higher or lower than those preceding.

The small buying and selling waves which occur during every stock market session run so many minutes. They are caused largely by the restlessness of active professional traders, much like the ripples produced by the wind upon the ocean. Traders must have activity; they make their livelihood by trading on fluctuations. Therefore, they engage in a ceaseless tug of war, trying to put prices up whenever the condition of the market is favorable, or drive them down when they find that the bulls are weak or have over-extended themselves. The degree of success or failure attending their efforts enables us to determine whether the market is growing stronger or weaker.

--Richard Wyckoff


Continuity of price and the idea of waves are two of the more troublesome aspects of trading price for those who haven’t spent enough time watching price move. Not checking in on it periodically to see how it’s doing, but watching it move, second by second, tick by tick, particularly if the observer has no experience with anything other than candles and indicators and patterns and setups and so forth and so on. For such an observer, the highs, lows, and closes of price bars -- any kind of price bar -- take on unnatural importance and influence, even if he is watching intraday movement, which is about as fluid as one can ask for. For the trader who cannot attune himself to the continuity of price, these bars become a series of snapshots rather than the movie that they are, and the ability to take advantage of the pushmepullyou aspect of demand/supply imbalances recedes ever farther into the distance.

Given that price is continuous, it has two choices: it can move in a straight line or it can move in waves. As it obviously does not move in a straight line (at least not for more than a few seconds), that leaves waves. These waves are the result of disagreements over value, i.e., just how much is X worth? And the deeper the disagreement, the bigger the wave. And as each “bar” is within itself a wave or series of waves, the more disagreement, the longer the bar. The less disagreement, the shorter the bar (if the bar is only a couple of ticks long, you’re about as close as you’re going to get to agreement in that moment). Once one truly understands that these bars are part of waves, that each bar may contain one or more waves, and that the bars themselves are connected by these waves, the manner in which he trades changes dramatically, particularly with regard to entry and to trade management (do I freak because price “broke” a line by a tick?).

Talking about this goes only so far. Eventually, the trader must watch price move in real time or via playback in order to understand at a bone-deep level just what continuity of price means and how that understanding can transform his trading and his results. In the meantime, though, here’s an example of a common, standard bar chart followed by “the waves within”:

Only five bars have been “exposed”, but that should be enough to show at least some of what is going on “inside” these bars (below), and if tick charts were used, such as the tick chart provided earlier, post #4, the wave structure would be even more apparent. As one can see, the more disagreement, the longer the bar; the less disagreement, the shorter the bar. But they’re all part of a continuous series of waves. And assessing each of these waves in terms of the pace, extent, and duration that I referred to in post #3 can be rewarding with regard to what’s going on in the “composite trader’s” mind (the “composite trader” being everybody who’s trading, world-wide).

Looking at “extent” in particular, the first wave, the green, sets the stage (the wave began before the left edge, so it’s a bit longer than what is illustrated above). The next stage of the upmove, the blue, is considerably shorter. This is not a warning but rather a caution. The first downwave is longer than the previous upswing, but not by much, and it does hold above the last important swing low.

The next upswing is unfortunately shorter, and it fails to make a higher high. However, it also makes a higher low, which is a plus if you’re long. All of this implies balancing and further caution, as price could dive from here. The next wave, the red, instead makes two higher highs, both of which are to the good, again if one is long. However, this wave culminates in a double top followed by a lower high, both of which signal even further caution, if not outright exit (a third warning, as it were). This is followed by the downwave, which is considerably longer than what is illustrated in the earlier charts as it goes on past the right edge of these charts. It was a biggie.

One example? Yes. Hindsight? Yes. But this example serves to illustrate how one can use price movement and waves in particular to gain insight into what traders are thinking and wanting. If after all they were thinking and wanting something else, these waves would assume a different form that would coincide with the changed landscape. Traders’ trades betray them. It’s unavoidable.

Illustrating waves with a static chart may be pointless. If one is going to trade price, he must after all trade price (paper, or simulated trading, to begin), either live, delayed, or via replay. However, it should not be difficult using one's own moving charts to determine whether each wave is cresting higher or troughing lower. If there is no discernible drive higher, there is no reason to expect a long to succeed. The reverse is true for a short trade.

Once one has parted this particular veil, he can assess static charts from the POV of motion, as demonstrated by the material addressed in the pdf attached to post #5. Once one has learned to trade price, or "read the tape", he can more easily determine the probabilities of higher or lower movement even with a static chart, e.g., a daily chart, and get past bars and candles and tick bundles and so forth, much the same way an astronomer sees motion in star charts.

 

[dbphoenix]

Trades are the footprints of price movement. Learning to track these footprints is more skill than art. Learning the skill requires at least a willingness to aside preconceptions of why price moves as it does and focus instead on the movements themselves. Speculating on the why later is fine, but there’s no time to do it in the moment, and to try not only wastes time, but helps to ensure that the trade is missed.

Price rises because demand is greater than supply. Or buying interest is greater than selling interest. Or buying pressure is greater than selling pressure. How one characterizes it is irrelevant. What matters when the rubber meets the road is whether or not buyers are willing to pay the ask. And that’s it. And while they may have been willing to pay the ask five minutes ago, that doesn’t mean that they will continue to be willing to pay it five minutes from now. But you can tell when their interest is beginning to wane by how they trade.

For instance, note here that after price reaches the top of the wave, price starts rolling over, in steps, and when it looks as if it might be trying to rally, it keeps bumping its head until it resumes its fall. It then does rally, a bit, then falls some more before rallying yet again to a double top, then a lower low, a lower high, a long sideways movement, then the collapse.*

​

*If you’ve read posts #4 and 7, you know that transactions are posted as “ticks” and that these ticks move in “waves”. Therefore, the “bars” in the above chart are, as previously explained, an optical illusion. They exist only because the software draws lines, or candles, connecting the “dots”, or ticks. Each bar, therefore, can contain many trades or as few as two. In order for this post to make much sense, the reader will have an easier time if he keeps in mind that (a) all these bars consist of ticks, i.e., individual transactions, (b) that the movement of price is continuous and does not begin and end with each bar, and (c) that these transactions move in waves. If you watch price move in real time or via replay, the ticks and the waves will be obvious. “Seeing” these movements in static charts is a bit trickier and requires a background of experience in watching price move.​

But all of this is telegraphed to the trader who’s willing to listen and who understands what’s being said. And if the trader has trouble believing what price is saying, perhaps he ought to consider what price is NOT saying, that it’s going up.

Another example of the withdrawal of demand (again, think waves, not bars):

​

Then there are the signs of an emergence of demand at or near a bottom: the waves crest higher and higher, and the “rests” after each crest are also higher and higher:

​

What is betrayed is the “bias” of the market, up or down, buying pressure vs selling pressure. This can of course shift at any time, but the trader who knows what it was and is will have a clearer idea of what it most likely will be.

​

What has been written and illustrated up to this point pretty much covers what needs to be covered. One doesn't learn how to trade price by reading about it. The best one can hope for from reading is an introduction to what trading price is all about.

Examples may be helpful. Or not. But there's no reason to post tons of them. Either it makes sense or it doesn’t, and if it doesn’t, there are many other approaches to trading to explore. This particular example of this particular approach is recent -- or was at the time -- and is consistent with the immediately-preceding charts. In this case, price quickly ran into trouble and bounced around in a range after the reversal. Nonetheless, the "emergence" of demand is clear and price eventually resumed its upswing:

​

 

[dbphoenix]

It is those areas where traders are least secure that the most potential for dramatic price movement occurs. To profit from the fear in others, you must first master your own in order to perceive that fear clearly.

Most traders are much like the deaf who don't know how to read lips, or at least aren't very good at it. Rather than focus on the person speaking (price), they instead focus on whoever is doing the signing (candles, indicators, shapes), glancing at the speaker only occasionally, or perhaps not at all. Rather than "hearing" for themselves what's being said, they're relying on somebody -- or something -- else to tell them what's being said. Even if they can rely on the interpreter, they are still removed from what is being interpreted.

Learn to read lips.

 

[dbphoenix]

Put simply, support is the price at which those who have enough money to make a difference are willing to show their support by retarding, halting, and reversing the decline by buying. Resistance is the price at which those who have enough money to make a difference attempt to retard, halt, and reverse a rise by selling. Whether one calls this money professional or big or smart or institutional or crooked or manipulative or (fill in the blank) is irrelevant. If repeated attempts to sell below this support level are met by buying which is sufficient to turn price back, these little reversals will eventually form a line, or zone. Ditto with “resistance”.

A swing high represents a point at which traders are no longer able to find trades, i.e., either buyers are no longer willing to pay the ask or they are being met with so much supply that they can’t absorb it all. A swing low represents a point at which sellers are no longer willing to lower their prices or buyers are eagerly stepping up to the counter to purchase as much as they can afford. Whether these points represent important future support or resistance will be seen the next time traders push price in those directions. But everyone who’s tracking price knows these points, even if they aren't following a chart. They exist independently of the trader and his lines and charts and indicators and displays. They are the points beyond which price could not go, hence their importance, both to those who want to see price move higher (or lower) and those who don't. Clearly these points will shift throughout the session, whether the session is five minutes or five years.

Therefore, before coming to any conclusions about what “works” or “doesn’t work” and thus does or does not provide an edge, one ought to keep in mind that the result of a given event -- such as price seemingly “finding support or resistance” at a trendline (or moving average, candlestick, Pivot Point, Fib level or whatever) -- may be only incidental to what is truly providing that support or resistance. Millions of traders will have millions of reasons for being unwilling to pay the ask, or, if selling, for being unwilling to lower what they’re asking, and those reasons will tend to cluster around what they all can see if they look to the left. So look to the left. Where was yesterday’s high? Last week’s high? The opening low? The last protracted range? Markets are moved by Big Money, not amateur daytraders. Anyone who can open a chart can see what they see. Focus on that. Focus on professionals’ behavior as revealed by the movement of price, that is, their trades. That is where you will find genuine support and resistance.

 

[dbphoenix]

The tape is like a moving picture film. Every minute of the day it is demonstrating whether supply or demand is the greater. Prices are constantly showing strength or weakness: strength when buyers predominate and weakness when the offerings overpower the buyers. All the various phases from dullness to activity; from strength to weakness; from depression to boom, and from the top of the market down to the bottom – all these are faithfully recorded on the tape. All these movements, small or great, demonstrate the workings of the Law of Supply and Demand. By transferring to the charts portions of what appears on the tape, for study and forecasting purposes, one is more readily enabled to make deductions with accuracy.

– Richard Wyckoff, “Judging the Market by its Own Action”


Except that nowadays more than just a portion of what appears on the tape is transferred to the chart -- every transaction, every tick is transferred to the chart. Therefore, the trader who understands the language of the chart -- supply, demand, greed, fear, hope, panic, capitulation, failure, arrogance, denial, the pushmepullyou tug-of-war between buying pressure and selling pressure -- is receptive to the messages of the market, he can “read” what the market is trying to tell him. And the market is remarkably communicative. And fair-minded. It sends out its messages to anyone who can hear. And wants to listen. That so many of these messages fall on deaf ears, or on the ears of those who consider these messages to be “noise”, is not the market’s fault. Sometimes the market taps you on the arm. Sometimes it shakes you by the shoulders. Sometimes it bangs your head like a Chinese gong. But if you’re not paying attention, all of this is wasted on you.

The Double Top. Everybody knows what a double top is. But what exactly does it mean? Thwarted greed? Dashed hopes? Manipulation of the stupid? Knowing is a characteristic desire of the curious, and curiosity is an essential characteristic of the successful trader. But in the moment, “why?” isn’t pertinent. The market is sending you a message that a higher high ain’t hapnin’. What is the trader to do? He should have thought about that beforehand. If he didn’t, now is not the time to formulate a protocol. Later, after the session, if he’s not too bummed to do the work. If he does have a protocol ready to go, now’s the time to fire it up.

The Double Bottom. Price isn’t falling. No matter how much you think it should. No matter how much you want it to. Perhaps buyers for whatever reason think that this is a steal and they want in. Maybe they’ve been absorbing whatever supply has been made available. Maybe there ain’t no more. Maybe their ability to keep price from dropping further is frightening the shorts, and they start to cover their positions. Who knows? What difference does it make? Price isn’t falling. What protocol do you have in place to take advantage of this turn of events?

Higher Lows and Lower Highs. These are perhaps more obvious manifestations of the same dynamic that results in double tops and double bottoms, except in these cases, buyers are just too exhausted to even try for the double top, or have lost interest in trying, and sellers can’t resist the lifting power of eager buyers and give you that double bottom. Whether you like it or not, whether you believe it or not, the HLs and the LHs are sending you a message. How do you respond to it?

Thrusts. Thrusts are the Gotcha! of trading price. Whether they are up or down, they are intended to attract attention, disturb focus, confuse thinking. They are the raised and extended left hand waving while the lowered and surreptitious right hand picks the pocket.

In an uptrend that is working its way toward a new high, they burst their way into the sunlight, persuading the unwary that a new leg is underway, at which point the rug is pulled out from under the “new high” trader and he is suddenly in the red. They might also appear arising out of a zone of distribution, enticing traders to buy so that the sellers can get rid of more of whatever it is they’re unloading (see examples of both below). One also sees them popping above accumulative bases, used to determine whether or not there is any buying interest yet (if not, the base continues).

On the downside, a downthrust out of what appears to be an accumulative base can frighten the unwary into selling what they have for fear that price is collapsing. But these short, sharp, high-volume downthrusts that recover almost immediately are meant to do just that: frighten the nervous into selling so that stronger hands can pick up their goods at a discount. Downthrusts can also fakeout the lower-low crowd, particularly after what appears to be a climactic low. The textbook traders are looking for a higher low after such a climax, but they instead get a lower low. They ignore the lower volume and get ready for a continuation of the decline, but the “lower low” snaps back upward into a reversal.

Changes in Stride. Perhaps the most frequently missed messages have to do with changes in stride, whether they become more acute, leading to climaxes of one sort or another, or more obtuse, leading to ranges. And while not every double top nor lower high is a guaranteed short nor every double bottom nor higher low a guaranteed long, a change in stride at the very least adds weight to the probability that momentum is broken and that the trade that is indicated will be a successful one.

Stop-Outs. After you have traded for a while, if you find that your stops are being caught too frequently, it will mean that you are not careful enough in starting your trades [emphasis mine]. Thereafter decide to use more discrimination. Refuse all but the best opportunities. Wait for them. Take your positions as close as you can to the danger points, as shown on your charts or on the tape. Place your stops according to the requirement of the situation. Study your mistakes and profit by them. Know every minute why you are starting a trade, why you are holding it, and why you should close out. (Wyckoff)

Being stopped out -- or more accurately exiting the trade, as you decided where the stop should be when you entered the trade, where price had to go to tell you that you were wrong -- is perhaps the most powerful message that the market can send you. Whether you are stopped out because you erred in your choice of entry or because your entry was correct but your stop was too tight or your management was faulty or everything was as it should have been but you find that you’re being stopped out just a bit too often, the market is bellowing at you to stop and re-evaluate your protocols. Are you following the stride correctly? Are you imposing your own biases on what you see? Are you waiting for retracements? Have you determined the criteria for validating your entries (you were right) and invalidating them (you were wrong)? Is hope being seductive? Could it be that you’re just not paying attention as closely as you should?

Most important, what are you doing to do about it? Yes, one must analyze what should have been done but he must also determine exactly what he is to do about it to avoid "being stopped out" in the future. What are the characteristics of the trades that worked? What are the characteristics of the trades that didn't? Can you tweak the protocols for the trades that didn't work so that they become successful? The market tells you by its actions, but the trader must learn the market's language in order to understand just what that message is.

Volume. Understanding volume is a lot like playing poker while being able to see everybody else’s hands. The chief impediment to this understanding is all the misinformation that one accumulates over the years. There’s nothing new here, more a checklist of what to think about and look for when analyzing or assessing the volume in any given circumstance.

An increase/decrease in volume: an increase or decrease in volume illustrates an increase or decrease in trading activity, nothing more. If volume increases as price rises, there is an increase in buying, but as every transaction requires both a buyer and a seller, there is also an increase in selling. A failure to understand this accounts for the confusion when the beginner sees a sudden collapse in price after what he thought was a textbook breakout (confused and panicked in case he happened to have bought that breakout). What matters, again, is what price does, not solely what volume does. If activity declines as price does, one can assume that the movement -- whether into a retracement or back toward a range -- was nothing more than business-as-usual selling, not a prelude to a rout. If price holds and continues its original course, then one’s assumption is confirmed and he can breathe easier: other buyers have his back. On the opposite side of the coin, if price rises on increased volume in an ongoing downtrend, buyers are trying to support price but sellers are having none of it, hence the increased activity and the eventual failure of price to hold its gains. If price continues to fall but on lighter volume, that doesn’t mean that the selling is any less but rather that buyers aren’t trying as hard to support the price, hence less activity. This is most easily seen in the “preliminary support” one sees as price has been declining but sudden increases in volume occur. This appears to be an increase in selling pressure but it is instead a concerted effort on the part of buyers to support the price. It is, in other words, the increased efforts of buyers to support price and the responding efforts of sellers to drive it down that account for the increase in volume. What matters to the trader is understanding that the buyers are out there, that they’re attempting to support the price. Eventually those efforts will result in a climax, though price may climax after the volume does. If there is no evidence of these efforts to support, then the decline in price likely has quite some way to go.

In short, increased volume on the upside: distribution. Increased volume on the downside: accumulation. If price continues to rise after the distribution, buying pressure still dominates. If price continues to decline after accumulation, selling pressure still dominates. A decrease in volume -- trading activity -- suggests that price is reaching equilibrium, if only for a few seconds. Thus one wants to see decreased volume/activity in, for example, a retracement because it indicates that buyers and sellers are reaching an agreement on value. This does not necessarily mean that price will reverse. Some new players may enter and spoil this agreement. But the decrease does indicate agreement and provides an encouraging sign that price will work its way out of the retracement.

Failures: the conceptual landscape of the failure is that one doesn’t see what he expects to see. An attempt at a higher high, for example, should be accompanied by at least marginally higher volume, particularly if the attempt is being made out of a consolidation or a retracement. If volume is suddenly withdrawn, one’s antennae should begin to vibrate. Think of amateur buyers having the rug pulled out from under them. If buyers’ interest in pushing price higher is waning and is matched by a decline in sellers’ interest in retarding them (hence the decline in activity), then where is the impetus for price to advance? Whether or not the trader interprets this as a signal to short is up to him, but at the very least he should be protective of his long (below). The same holds true on the downside: a sudden withdrawal of volume in an effort to make a lower low. If sellers are losing interest in pushing price lower and buyers are not yet rushing in to support price, sellers may be getting ready to cover their shorts, and that can be a nasty surprise if one isn’t ready for it. Tests which follow climaxes and are accompanied by lower volume are examples of this dynamic.

This sudden withdrawal of volume should not be confused with the gradual waning of trading activity that one witnesses in trends. Trends often begin with toots and whistles and streamers, but the volume soon diminishes, not due to lack of buying interest but more to sellers having finished what they set out to do, such as distributing the bulk of their initial line (below). This lower volume does not signal the ending of the trend but rather a perception on the part of sellers that the conditions for a “top” are not present. When those conditions begin to present themselves, volume -- activity -- will increase. And if there is insufficient demand to keep price suspended . . .

 

[dbphoenix]

Spending one's time memorizing and searching for "setups" is generally unproductive. For one thing, setups have variations. This fact alone ensures that the number of setups will multiply like rabbits. Then there is the problem of "analyzing" all the minute aspects of the setup in real time in order to determine whether or not it "fits". This alone encourages self-doubt, brother-in-law of fear. And it wastes time. And time may be in short supply.

If one is going to trade price successfully, he must understand what traders are doing and where, their behavior, not search for pretty pictures.

The chart below illustrates a typical decline, climax, test. They happen again and again, but if one gets wrapped up in details, he is unlikely to be able to do anything about the trade in real time.

Here there is an initial drop to "1". Volume is lower than the previous bar suggesting a withdrawal of supply. This is confirmed by the rush of buying in the next interval (we know it's demand because price rises). One can buy this or not, keeping in mind that there is always the possibility of a test. If one did buy and exited the trade when the stride broke, he might think he was done. This would not be the case.

Price then drops again, this time to a lower low, in a climactic way. Demand rushes in (price rises), and one might buy again. If he did, he'd see a series of higher highs. Then the stride would break again, this time followed by a deep and rapid plunge. At that, the trader might think he's done. But he'd be wrong. Buyers bring the drop to a halt and reverse the course. And if the trader notes that the drop is halted at exactly the same level as the first decline, he might give the long another try. And this is the one that results in a day-long move to the upside.

The points are that (a) these never look exactly the same, (b) they never play out exactly the same way, (c) one can't assume that the trade is over just because he got stopped out. Yes, hindsight is easier than real time, but, if the trader is trading in the moment rather than dwelling on the two longs that failed to take off, hindsight will be available to him almost immediately, perhaps quickly enough so that he has time to take advantage of the opportunity.

Though I’ve made my share of snotty remarks about diagrams and templates and pretty pictures, this climax/test dynamic is central to trading the price movement that results from this particular kind of behavior. And if the following helps you to remember it, we’ll just keep it between us:

Successful tape reading is a study of Force; it requires the ability to judge which side has the greater pulling power and the courage to go with that side.

--Richard Wyckoff

 

[dbphoenix]

The beginning trader generally has little or no understanding of market structure. He has no concept of the interrelationship among markets, much less between markets and the economy. Price charts are a meaningless mish-mash of colored lines and squiggles that look more like a painting from the Museum of Modern Art than anything that contains information. Anyone who can make even a guess about price direction based on this tangle must be using black magic, or voodoo.

But those ads on TV are so persuasive. Earn $100,000 A Week In Your Spare Time! At Your Kitchen Table! In Your Bathrobe! All one has to do is buy Hidden Secrets of Market Wizards Revealed! (plus shipping and handling). Or that software with the red and green arrows (how hard can it be?).

So you open an account, subscribe to Level II, install your charting software, and are absolutely mesmerized by all the flashing lights and colors. DOM? You bet! And all you have to do to participate is . . . click.

Before you’ve lost all your money, the thought that you haven’t the least idea what you’re doing may prevent you from blowing your account entirely. You realize now that this is not easy, it’s hard, it’s work, but rather than chuck it, you elect instead to take the subject “seriously”. You locate your library card and/or shop Amazon. You check out – or take much of what you have left and buy – all the “recommended reading”. You take the courses. You attend the seminars (box lunch included). You subscribe to the chatrooms and websites and newsletters. How-To book or notes in hand, you scan the markets every day. After a while (sometimes a good long while), you notice a particular phenomenon which pops up regularly and seems to "work" pretty well. You focus on this phenomenon. You begin to find more and more instances of it and all of them work! It’s all true! It Works! Your confidence in the “setup” grows and you decide to take it the very next time it appears. You take it, and almost immediately your stop is hit, and you're underwater for the total amount of your stoploss.

So you back off and study this setup further. You go back to the books, back to your notes. And the very next time it appears, it works. And again. And yet again. So you decide to try again. And you take the full hit on your stoploss.

This can go on, believe it or not, for years. The pot of gold is placed tantalizingly within reach. The winning lottery ticket is dangled before one’s eyes. The nickel slots pay off, finally, before taking back everything they’d given you and then some. If they never paid off, even the most devout would eventually say screw it and find some other way to throw away their money, maybe Cabbage Patch dolls. But just when the trader is ready to chuck it, the nickels fall into the cup, the fires of lust flare up yet again, and he’s off.

The technical term for this is intermittent positive reinforcement. The market pays off just enough, just often enough, to keep the trader hooked. Just when he’s completely fed up with the enticements and the baloney and the false assurances that he will eventually succeed if only he keeps at it, keeps trying, keeps up the “good work”, he lucks onto a winning trade. It may not be enough to cover his losses. Not nearly enough. Not even close. But it’s a win. And where there’s one win, there’s got to be another. Surely. But there isn’t. And won’t be. Until he’s ready to chuck it all once again. And there it’ll be. Just enough. And another year goes by. Then another. Then five. Then ten.

Practically everyone goes through this to at least some extent. Some bring down the curtain on this little play when they find out just how much work is going to be involved not only in understanding all of it but in morphing that understanding into a consistently profitable – not just intermittently profitable – plan of action. They may be smart or not, but they at least have enough sense of self-preservation that they can smell the danger they’ll be in if they linger. Others refuse to give up, even after the market has begun banging their heads like a Chinese gong. After all, only sissies quit.

Some, though, will be able to back away from this wheel of fortune and observe it, detached, disinterested, and eventually see a pattern, a pattern of wins and losses, what is called “the win-lose cycle”. They will note, for example, that out of every twenty spins, twelve come up winners and eight come up losers. The stick in the spokes, though, is that one is unable to predict the outcome of any given turn. Does this mean that the outcome of any given turn is “random”? Well, it depends on how you define “random”. But regardless of how you define it, the outcome of any of the aforesaid turns is unpredictable, which, on the face of it, puts you in the same spot, i.e., what do you do?

At the very least, understand that there is no such thing as a 100% win approach. When novices gauge the success of a particular setup, they get caught up in the win cycle. They don't wait for the "lose" cycle to see how long it lasts or what the win/lose pattern is. Instead, they keep touching the pot and getting burned, never understanding that it's not the pot (setup) that's the problem, but a failure on their part to understand that it's the heat from the stove (the market) that they're paying no attention to whatsoever. So instead of trying to understand the nature of thermal transfer (the market), they avoid the pot (the setup), moving on to another setup without bothering to find out whether or not the stove is on.

The first step, then, is to determine whether or not the stove is on, i.e., determine the conditions under which any given spin of the wheel is most likely to come up a winner, understanding at the same time that there are no guarantees, declining to be upset by a loser, remembering that over a series of spins the overall result will be profit. The next step is to spin the wheel every time the aforesaid conditions are present and to do so without reservations and without hesitation. Sounds simple enough. Why then do so few do it? Largely because those who don’t do it believe that they don’t have to. They believe that they are smart enough, talented enough, knowledgeable enough, skilled enough that they can spin the wheel however and whenever they choose and come up a winner, or at least do so often enough to make consistent money.

This particular kind of self-assessment is called a “superiority bias”, also referred to as “illusory superiority” or “the Lake Wobegon Effect”, the latter referring to Garrison Keillor's fictional town where all the women are strong, all the men are good looking, and all the children are above average. It is a cognitive bias “whereby individuals overestimate their own qualities and abilities, relative to others, in a variety of areas including intelligence, performance on tasks or tests, and the possession of desirable characteristics or personality traits.” We believe that we are better-than-average drivers, that our intelligence is above average, that we are more tolerant than we are, more sensitive, more perceptive, more rational, more accomplished and, of course, less subject to bias. So why wouldn’t we make great traders?

The market, however, couldn’t care less how skilled and talented and intuitive the trader thinks he is. The market doesn’t even know him. That market is going to do what the market is going to do, which is pretty much what it has done for thousands of years, and it’s up to the trader to face facts and acquire enough humility to negotiate his way toward at least minimal success. Once he is ready to address the market without all the attitude, acknowledging that trading is not a video game, he can begin serious study: What exactly does he want? What is he trying to accomplish? What sort of trading makes the most sense to him? Long or intermediate-term trading? Short-term trading? Day-trading? Trend-trading? Scalping? Which is most comfortable? What instrument – futures, stocks, ETFs, bonds, options – provides the range and volatility he requires but is not outside his risk tolerance?

And so he "auditions" all of this in order to determine what suits him, taking all that he has learned so far and experimenting with it. He begins to incorporate the "scientific method" into his efforts in order to develop a trading plan, including risk management and trade management. He learns the value of curiosity, of detached interest, of persistence and perseverance, of taking bits and pieces from here and there in order to fashion a trading plan and strategy that are uniquely his, one in which he has complete confidence because he has tested it thoroughly and knows from his own simulated trading and real-money experiences that it is consistently profitable. This eventually becomes his “edge” (the knowledge gained through research and testing that a particular market behavior offers a level of predictability that provides a consistently profitable outcome over time).

He accepts fully the responsibility for his trades, including the losses, which is to say that he understands that losses are inevitable and unavoidable. Rather than be thrown by them, he accepts them for what they are, a part of the natural course of business, of the win-lose cycle. He examines them, of course, in order to determine whether or not some error was made, particularly one that can be corrected, though true trading errors are rare. But, if not, he simply shrugs off the loss and goes on about his business. He understands, after all, that while the market deals the cards, he is in complete control of how he plays the hand, of his risk in the market.

Eventually he is able to meet the market on its own terms but without ego. Planning, analysis, research are the focus of his time and his effort. When the trading day opens, he's ready for it. He's calm, he's relaxed, he's centered. Trading becomes effortless. He is thoroughly familiar with his plan. He knows exactly what he will do in any given situation, even if the doing means exiting immediately upon a completely unexpected development. He understands the inevitability of loss and accepts it as a natural part of the business of trading. No one can hurt him because he's protected by his rules and his discipline.

He is sensitive to and in tune with the ebb and flow of market behavior and the natural actions and reactions to it that his research has taught him will optimize his edge. He is "available". He doesn't have to know what the market will do next because he knows how he will react to anything the market does and is confident in his ability to react correctly.

He understands and practices "active inaction", knowing exactly what it is he wants, exactly what it is he's looking for, and waiting, patiently, for exactly the right opportunity. If and when that opportunity presents itself, he acts decisively and without hesitation, then waits, patiently, again, for the next opportunity.

He does not convince himself that he is right. He watches price movement and draws his conclusions. When market behavior changes, so do his tactics. He acknowledges that market movement is the ultimate truth. He doesn't try to outsmart or outguess it.

He is, in a sense, outside himself, acting as his own coach, asking himself questions and explaining to himself without rationalization what he's waiting for, what he's doing, reminding himself of this or that, keeping himself centered and focused, taking distractions in stride. He doesn't get overexcited about winning trades; he doesn't get depressed about losing trades. He accepts that price does what it does and the market is what it is. His performance has nothing to do with his self-worth.

And at the end of the day, he reviews his work, makes whatever adjustments are necessary, if any, and begins his preparation for the following day, satisfied with himself for having traded well.


To nurse the idea that because you are a successful merchant, manufacturer, physician or business man you are qualified to take part in the vast operations which center in Wall Street is to mislead yourself into worry, strain, nerves, failure and break-down in health, business and fortune. The stock market is something you must learn, just as you originally learned your own trade, business or profession. The foundation knowledge must be acquired; to this must be added the technique.

Trace your record as a successful business man, for instance, and you will recall that you started as an office boy or clerk, gradually worked up to the position of manager, partner or officer and director. In your own line you are a success. Could you have succeeded without long training and practical experience? Certainly not.

Why imagine that you can hand a check to a broker, ask his advice or tell him to buy this or that stock on the strength of some tip, rumor or hunch, and begin making money and keep on making money in this most difficult and complicated business – one in which millions fail and a comparatively few succeed?

–Richard D. Wyckoff


If you want to change your experience of the markets from fearful to confident, if you want to change your results from an erratic equity curve to a steadily rising one, the first step is to embrace the responsibility and stop expecting the market to give you anything or do anything for you. If you resolve from this point forward to do it all yourself, the market can no longer be your opponent. If you stop fighting the market, which in effect means you stop fighting yourself, you'll be amazed at how quickly you will recognize exactly what you need to learn, and how quickly you will learn it. Taking responsibility is the cornerstone of a winning attitude.

–Mark Douglas


Let the market do its own forecasting. In short, we may let the market, and our proper analysis of its own technical action, be sufficient for our own personal guide as to what is going on inside the secret sanctums of the directors' meeting room, the corporation order books, the private conferences of professional operators and the other indefinite mediums of gossip and unfounded rumor.

We need not go near a brokerage office in person; we need certainly not hang over the ticker or devour the news releases as they come over the heated wires. Without ignoring other basic news and confirmed information, we may rather sit back in our own office or study, not secure in our own conceit, not smug with contented over-confidence, but assured none the less that if we have properly prepared ourselves, properly attuned our inner ear and eye, with study, with patience, with hard work, experience and understanding, then our most faithful friend in practical market operation is the market itself, as it outlines in the present its probable future course for those who can successfully read its signs and signals.

–Richard W Schabacker


Certainly there are some people who jump into the market with such a glaring insufficiency of knowledge that we can predict with fair accuracy about how long it will take them to lose their capital. It may not be so obvious that there are others, hardly any better off, who collect unnecessary and irrelevant facts the way a pack rat collects bits of colored glass, beer bottle tops, and buttons. Too much information of the wrong sort not only adds nothing to clarifying understanding, it can confuse the issue so hopelessly that it is impossible to see what is going on at all.

–John Magee


If every man and every woman that puts in days, weeks, and months, in a brokerage office [or it's modern equivalent: the Internet] would put in that same amount of time staying at home, or in their office, studying the past action of the market, they would make a success and would find that time would turn into profits in the future.

Make it a rule to quit wasting your time, because time is money. Put in your time studying and you will be well repaid for it.

–W D Gann


. . . there is little reason for the proponents of either fundamental or technical analysis to worry about the numberless traders speedily adopting the useful methods employed in selecting securities and timing commitments. At least 95% of those who enter the stock market (including the readers of this work) can never be stimulated to study it seriously and logically – the greatest proportion because they haven't the time, or are simply too lazy. The market opinion of this 95% is at heart the perennial human hope to make something for nothing; and the results are, and will continue to be commensurate with the reasonableness of the hope.

–H M Gartley

 

[dbphoenix]

A Personal Favorite
(lightly edited)

​

Alright, so you've pissed about , read the advantages of swing trading versus day trading, spreadbetting versus real market, calculated how much you would make if you made X$ per. But you're probably lacking any real progress, energy or momentum when it comes to your trading eh?

The best way to learn trading discretionary is firstly to grab an approach, and then never listen to anyone else's opinion on the market, even those who trade the same approach.

I see traders too often wondering what others have came up with in regards to their approach; they will flock to the 'authorities' on the method, and try and somehow be that trader. This will never work. Never. Trading is just too damn personal and it really is a journey which involves building a ****ing complex mental map with which you read the market.

Simply reading 'do this when X' will never embrace this fact, because there will always be exceptions to the rule, times when the black and white 'rules' you thought would guide you so peacefully to financial freedom, don't work. This is because markets and successful traders' mental maps are grey.

Now that you know it's up to YOU only , my last bit of advice is fairly simple: trade, take records, and BACKTEST.

You can backtest with discretionary trading, it's just not for the purpose of coming up with % win or loss. This is how I made it into being a good trader. Pick 3 or 4 years, or a huge sample set that's easily divisible....and then literally, scroll bar by far (going left to right btw) and just be honest with yourself; never give yourself the benefit of the doubt when you see a trade you're not sure about, this ensures you are realistic.

Keep on doing these backtests after every few months to 'refresh' and again be honest with yourself. You will be improving by starting to feel comfortable with whatever the backtests throw at you,and gain somewhat artificial experience of trading. Also, include the trades you have taken into the backtest and constantly re-assess what you 'would have done'.

This way you are thrown into situation after situation; you are forced to mould your approach to fit into the context of the market, and you will slowly burn patterns (which are grey in nature) into your mental map of trading.

This is painful, this is extremely difficult, this takes time and you will end up throwing 'brilliant' ideas you came up with away, slowly stripping away ****ty ideas and gaining new ones. You will end up having to admit that you wouldn't have taken that great trade, that you would've taken that ****ty one. This is learning.


This was my approach to building a mental map of the markets and it worked (after 1.5 years), there are other ways of course which don't look at historical data, I wish you luck, this is my giving to the trading community, however it might be pissed on.

--SybilCut